Mr. Chairman, members of the Commission, I thank you for the opportunity to speak to you today. As the members of the Commission are aware, the AFL-CIO is a federation of trade unions that represent 13 million working men and women and their families. In addition to the direct contribution that they make to the American economy at work, our members also participate in the global capital markets as investors through defined benefit and defined contribution plans as well as through mutual funds and individual accounts.  Our member unions sponsor benefit plans with over $400 billion in assets, and our members are participants in public employee and collectively bargained single-employer plans with over $5 trillion in assets. Nearly $800 billion of these assets are invested outside the United States. The largest 1,000 public sector defined benefit funds invested, on average, 15.7 percent of their assets internationally at the end of 2000, and the average Taft-Hartley portfolio invested 5.3 percent in international assets. To give one example, the California Public Employees Retirement System, or CalPERS, with more than 1.2 million members, currently has nearly $31 billion invested in international equity and fixed income instruments, out of a total portfolio valued at nearly $144 billion.

The AFL-CIO has become particularly concerned by recent efforts by Wall Street investment banks and international financial institutions, such as the World Bank, to structure transactions that tap into our members’ retirement assets in order to aid regimes around the world that violate fundamental human rights, core labor standards and basic principles of effective corporate governance. We believe that the traditional approaches to valuation used by Wall Street and a narrow approach to disclosure of information to investors mandated by our existing securities law regime reinforces the creation of such transactions and makes it all but impossible for our members, the beneficiaries of these funds, to understand how their retirement assets are being invested. Further, we think that there is a direct link between, on the one hand, the encouragement of an investment climate that promotes human rights, labor standards and strong corporate governance, and, on the other, the creation of long-term economic value and political stability. Thus, it is our view that this Commission is well situated to make a significant contribution to the development of policies towards the financial markets that genuinely enhance Americans’ sense of security and stability in its relationship with the People’s Republic of China.

The AFL-CIO became intimately aware of the complexity of America’s relationship with China during its role in the campaign last year against the initial public offering of common stock on the New York Stock Exchange by PetroChina, a subsidiary of one of China’s two leading state-owned oil companies. At the request of many of our members who serve as trustees on large pension funds, the AFL-CIO examined this transaction in great detail. We discovered that the structure of the transaction—put together in a joint program involving the Chinese government, the World Bank and major U.S. investment banks, consulting firms and law firms—was a kind of model that is being replicated by many countries around the world. Far from creating a level playing field that encourages stable and constructive forms of competition and economic growth, this strategy is an attempt to privatize only a small part of a large state-run industry in order to tap into the global financial markets while retaining control safely in the hands of government—and in the case of China—Communist Party insiders. With billions of other people’s money safely in their hands, the Chinese regime planned to lay off nearly a million workers at the parent of PetroChina and to turn PetroChina into a Korean-style chaebol—a government backed near monopoly built to compete with the international oil industry.

In our economy and in that of both Western Europe and genuine emerging market democracies such as South Africa, Brazil and South Korea, there are a series of checks and balances in place that ensure that major financial decisions are not taken without some examination and consideration of their real total costs. Inside the workplace, workers and employers can, if they so choose, engage in collective bargaining about basic wages, hours and working conditions. Although we believe that much can be done to improve the ability of workers to organize, democracies do at least provide a general climate of support for free speech and freedom of association. This encourages workers to express their interests and make their voices heard. Employers are not, in theory, free to arbitrarily alter workers’ lives. Similarly, in the financial markets, investors can generally rely on boards of directors with legally protected oversight powers, securities law regimes that mandate the disclosure of material information necessary to make reasonable investment decisions and a variety of legally established mechanisms for management accountability. While we advocate reforms to this institutional framework, in general it, too, provides a kind of check on arbitrary power by corporate insiders.

But these basic democratic institutions, these checks and balances on arbitrary power, are sorely lacking in China. The unfortunate tendency to centralize power in the hands of a few in our Wall Street driven economy, is magnified significantly in an environment like that found in China, where an authoritarian government remains in the hands of the Chinese Communist Party. As you have heard from AFL-CIO Secretary-Treasurer Trumka and United Steelworkers of America President Leo Gerard, there are no real trade unions in China, there is no collective bargaining, there is no right to strike, and there is no effective guarantee of the freedom of association or free speech. As China has proceeded in the last decade with a kind of muted shock therapy—restructuring its state owned enterprises and laying off millions of workers—it has triggered what one researcher has called a “labor insurgency” with thousands of wildcat strikes, demonstrations and protests across China each year. The absence of democratic institutions like collective bargaining has forced workers to take desperate action, sometimes risking their own lives, just to make their voices heard. We believe this so-called reform process contributes to insecurity inside China and to an unstable and unpredictable relationship between China and the rest of the world.

A similar kind of problem exists in the financial markets. None of the three basic protection devices for outside investors are present. At PetroChina, for example, in a pattern that repeats itself at most of the companies that have attempted to raise funds on the international financial markets, there are only three outsiders on a board of thirteen. One of these three and all ten of the inside directors are members of the Chinese Communist Party. A second outsider is a senior figure in Hong Kong and considered friendly to Beijing. So there is no clear voice for shareholders inside the Company. There is, of course, no real accountability for management, either. PetroChina remains majority owned by the state-owned China National Petroleum Corporation. And China lacks a strong independent regulatory agency like the U.S. Securities and Exchange Commission, or SEC. In sum, investors who buy shares in companies like PetroChina have no idea how their money is being used and they have almost no legal recourse to either monitor or change corporate behavior.

In case it is not yet clear, let me point out that we believe there is a link between the checks and balances that investors count on in the United States and the existence of basic human rights and labor standards. The right to free speech and the freedom of association cannot be said to exist in any meaningful way if they are denied to workers inside their own workplace. And where they do exist they reinforce the existence of freedom in general social and political life. Without these rights, investors would be unable to voice their interests inside the financial markets or corporate boardrooms. For example, the basic provision of financial information to investors began as a task of financial journalists in the early 19th century evolving over time into our present system of securities regulation, both here and in the United Kingdom. Today, a free and independent press continues to serve as a valuable source of insight and information on basic financial decisions by Wall Street and corporate America.

It is in this spirit that we welcome the initiative described by the U.S. Securities and Exchange Commission in its recent letter to Congressman Frank Wolff. In this letter, the SEC’s then Acting Chairman, Laura Unger, noted that the SEC was now “sensitized” to issues involving human rights and the capital markets. She stated that the Commission would be “looking for creative ways to enhance investors’ access to material information” about issuers who access the U.S. capital markets and have investments in countries like the Sudan—where PetroChina’s parent company had significant operations—and the impact of such investments on human rights. We believe that this approach is entirely consistent with existing standards under our securities laws. It is particularly important now because of the effort by some foreign issuers to access U.S. investor capital through our domestic stock exchanges that they would otherwise not be able to attract to their own national exchanges precisely because of inadequate protections for investors. These foreign issuers are, with the assistance of leading investment banks, engaging in a kind of regulatory arbitrage—relying, we think, on the inability of American investors to expend the resources necessary to engage in adequate due diligence of issuers located halfway around the globe.

We believe that then Acting Chairman Unger properly targeted the concept of “materiality” in her letter. As should be clear from our assessment of the PetroChina experience, appropriate disclosure to investors about an issuer’s human rights record, respect for core labor standards and corporate governance goes to the heart of value creation at a company and thus is clearly material to investors. More broadly, attention to such issues in the disclosure regime highlights the need to insure that our financial markets are not left unchecked and thus free to channel the retirement assets of working Americans into environments—like that currently found in the People’s Republic of China—that could undermine our security and contribute to a deterioration of the basic values we consider central to stable and constructive economic growth.

We do not believe that this is simply a matter for government regulation; however, and thus we support initiatives to expand the investment criteria that are traditionally relied upon by fund managers in making investment decisions, particularly in emerging market countries. For example, last year, the board of trustees of CalPERS, the nation’s largest pension fund, established a policy that will require active management of its emerging market equity investments. This policy will require fund managers hired by CalPERS to include in their investment decisions criteria that include human rights, core labor standards, and effective corporate governance. A similar policy is also now in place at the New York City Employees’ Retirement System.

The success of the American economy is due in large part to the shared role that all stakeholders, including investors, managers, workers and the surrounding community, play in creating lasting and stable economic organizations. Major investors now are demanding information about the state of these relationships in the countries and companies they invest in the global capital markets.
If countries like China shape their legal regimes and corporate structures to provide investors reliable information, then we believe they have a welcome place in America’s capital markets. But absent such a commitment—and in our view such a commitment has, indeed, been absent in the case of China—we believe that U.S. regulators must engage in heightened scrutiny of the disclosure interest in any attempt to market financial instruments from such countries to American investors.

Thank you for this opportunity to present the views of the AFL-CIO on this important issue. I look forward to your questions and comments.