Sunday, August 2, 2009
Post-American Securities Regulation, by Chris Brummer, Georgetown University Law Center, was recently posted on SSRN. Here is the abstract:
International securities regulation has arrived at the forefront of the country's debate on financial market reform. The global economic crisis has exposed the enormous systemic risk that can arise where securities are sold across borders. Meanwhile, the Bernie Madoff and Allen Stanford frauds have illustrated the international reach of swindlers and conmen. Consequently, policymakers have vociferously called for not only domestic securities law reform, but also a more effective international regulatory architecture.
Yet international securities regulation is poorly understood. Securities scholars traditionally view the SEC as a global regulatory monopolist due to the size of US stock exchanges. But they overlook the rise of foreign capital markets and the diminished influence of the SEC. Meanwhile, international law scholars view international securities regulation as involving what game theoreticians would call an "assurance" game where information sharing through informal networks of regulators facilitates swift agreement on standards. But they ignore the asymmetric costs of adopting international standards and thus underestimate the obstacles to convergence.
This Article overcomes these limitations and offers a fuller theoretical account of international securities regulation. It argues that due to increased global competition for securities transactions, coordination among securities regulators often comprises a "battle of the sexes" game where regulators are not necessarily incentivized to adopt the other's regime. Instead, only where securities regulation touches upon what can be considered "systemic risks" - defined as financial risks whose costs are internalized broadly and deeply across borders - will networks be potentially capable of realizing significant regulatory coordination. And even here, coordination is most likely to be undertaken by cross-functional networks operating with the credibility and support of political elites. The Article then shows how the SEC, cognizant of this development, is forming club-like alliances that offer foreign regulators special rewards, like eased market access for foreign market participants, for adopting some of its policy preferences. The Article then assesses the effectiveness of this approach and concludes that clubs have better prospects of success in enforcement cooperation than in substantive areas of securities law.