Speech by SEC Staff:
Tchaikovsky's Fourth or Monk's Mood: Improvisation and Harmony in Cross-Border Regulation
Director, Office of International Affairs
U.S. Securities and Exchange Commission
Chatham House — City Series 2007
London, United Kingdom
June 15, 2007
Thank you, David, for that kind introduction. And thank you to the organizers for their kind invitation to speak.
Before I give you my perspective on the subject of "Regulating Beyond Borders," I should start with the standard SEC disclaimer: The SEC as a matter of policy disclaims responsibility for any private remarks made by SEC commissioners or staff. These remarks constitute my own opinions and do not necessarily reflect the views of the Commission, the individual Commissioners, or other members of the Commission staff.
A Little Night Music
I thought I would begin my remarks this morning with a bit of a cultural digression. I know I state the obvious — but I'll go ahead and say it anyway — when I say that London is a city blessed with not only wealth but cultural riches that are the envy of the world. London is justly celebrated for its art and architecture, and for its theater as well. From Shakespeare to Stoppard, from the traditional to the innovative, if it can be done on a stage, you know that it is being done in this city and that it is being done well. And though I think that Broadway can hold its own against the West End, the fact of the matter is that balance of trade in this area favors the United Kingdom.
And there is, of course, the London Symphony Orchestra, which is a treasure that belongs to the world as much as it does to London. Thanks to the miracle of digital technology, people from all over the world can enjoy the virtuoso performances of the London Symphony Orchestra, including the LSO's legendary 1962 performance of Tchaikovsky's Fourth Symphony, conducted by George Szell, who was visiting from the Cleveland Orchestra. Those that know music far better than I do have praised this particular performance of Tchaikovsky's Fourth, raving about Szell's razor-sharp precision, his professionalism, his intensity. I wonder at the dedication that Szell brought to bear on this particular performance, at the long, arduous labor he must have undertaken to unite the members of London Symphony Orchestra behind his artistic vision. And while I admire the results, I confess that I do not envy him what must have been the Herculean burden of coaxing, coddling, pleading, exhorting, and unifying the individual musicians and the sections into breathing life into his vision of Tchaikovsky's Fourth. I will confess that being a securities regulator is hard work. But to me, being the conductor of a symphony orchestra seems well-neigh impossible.
But then I think a bit more about the matter, and I think that maybe Szell had it easier then the securities regulators of the world do. After all, he had one score to work from. We don't. His score was written in what is as close to a universal language as this world has ever seen, while we regulators work in multiple languages, including a variety of accounting languages. And perhaps the thing I envy him most: like all good conductors, he was an autocrat, able to unify the Orchestra behind his vision, his interpretation. He didn't have to worry about the strings wanting to play one way, the woods another, and the brass and percussion sections wanting to play alone. By contrast, there is no conductor that the securities regulators of the world can look to make sure that we are all on the same page. There is no single place we can look to for clear direction. Instead, we must look to each other.
If you were to ask some in the securities industry, you might get the impression that the state of cross-border securities regulation today resembles an orchestra tuning up before the conductor walks to the podium, waiting for direction as it gets ready to play. To the untrained ear, it perhaps sounds like cacophony and chaos. But, like an orchestra, I think there is also an excitement in the air. There is a realization that great things are about to happen. Within the discordant sounds, I think that you can hear the promise of a great melody waiting to be realized. We are working towards harmony. And if you listen closely, you just might be able to make out some of those themes working their way through the pit.
Variations and Emerging Themes
Only a few weeks ago, Chairman Cox and I were here in London where we received a great number of questions about mutual recognition, and the future of SEC policy in this area. For those of you prone to studying tea leaves, I'm sure that some comments that Chairman Cox has made, as well as the speeches by Erik Sirri and Commissioner Nazareth, and the article in the Harvard International Law Journal signal something of a change in the way that the SEC thinks about these things. But the emergence of mutual recognition is one note that is being sounded in a much larger context of cross-border cooperation and coordination that the SEC and its foreign counterparts have been engaged in over the past few years.
To give you a few examples of this cross-border collaboration, the SEC and its foreign counterparts have embarked on initiatives such as the global acceptance of International Financial Reporting Standards. Indeed, towards this end, the Commission is scheduled to consider on June 20 a proposed rule that would allow foreign private issuers to use International Financial Reporting Standards in financial reports filed with the SEC, without requiring these issuers to reconcile to US GAAP. This development would not have been possible without the active collaboration of the SEC and its foreign counterparts.
But this particular initiative is simply the latest result of a healthy, robust dialogue that has been going on among regulators for quite some time. There is, in fact, already in place a cooperative international infrastructure for regulating this new global securities market, an infrastructure that has been carefully built over several years.
This infrastructure consists in part of a web of bilateral and multilateral ties. Bilaterally, for example, we have had for many years now a series of formal information-sharing arrangements for cross-border enforcement assistance. We can proudly say that as a result of this arrangement, serious insider trading, market manipulation, and financial fraud cases have been prosecuted successfully. Just to give you a sense of how important these arrangements are, in a give year the SEC makes on average 500 requests for assistance and receives approximately 400 requests.
The importance of cooperation and information sharing is so widely recognized that it has become a keystone of multilateral cooperation. For example, in 2002, the International Organization of Securities Commissions created a multilateral information-sharing memorandum of understanding under which its signatories pledge to share enforcement information with each other and to assist one another in investigations. This multilateral MOU has proven so successful that, after only 3 years of operation, IOSCO agreed that by 2010 all members of IOSCO should have committed to the agreement as part of continued membership in the organization.
But enforcement — important though it is — is only one area where national securities regulators coordinate their efforts. Recently, the SEC and a number of other securities regulators have entered into a type of "supervisory" MOU that goes well beyond sharing information on enforcement investigations. These supervisory MOUs, such as those the SEC has recently signed with the FSA and the German BaFin, represent groundbreaking efforts by national securities regulators to work together to coordinate their oversight of financial firms that increasingly operate across borders.
Perhaps the preamble to the SEC-FSA supervisory MOU, signed by the SEC's Chairman Cox and the FSA's Chief Executive John Tiner last year, best summarizes the common values that we are trying to give effect to:
The SEC and the FSA express, through this MOU, their willingness to cooperate with each other in the interest of fulfilling their respective regulatory mandates, particularly in the areas of investor protection, fostering market integrity, and maintaining confidence and systemic stability.
In other words, securities regulators today recognize that they cannot do their jobs without cross-border cooperation and coordination. Recognizing this, we are reaching out to each other as never before. We see this spirit of cooperation and coordination not just in the bilateral agreements, but also in the ambitious multilateral initiatives such as the US-EU Financial Markets Dialogue and the SEC-CESR meetings, not to mention in the work being done by IOSCO and other international organizations.
But behind all of these projects is a paradox. We have global markets and global market participants. But these markets and market participants are regulated by national regulators. Because we do not have — and are not likely to have — a global regulator with the same autocratic powers that a gifted orchestra conductor enjoys when he steps up to the podium, we will need national regulators with a global vision for our markets to work effectively. More than that, we need national regulators that can cooperate with each other, coordinate their regulatory efforts, and share responsibilities in order to promote investor protection and market integrity in their home markets and in those markets that cross international borders.
Monk and Coltrane
As we watch the inexorable growth of cross-border markets, it is tempting to ask who should regulate. We want to know who the conductor is that will choose the score and unite the various parts into a seamless whole. And to some, it is a source of concern that there is no single maestro to bring order where there appears to be none.
If you will permit me to torture this musical metaphor just a bit more, I think that jazz — America's unique contribution to the world of music — may have the answer. Unlike an orchestra, which depends on conformity and predictability at all costs, jazz acknowledges the individuality of its performers. It celebrates the unique experiences of the players. It gives them license to be spontaneous, to improvise, to interpret. There is, of course, a melody — a theme, an idea that is common to the performers. But there is no conductor. There is simply a group of players, on the stage, each playing his part but contributing to the whole.
When you hear it described like that, you have to think that jazz is simply anarchy run riot. And then you hear something like the 1957 recording of Theolonius Monk and John Coltrane at Carnegie Hall and you realize that when jazz lives up to its potential, the whole is something substantially, wonderfully more than its parts. The trick is realizing that before they got there, Monk and Coltrane spent years perfecting their craft. In the United States, there is a very old joke that goes like this: "How do you get to Carnegie Hall?" The answer, of course, is "Practice, practice, practice."
Although not quite so neat and not nearly as funny, the question "how do you regulate the cross-border market" admits of a similar answer: "cooperation, cooperation and cooperation." US and European regulators have been regulating their individual markets for many, many years now. And though I am afraid of sounding immodest, I think that we have gotten pretty good at it. What is new is that given the growth of the cross-border markets, we find that instead of the soloists that we thought we were, we are instead part of the same musical group, sharing the same stage. None of us is about to stop playing; the challenge now is to play together in a way realizes the values that we all share while respecting our individual contributions and circumstances.
For us regulators, that necessarily starts with a discussion of principles. There is, of course, lots of discussion these days about regulatory principles, often in the context of what I believe is a sterile debate over whether "principles" or "rules" make for better regulation. What I mean, instead, are the bedrock values upon which our regulatory systems are based. Because, truth be told, the actual regulations we put in place are just the superstructure of our regulatory system. And there may be more than one way to achieve a given objective — sometimes there may even be a better way out there than the approach we are currently taking.
But it does require that we all agree on the basic tune. From the SEC's perspective, I believe the most crucial first step to greater regulatory cooperation, in the absence of an international conductor, is listening for a common tune — essential agreement on regulatory objectives and philosophies. We don't all have to agree on objectives, of course, and there will always be jurisdictions that have fundamentally different philosophies about such things as investor protection than we do. And that's fine. But the closest integration and most effective cooperation will be among like-minded partners. I expect that the SEC will continue to seek out such partners in the near future as our markets integrate even further.