Despite sustained economic growth and the creation of 7 million new jobs since 2003, the competitiveness of the American economy is facing a serious challenge from markets overseas. Certainly, America remains the world’s premier economic superpower, but gone are the days that capital would blindly flow to Wall Street — and from there to every sector of our national economy.

My district of Staten Island and parts of Brooklyn is just a stone’s throw from Lower Manhattan and the financial capital of the world. Tens of thousands of residents each day travel across New York harbor on the Staten Island ferry or take the subway from Brooklyn to their jobs on Wall Street, where they help power the economic engine of America and the world. The benefits of a vibrant financial services industry are essential not just for our financial well-being, but also indirectly for the economic health of the deli owners, tailors, and restaurant operators across the city.

The gross domestic product of the financial services industry topped $1 trillion in 2005, represented 8.1% of total U.S. GDP, and 5% of total private sector employment. In New York City the financial services sector represents 175,000 employees, 20.7% of total wages, and $2.1 billion in tax payments. Indeed, the city’s projected $2.9 billion surplus this year — and Mayor Bloomberg ‘s pledge to reduce property, sales, and business taxes by $1 billion — is a direct result of Wall Street’s success. It also means more money to build new schools, repair damaged roads, and provide health coverage for the uninsured.

Sustaining the competitiveness of the sector is essential. An interim report recently issued by the Committee on Capital Markets Regulation, an independent group that includes more than 20 corporate and financial leaders, traces the decline of American competitiveness and offers some common sense recommendations to regain our economic standing.

The report notes that global initial public offerings, a leading indicator of market competitiveness, are now more likely to go to London than to Wall Street. Consider this: 96% of the largest global IPO’s were issued in foreign markets in 2005. That same year, only 10% of all global IPOs chose to list on the New York Stock Exchange compared to 37% five years earlier. London’s market share jumped to nearly 25% during that same time period.

The seeds of this reversal were planted nearly two decades ago when foreign markets began to implement reforms, challenging our supremacy. These markets enhanced technology, improved liquidity, and strengthened investor confidence by, among other things, requiring greater transparency and accountability.

Today, companies seek out markets that offer a meaningful balance between the costs of effective regulation and protections for investors, access to efficient capital without excessive and undue liability costs, and regulators who instill confidence in the market without dimming innovation and progress.

In America, new regulatory requirements, most notably the implementation of the Sarbanes-Oxley Act, have driven compliance costs into the millions, contributing to a climate that encourages companies to explore foreign and private equity markets.

The increased risk of liability, including government and shareholder litigation, has also spurred corporations and investors to consider new options. In America today, capital raised in the private equity markets, which do not require compliance with Sarbanes-Oxley and feature less daunting liability risks, is now more than 10 times greater than in the public markets.

The key to reclaiming our competitive advantage does not lie in a wholesale elimination of regulations and litigation, for a properly balanced regulatory environment attracts capital and encourages confidence in the markets’ integrity.

As a first step, we need to streamline the regulatory process while maintaining the highest level of investor confidence. That is why in 2005 I introduced legislation to make structural and procedural improvements to the Securities and Exchange Commission.

My bill sought to enhance communication between the policy-making and the enforcement and examination divisions of the agency to ensure that the compliance costs for registered firms were consistent with the risks posed to investors. To its credit, the SEC implemented several recommendations contained in the bill less than six months later, creating the real possibility of more comprehensive, self-imposed reforms in the years ahead.

We must also enhance communication between regulators and the regulated so companies no longer need to fear that interaction with the SEC will lead to an investigation. Indeed, the Committee on Capital Markets Regulation echoed this concern by recommending that the SEC adopt prudential regulation similar to bank regulation to encourage companies to come forward with questions and explore new products with regulators.

In addition, the SEC and the self-regulatory organizations should be required to perform a cost-benefit analysis on new rules and regulations.

America must also reclaim its position as the leader in shareholder rights by exploring concepts like majority voting, a more transparent nomination process for directors, and the ability to seek alternatives to litigation. Empowering shareholders will enhance management accountability and likely reduce regulatory and legal action.

Finally, the enforcement emphasis must remain on bringing to justice those who violated the law — not on destroying entire companies.

New York and the nation have much to gain by encouraging action to re-establish our nation’s capital markets as the destination of choice for investors and companies.

Mr. Fossella is a congressional representative for Staten Island and parts of Brooklyn.