Speech by SEC Staff:
European Regulatory Convergence - The Importance of Context
Director, Office of International Affairs
U.S. Securities and Exchange Commission
European American Business Council
October 20, 2006
Thank you very much. I have been involved in what is now called the "Transatlantic Dialogue" for several years now, and I can say, with all honesty, that symposia such as yours have proven indispensable in providing input regarding the many cross-border financial regulatory issues that only a few years ago seemed intractable.
But before I go further, I should give the SEC's standard disclaimer, which I imagine most of you have heard before and no doubt will hear again: The US Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. These remarks express the author's views and do not necessarily reflect those of the Commission, the Commissioners, or other members of the SEC staff.
With that said and given the brevity of our panel, rather than presenting remarks, I would instead like to pose a set of questions for discussion. I am approaching the topic in this manner because I believe we should not overlook the context in which the Dialogue occurs and I wish to give you a sense of the difficult issues with which Mark Sobel, Crispin Waymouth, and I have had to contend. Context is fundamental to understanding the nature of our discussions on creating a seamless transatlantic financial market, and this context makes the success of the Dialogue that much more remarkable.
In illustration, I'd like to begin with a subject that may appear to be a digression: cheese. Clotaire Rapaille is a French psychiatrist and cultural anthropologist who has devoted himself to uncovering the meaning and decoding the thoughts that lie at the heart of different cultures. He describes his work as psychoanalyzing a culture.
Rapaille has observed that in France, cheese is "alive," which means that you can buy cheese that is young, mature, or old. In France, you have to read the age of the cheese when you go to buy it - you smell it, you touch it, you poke it. If you need cheese for today, you buy a mature cheese. If you need cheese for next week, you buy a young cheese. And when you buy a young cheese, you never, ever put the cheese in the refrigerator, for the same reason that you don't put your cat in the refrigerator: the cheese - like the cat - is very much alive.
By way of contrast, Rapaille has observed that in America, cheese is "dead." Because the cheese is pasteurized, it is legally and scientifically dead. In America, you buy cheese wrapped in a little plastic body bag, and you take it home and put it in the refrigerator - which Rapaille claims is like putting the cheese into a cheese morgue. The smell matters much less in America than it does in France. The most important thing is that the cheese is safe: Americans want safety before taste. And the French want taste before safety.
I think what I find most interesting about Rapaille's work is that it shows that even when we're talking about something that is as commonplace as cheese, we - on different sides of the Atlantic - bring to the conversation an unvoiced set of assumptions, experiences, and preferences to the conversation. And this difference in understandings is not just limited to America and France. It exists between and among European countries as well. For example, Rapaille has pointed out that in France, the sun - le soleil - is masculine. Louis XIV used it (or should I say him) as a symbol of power and might. By contrast, in Germany, the sun - die Sonne - is feminine. The Germans will tell you that of course the sun is female - she brings warmth, she makes things grow. And if you were to ask an American whether the sun is masculine or feminine, you would of course get a bemused stare, and you would be told that the sun is neither a "he" nor a "she." The sun is an "it."
My point is that we must be mindful of differences in regulatory philosophy, differences in legal regimes, and cultural biases. Yet through the Dialogue, we have found that we share the same concerns, and, despite our differences, are minded to take similar approaches to issues. Both the US and the EU agree on what the central issues are. We agree on how important these issues are and that we all stand to gain from the Dialogue. We know that investors today can invest abroad with relative ease, and that issuers are not limited to their own countries when seeking capital. We also recognize that there still can be significant transaction costs to doing so. And regulators in the United States and Europe all agree that, everything being equal, both issuers and investors will benefit if these transaction costs can be reduced or eliminated.
Mutual recognition is often offered as the panacea that will make cross-border issues moot. But such a facile statement ignores some basic, fundamental questions. The United States has long had a very large, and - until recently- relatively isolated capital market. And this capital market, with its numerous stock exchanges, has for the past 70 years been overseen at the national level by a single federal securities regulator and governed by a single set of federal securities statutes. When problems arise - and, let's be honest, problems inevitably arise in this world - the US Securities and Exchange Commission and the US Congress have long been accustomed to addressing problems on their own, without seeing the need to consult with regulators or legislators outside our country. There are obviously advantages to this approach, such as the ability to address problems quickly. After all, the Sarbanes-Oxley Act, the single most sweeping change in US securities laws in 70 years, was passed by Congress within months of the collapse of Enron.
Consequently, mutual recognition is viewed with some suspicion in certain quarters. After all, won't the first significant unilateral change by any jurisdiction ruin the recognition? And if jurisdictions can't make changes unilaterally - that is, quickly - won't that harm the regulatory flexibility that has made our markets so strong to begin with?
By contrast, mutual recognition is viewed quite differently in the European Union. The EU right now is engaged in a truly momentous effort to harmonize and converge the laws and regulations of 25 different countries. And it obviously colors how Europeans view the Transatlantic Dialogue - after all, if it is possible to create a regime of mutual recognition encompassing 25 countries, how difficult can it be to achieve mutual recognition between just two?
But the EU's experience has not been easy. It has produced potentially differing legal and regulatory interpretations and applications, even though the EU now has a single overarching legal infrastructure, a single set of EU-wide directives, and a closely linked set of securities regulators cooperating through CESR. And concerns remain that even subtle divergences in member-state regulations under the relevant EU directive - not to mention enforcement - will create opportunities for "regulatory arbitrage," and different levels of investor protection in different member-states.
WHITHER CONVERGENCE: QUESTIONS FOR DISCUSSION
And this leads me to my questions, for both the European and US sides.
Question 1: How Much Do Differences Matter?
First, when considering how to create a seamless transatlantic capital market, do different regulatory approaches in the United States and Europe necessarily result in different regulatory costs and different levels of investor protection?
I recognize that this is a sensitive issue. After all, no regulator will admit that its approach results in less investor protection than another, or is more expensive. But the European experience seems to suggest that differences do matter and to pretend that different regulations do not produce different results is to ignore reality. And different levels of investor protection can result in regulatory arbitrage that could harm the integrity of all of our markets. Within Europe, these concerns about regulatory arbitrage have resulted in a push to greater harmonization and convergence in advance of "mutual recognition."
So, what level of regulatory convergence is necessary for mutual recognition? Can a transatlantic securities market really exist unless the securities regulations in both the United States and the EU are, for all practical purposes, the same - which is a utopian hope, at best? Can less-than-full convergence lead to mutual recognition, without creating the impression that the resulting gaps can be used by market participants to shop around for the lightest regulatory touch while maintaining undiminished market access?
Question 2: What Can We Accomplish, and What Are Our Alternatives?
My second question then is, if regulatory convergence cannot be achieved, what alternatives exist to lowering the transaction costs of accessing capital or investing across the Atlantic that would not result in regulatory arbitrage?
Question 3: Is Regulatory Convergence Enough?
But even if mutual recognition based on regulatory convergence were possible, securities regulation is just one facet of investor protection. Investor protection also requires securities regulators with expansive enforcement and investigative powers, adequate resources, and the will to use these powers and resources. And investor protection must protect the private rights of shareholders to seek redress when they are defrauded.
So my third and final question is, even if regulatory convergence proceeds to the point where US and EU securities regulations are essentially identical, will significant differences in enforcement remain that would in turn create opportunities for regulatory arbitrage? In other words, is regulatory convergence enough of a basis for mutual recognition? Does mutual recognition not also require enforcement convergence, to ensure that investor protection standards are equal on both sides of the Atlantic?
These questions help frame the philosophical debate surrounding facilitating cross border securities activity - a debate that remains unresolved. Yet, even though the debate remains unresolved, the Dialogue has nonetheless been an unmitigated success, and I would like to share with you just a few examples of that success.
Through the Dialogue, we have been able to identify the potential conflicts between the Sarbanes-Oxley Act and foreign law that could have made compliance by foreign market participants difficult, if not impossible, and we have been able to make accommodations consistent with the spirit and intent of the Sarbanes-Oxley Act and that did not place foreign market participants in the position of having to choose which laws to abide by or violate.
Through the Dialogue, we have charted a roadmap that sets clears milestones for the potential elimination of the reconciliation requirement for foreign companies listed in the United States that prepare their financial statements using IFRS. Through the Dialogue, we have come to an understanding as to the most sensible regime to apply to credit rating agencies. And through the Dialogue, we are modernizing the thresholds that apply to deregistration with the SEC as a public company, so that the thresholds reflect the markets of the 21th century and make it possible for companies to exit the public markets if their circumstances so warrant. And this is the short list.
Most importantly, through the Dialogue we have devised a method of engagement and have forged relationships that allow us to identify issues, discuss our concerns, and deliberate our options. The Dialogue ensures that our regulatory decisions are informed by events and actions elsewhere, and increases the likelihood of converged regulatory responses. Its continued success will inure to the benefit of transatlantic securities activity and to the investors that allocate their capital in the transatlantic space.
Thank you for your time and attention.