Breaking Down the Walls: Creating Closer North American Ties

"He speaks English with the flawless imperfection of a New Yorker."

Gilbert Millstein

Disaster! That's the first thought most investors ponder when they consider stock market performance in October. The examples of stock market weakness in October are legendary. Consider the stock market crashes--or as former SEC Chairman David Ruder prefers to call them "the compressed large downward moves in stock prices"--in October 1929 and October 1987. Weakness has occurred so frequently during that month that some technical analysts talk about "The Ides of October."

It's now November and time to drink to having survived October. Only the bears got clobbered last month, as stocks large and small soared to stratospheric heights.

Another theme we ought to drink to is the theme of change. Change is one of the constants in our lives; it always has been. It is said that, when Adam and Eve were cast out of the Garden of Eden, he turned to her and said: "My dear, we are living in a time of transition."

One of the areas where we are seeing the greatest degree of change or transition is in our capital markets and, in particular, in some of the institutions that play a key role in the marketplace.

The American Stock Exchange is a good example. Over the past couple of years, the AMEX has introduced a number of fundamental changes, including the proposed listing of companies with smaller market capitalizations--the "incubator" market for fledgling companies that are heavily into R and D; and the setting up of so-called "skunk works"--after the entrepreneurial think tanks of Silicon Valley--in which the Exchange works with member brokerage firms to create new securities.

Our guest speaker today, James Jones, has launched a number of these initiatives. One commentator has credited Mr. Jones with having turned a "sleepy sister into an active competitor." Trading volumes on the AMEX have risen dramatically compared with declines on both NASDAQ and the Big Board.

Another recent initiative of the AMEX is the drive to recruit Canadian listings--a sign of the withering away of the walls that separate the U.S. and Canadian capital markets. The Exchange presently includes listings for such prominent Canadian corporations--some of whom are represented at the head table today--as Brascan, Cominco, Echo Bay, Gulf Canada, Imperial Oil, Inter-City Products, Norcen and Rio Algom. The AMEX has recently stepped up its marketing campaign to attract listings by Canadian companies in the light of new cross-border disclosure rules by U.S. and Canadian regulators.

Our guest speaker today, Mr. Jones, has been Chairman and CEO of the AMEX for two years.

He is also an answer to the question: Is there life after politics? Prior to accepting his posting at the Exchange, he had served in the U.S. Congress for 14 years, from 1972 to 1986, representing the First District of his native Oklahoma. His stay in Congress included a stretch as Chairman of the House Budget Committee. As well, he served on the powerful House Ways and Means Committee. Mr. Jones was recognized as a leader in the areas of budget, tax, international trade and health care.

In the 1960s, Mr. Jones worked in the White House under President Lyndon Johnson, first as a special assistant and later as the youngest Presidential Chief of Staff in history.

Mr. Jones has also practised law and is currently Chairman of the American Business Conference.

Mr. Jones intended to address us today on Breaking Down The Walls: Creating Closer North American Ties. Over lunch, he has been re-crafting his remarks and has warned me that he may deviate from his prepared text.

Please join me in welcoming James Jones.

James Jones:

As you have already figured out from my accent, I'm a foreigner. An American to be exact. Oklahoma born and raised. But I have to tell you I feel incredibly at home in front of you today. But that's not surprising. In fact, given the history that the American Stock Exchange shares with your country, I would have been shocked if I felt any other way.

The American Stock Exchange and Canada have always had a special relationship.

We have many friends here, and this morning I had the pleasure of meeting again Pearce Bunting, President of the Toronto Stock Exchange. I have the highest regard for Pearce and the leadership he provides to the Federation of World Stock Exchanges. It is always a pleasure to visit the Toronto Exchange.

Our ties with Canada, of course, go back a long way. I believe one of your major corporations--Imperial Oil--has been with us since 1929, before most of us were born. Speeding up time a bit, the electronic link between the AMEX and the Toronto Stock Exchange back in 1985 was the first two-way hookup between primary equity markets in different countries.

As with many pioneering efforts throughout history, perhaps the link was ahead of its time. But it did pave the way for others, and perhaps the next time Pearce and I meet up, we should revisit the linkage in the context of a new and different type of alliance.

There are 51 Canadian-based issues now trading on the AMEX. No other country--other than the U.S. of course--comes close to being that well represented on our Exchange.

In fact, there are more Canadian companies listed on the AMEX than on any other American Exchange.

Those Canadian issues account for more than six per cent of the volume on our Exchange on any given day, and the investors buying into those firms are clearly onto something. Even though Canadian-based companies account for just under five per cent of the total number of firms listed on the AMEX, they make up 24 per cent of our market value.

So as you can see it's no wonder I feel comfortable standing here this afternoon. The relationship between Canada and the AMEX has always been close, and it is exactly that relationship I want to talk about today. For as close as it has been in the past, I think it must become even closer in the immediate future--for our benefit, as much as yours.

I'd like to talk about two things this afternoon. First, I'd like to discuss the easing of legal and regulatory barriers that are permitting more Canadian companies to list on American exchanges.

And my second topic is directly related to the first. I want to explore with you the idea of creating a North American Trading Group, an alliance that would include not only the United States and Canada, but Mexico and perhaps other Latin American countries as well.

Let me start with regulations, and tell you a story which--I'll concede at the outset--shows that you are a lot smarter than we are.

A couple of years back our people in New York came up with the idea for a new product: one that would essentially give the holder of the security the equivalent of a position in stocks of an entire index. We called them equity index participations. This was one of the most successful new products to come down the pike. It had attracted substantial investor interest. And we were very excited about it. We thought it had a chance to be a big winner.

And it still might be--some time in the future. Equity index participations became snared in a web of regulatory red tape in Washington. You, on the other hand, had no such problems.

The Toronto Stock Exchange agreed this was a good idea So good, in fact, that it created a very similar product, the one you know as TIPS, an index which monitors the performance of the 35 leading Canadian stocks, and is based on the same concept as our index participations. And it's proving that the instincts of our people were right. I understand it is a very popular product. But it's only available up here. You can't buy TIPS on the AMEX, or any other American exchange. However, I understand that only recently The Toronto Stock Exchange filed with our SEC to have TIPS marketed to investors in the United States.

Now granted this is one isolated instance, but my question is why should this sort of thing happen at all?

Why should we have any regulatory barriers between our two countries when it comes to the trading of securities? Why shouldn't it be easy for us to list our stocks and products on each other's exchanges?

The answer is it should be easy, and I'm happy to see that our SEC and your Canadian regulators took a major step in that direction earlier this year. As many of you know, the SEC changed its rules to allow Canadian companies listing on a U.S. exchange to use the same modified disclosure system that is available to all other non-U.S. companies, including Canadian companies traded in the U.S. over-the-counter market.

What this means is Canadian companies listing on the American Stock Exchange will no longer have to disclose managers' salaries; they will be exempt from U.S. proxy rules, and also from other inside reporting, short-swing profit recovery requirements.

This long-awaited rule change was part of a larger effort, called the Multi-jurisdictional Disclosure System (MJDS) which will allow world-class Canadian companies to use customary Canadian documents to offer their securities and fulfil reporting requirements in the U.S.

There may have been a time when those regulatory hurdles were a worthwhile way of protecting your country and mine. After all, those barriers were just another example of the protectionism that used to be rampant when the world was a lot bigger.

Back when worldwide communication, travel and trade were extremely difficult--if not impossible--regulators would do whatever they could to make sure that the home team got an edge when foreigners invaded. Be it with restrictive trade policies--or securities regulations--they'd try to make it difficult for outsiders to do their business on their turf.

But with Europe 1992 now less than two months away, you can see just how outdated that kind of protectionist thinking is, especially when it comes to securities law.

The 12 nations that will make up a unified Europe are now reviewing and revising the financial regulations that govern their public markets. When they're done, the expectation is that each country will accept the accounting, reporting, and disclosure rules of the others.

The result will be startling--and long overdue. No longer will you have to meet 12 different sets of standards, if you want to trade securities in Europe. There will be one, uniform standard. A standard that will also provide a level floor of protection for all European investors.

That kind of thinking is not only needed in Europe, but throughout the world. There needs to be one basic set of regulatory rules that governs major public offerings everywhere.

Security regulations should reflect reality. And the reality today is neither investors, nor companies, only look within their borders when it comes to finding the best possible use for their money.

The proverbial grandmother in Tulsa or Toronto is literally shopping around the world today, in search of the highest return on her investment. Whether she puts her money in things like global sector funds--where you can invest in specific areas of the world, Germany or the Far East for example--or things like the Nikkei warrants, that we at the American Stock Exchange introduced, she is constantly looking for the best deal.

Companies are also; and regulators need to make their search easier.

Just yesterday I had the privilege of addressing my own securities industry, specifically the group of American lawyers who are in charge of regulating securities trades. Unequivocally, I suggested we needed one worldwide regulatory standard, a standard that must do two things: (1) Make it easy for companies to access capital worldwide, while (2) fulfilling our obligation to protect the investor. For any stock exchange to succeed, investors need to believe that it is above reproach.

You all have probably seen the old American Western where a cowboy, who probably has had one too many, continues to play a slot machine, or in a poker game, even though he knows the game is rigged. When asked why he continues to risk his money, even though he's sure to lose, the fellow says: "Because it's the only game in town."

What holds true for drunken cowboys most decidedly does not hold true for today's sophisticated investors. If the game is rigged--or even if they just think the game is rigged--they simply are not going to invest.

As was mentioned in that very nice introduction I received, I've spent a lot of my life in Washington, first in the White House as Lyndon Johnson's Chief of Staff and later as a Congressman from Oklahoma. These experiences, plus those during my present role at the American Stock Exchange, led: me to the conclusion that financial markets are a lot like governments. In both places, the confidence factor plays a huge role. If people stop believing in their government, you lose the ability to govern. If people don't believe--or stop believing--in the absolute fairness of an exchange, they won't invest. You lose the ability to provide a liquid marketplace. The only way you will ever have liquidity is if investors believe they are competing on exactly the same footing as everyone else.

That's why absolute protection for investors must be the starting point in any discussion of securities law, whether you are trying to create efficient stock exchanges, as they are now in places like Taiwan and Poland, or talking about changing existing ones. And that protection is also absolutely necessary if we are ever to have one universal regulatory standard, because that standard will have to be something that everyone believes in.

Now a single worldwide regulatory standard is a tall order, and one that is not going to happen overnight. However, removing the regulatory barriers that exist between your country and mine is not quite as complex. And if we are doing it, and Europe can do it, the rest of the world just might be convinced such a universal standard is possible.

Uniform standards would go a long way to make it easier for companies to raise capital in other countries. Let me bring that point closer to home. For instance, the SEC's rule changes should make it easier for Canadian companies to raise capital in any number of ways. Let me touch on a few of them, briefly, and, for the sake of argument, let's say a Canadian firm decides to list on the American Stock Exchange.

(In my only overt commercial pitch today, let me say that, I hope a number of them do).

There are three major advantages in being listed in both Canada and the U.S.: Less red tape, greater visibility, and increased marketability. Let's take them one at a time:

• Less Red Tape: If you are traded on the AMEX, you are automatically exempt from state registration and filing fees in virtually all of our 50 states. Also, the fact that you've been filing reports with the SEC as part of an exchange listing, will facilitate the preparation of a '33 Act registration statement and prospectus, if one is required for a public offering in the U.S.

• Greater Visibility: Analysts, brokers and investors pay attention to stocks listed on major exchanges. And we make it easy for them to meet the people behind the companies through our AMEX Clubs, which are located in 19 key business centres throughout the world, including the two in Canada--one in Montreal and the other right here in Toronto. These are forums in which listed company executives can deliver corporate presentations to groups of investment professionals, principally brokers, analysts and money managers. And, as some of you probably know, the AMEX also sponsors the annual Canadian Oil and Gas Symposium, held just last month--again right here in Toronto.

• Increased Marketability: The cornerstone of both The New York and American Stock Exchanges' auction market is the specialist who assures investors that there will be a fair and orderly market in every stock One of our primary customers is the public, and our studies show that investors trading in the auction market pay far less in trading costs than those in the dealer market system.

Furthermore, during market aberrations, specialists have the affirmative obligation to buy or sell in the absence of public orders in order to maintain a liquid market. This is very important to shareholders in an uncertain market.

We at the AMEX are looking to further help that marketability in different ways, all part of a larger commitment we've made which is to provide total quality service to our customers. It's a very serious commitment on our part, and will require us to meet some pretty tough standards, including satisfying our customers not only the first time--but every time.

It's also pretty basic. You ask customers what they want, and then you give it to them.

At the heart of everything we are trying to do is the fundamental recognition that the needs of our customers come first. And, as I've already indicated, those customers are not just in the United States, but in Canada and spread throughout the world.

One example of providing that needed service is in the area of research. Those of you in the audience from the securities business no doubt have seen the drop-off of quantitative and qualitative research on publicly-traded companies since the 1987 crash. We long suspected that brokerage firms have scaled back on the research they provide.

The net result is this: Many companies--particularly the mid-sized firms and growth companies for which our exchange specializes--aren't getting as much coverage as they used to get. That makes it harder for investors to make educated decisions, and it also makes it a lot harder for these less well-known firms to get their story across. Without information, you know what happens. Confidence in the equities markets suffer, and--as a direct result--liquidity falls.

To ensure they have access to needed research, we are seriously considering creating a separate entity devoted exclusively to industry research--on our own companies and others. This new entity might be in the form of an independent subsidiary, or it could be some type of joint venture.

Another way of helping is through the new marketplace that we'd like to create. You may have read that the American Stock Exchange is in the process of creating a new marketplace for companies smaller than the ones that currently trade on the AMEX.

Let me tell you how this idea came about.

More than two years ago we recognized there was a group of emerging companies that were not getting all the services they needed to grow. Most notably they were lacking three things: Access to the auction marketplace that we talked about earlier, specialist support, and short-sale protection.

Earlier this year, these deficiencies became even more apparent when the credit crunch for these companies reached crisis proportions. So we stepped up our efforts to serve these firms through the development of an incubator market, which we call the Emerging Company Marketplace.

By early next year, we hope to have approval from the SEC to begin operating it.

We are excited about the idea. We have had calls from people representing Canadian companies since the announcement, so apparently the concept has generated some interest up here.

Companies will be accepted for listing on the new exchange according to two standards. First, they'll need the--endorsement of a blue-ribbon panel of small-company experts who will determine if the company is poised for substantial growth.

Second, they will have to meet a specific set of financial criteria, financial criteria that accurately reflects the reality in which an emerging growth company operates. For example, we won't require these companies to have $750,000 in annual pre-tax earnings, the minimum standard to be accepted on the AMEX. That just wouldn't make sense. Often new and rapidly growing companies operate at a loss, while their products are being developed. The financial standards for listing on the Emerging Company Marketplace will recognize that rapidly growing companies often have atypical balance sheets.

We think the idea of an emerging company marketplace is over-due. This new market will provide smaller growth companies with the discipline, liquidity and efficiency of an auction market which can only help them.

And the idea of the marketplace also fits in very nicely with our plans to do everything we can to satisfy the needs of our customers. If small and mid-sized companies need a new exchange to help them grow, it is up to us to create it. As you have already figured out from all I've said, the AMEX is dedicated to becoming known as the customer driven exchange.

Having Canadian companies fist on American exchanges, and American companies list up here, is an excellent way of tying our two countries closer together economically. I understand there are more than 50 U.S. companies listed in Canada. But I think we have to do even more. I think we have to move to create a North American Trading Group or Alliance, just as a precautionary measure, if nothing else. While I personally hope the Uruguay round of trade talks will be successful and Europe '92 will result in free and open trading, my fear is that the talks may fall short of the mark. The result could be a protectionist market, particularly in the manufacturing sector initially. Very likely trading blocs will evolve until we get multilateral free trade agreements.

Now, I am a free trader. Always have been, always will be, and I take great pride in the fact that I testified before the U.S. Congress in favour of the Canadian Free Trade Agreement and, more recently, in favour of the Mexican Free Trading Agreement.

I don't like economic blocs, here, there, or anywhere. I think they are inherently pernicious. Economic blocs, as you well know, have given rise to disputes between the U.S. and Japan over the importation of heavy industry and electronics, and have also caused the agricultural warfare that exists today between Europe, the U.S. and developing countries. There is no doubt that economic blocs are not the most efficient way to establish worldwide economic order.

But the fact remains that Europe '92 has the potential of being the largest economic bloc the world has ever seen. If you add the seven-member European Free Trade Association--whose members are Sweden, Finland, Iceland, Norway, Switzerland, Austria and Liechtenstein--to the 12-nation European Community, you are talking about an economic affiliation of 19 countries and 380 million people. That's a powerful group indeed.

Given this, it is in the best interest of Canada and the U.S. to join forces with Mexico, and perhaps other Latin American countries, to create a trading bloc of our own.

My objective isn't to create two trading blocs that will compete against one another. My goal is actually quite the opposite.

A North American trading bloc--especially one that formally recognizes Mexico's growing economic power--will be far bigger economically than a United Europe. With Mexico, and other Latin American countries, finally moving to put its financial house in order, a huge new market is available to us very close to home. It's a market well worth exploring.

But there is another major advantage of Canada, the United States and Mexico joining forces. Europe's main protectionist concern is Asia, and vice versa A North American Trading Alliance could become so big and powerful so as to act as a catalyst or balancing wheel between the two and break all the protectionist logjams. We could do business with both, or a multilateral agreement could be the result. Seeing the combined size and economic might of a North American trading bloc, those 19 countries in Europe may see the wisdom of opening their markets to us, or risk being excluded from ours.

If we move to create a North American trading bloc, we can approach negotiations about opening up Europe '92 from a position of strength.

If we don't work to create a North American trading bloc, we risk going into the negotiations as a weak sister, instead of being the dominant player.

The idea behind those negotiations will be identical to the concept underlying my call for the elimination of the regulatory barriers that are keeping financial markets apart. The world has changed. We are more inter-dependent than ever before and the markets--both financial and economic--should reflect this new reality.

Thank you very much for your attention.

The appreciation of the meeting was expressed by Thomas Spencer, Vice President, The Toronto Dominion Bank, and a Director, The Empire Club of Canada.