Geraldine Walsh, Washington, DC-based deputy director of the office of investor education and assistance at the US Securities and Exchange Commission, says corporate disclosure is key to investor education. Last week she completed a visit to Hong Kong and Shenzhen to talk about cooperation with local regulators, and today (Monday) is speaking at an investor education conference in Kuala Lumpur.
Looking at the market structure in China and Hong Kong, Walsh acknowledges that the experience of the United States has its limits as a model for Asia. For example, she notes most Chinese retail investors chase IPOs, while new issues are the exclusive purview of brokers and institutional investors in the US. This creates a different mindset.
But she says there is a correlation to the US experience in that both Chinese and Hong Kong regulators are eager to foster long-term investment, and ensure people understand the products they buy. And the best way to do that, she says, is to make more information available and ensure people know how to use it. "The crux of that is clear, concise disclosure from companies, fund managers and brokers," she says.
The development of a relatively informed investor culture in the United States began in the 1970s with the rise of mutual funds and later the shift from defined benefit to defined contribution retirement schemes. Walsh says it is a myth that most Americans had a DB pension plan and are now worse off; "More people today have a retirement plan through work than ever before," she says.
A big driver behind all of that was tax changes that included the 401(k) provision in the 1974 Employee Retirement Income Security Act. In the early days of DC, the late 1970s and 1980s, many workers still lacked much choice in how their retirement money was invested. But their exposure led to pressure to invest more, and the 1990s solidified the investment culture. Walsh says that the past three years of miserable markets may have made people frightened, but the investment culture remains; even today, the mutual fund industry has more assets than commercial bank deposits. "Most Americans look to the capital market, not banks, for retirement savings," she says.
Recent legislation, particularly the Sarbanes-Oxley Act, has been an important step toward restoring investor confidence and shoring up that investment culture. By federalizing corporate governance (i.e. now issues such as independent boards of directors are federal rules, not just left to the patchwork of state regulation), Congress has built on the SEC's ongoing investor education and disclosure work.
One important thrust of Walsh's job is to ensure disclosure is in plain English. The SEC's efforts have been deemed successful enough to make this now the model for the rest of the federal bureaucracy. "We get companies to disclose critical information in plain language. This doesn't mean dumbing down the content, but making it precise and clear," she says.
While she acknowledges that CEOs sometimes twist this into legalese, to cover their backsides from a potential lawsuit rather than explain corporate strategy, she says Sarbanes-Oxley is designed to change the tone and make managers more responsible. She says SEC chairman William Donaldson preaches that this is a bellwether of good things for corporate America, not a threat to innovation.
Walsh isn't prepared to pass judgement on the family-dominated corporate scene prevalent in much of Asia. But she does say her talks with regulators here reveal a similar need for strong, accountable independent directors.
Throughout her visit she is networking with regulators in Asia about ways the SEC can lend a hand developing investor education and promoting clear corporate disclosure. For instance, she notes Hong Kong's Securities and Futures Commission is keen to use the internet for disseminating investor information. In the US, the World Wide Web is a key tool for investors; it is less so in China or Hong Kong, but becoming more common.
One idea the SFC may consider is setting up dummy scam sites. The SEC, aware that Americans are often sceptical of the government, created fake scam websites that, when clicked through, take people to a warning informing them they nearly lost their shirt. "The concept is that people won't turn to the SEC for information, so how do you reach these people? You don a disguise."