Speech by SEC Staff:
The SEC's Experience in the Development of an Integrated Securities Market in the United States
Presented at the 2nd Annual European Financial Services Conference
Director, Office of International Affairs
U.S. Securities and Exchange Commission
January 27, 2004
Thank you very much, Chairman.
As is the norm for remarks given by those of us from the SEC, I must start off with a disclaimer: The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views that I express are mine and do not necessarily reflect those of the Commission or other members of the SEC's staff.
That said, I would first like to thank Houston Consulting for hosting this conference and managing to gather so many distinguished leaders of the European financial, regulatory and investor community. The topics participants of this conference have chosen to discuss are among the most critical to determining the shape for years to come of not just European capital markets, but capital markets around the world.
The European Union is now embarked on an unprecedented project - the peaceful incorporation of 25 nation-states into a single relatively seamless common market. Where this involves creating a borderless capital market, this task is particularly daunting. In addition to speaking different languages and having different domestic legal systems, the members of the EU approach this project having different sized markets, regulatory philosophies and different market cultures. English Company Law, for example, dates back to the 19th Century and forms the basis of the securities laws and corporation laws of much of the English-speaking world, the United States included. By contrast, many proposed Eastern European members of an enlarged EU have had market economies for only a decade.
As you all know, the Lamfalussy process has been at the center of building this borderless capital market. I've been asked to say a few words about the US experience in creating its own borderless market.
History of the SEC
Before 1933 securities markets in the United States were regulated entirely at the state level. During this time, the level of development of securities markets in the United States was highly disparate.
On one end of the spectrum was a very developed, albeit self-regulating, market found in the New York Stock Exchange. From its very beginnings under the Buttonwood tree, the NYSE regulated how much its members could charge in brokerage fees, how transactions should be handled, and what corporate governance structures issuers on the exchange should have.
At the other end of the development spectrum were the curb-side markets found in areas away from the exchanges in New York, Philadelphia and Chicago. These informal markets traded in securities and commodities, were almost entirely unregulated, and frequently were wracked with fraud and manipulation.
During the first two decades of the 20th century, many US states took steps towards regulating these markets by passing what are now called "Blue Sky" laws. The name for these laws comes from their efforts at preventing fraudsters from offering for sale shares of the "blue sky."
As many of you know, the 1929 crash led the US Congress to many of the same conclusions that the Lamfalussy and the Wise Men's Committee were able to draw under much less traumatic circumstances. Principal among these conclusions was that an integrated securities market requires an integrated regulatory and enforcement approach. In the United States, this translated into the creation of a single national securities regulator.
One thing I'd like to point out is that, although the SEC is the national securities regulator in the United States, blue sky laws still exist and state securities regulators still have an important role to play in detecting and prosecuting securities fraud. This approach is similar in some respects to what is developing in the EU today, with centralized regulatory policymaking and decentralized and overlapping implementation and enforcement.
Lessons from the SEC Experience
Consequently, though the reason Europe is moving towards an integrated market may seem very different from that of the United States 70 years ago, the paths taken may not be so different as one might think. Indeed, aside from securities and banking regulation, the fully integrated US market is still dominated, in many ways, by a decentralized regulatory system. Corporation law and insurance regulation in the United States remain the province of state law. Even with regard to securities, banking and commodities regulation, the United States still divides those tasks among different regulators, while many European jurisdictions have moved towards a consolidated regulatory approach.
I must admit that this interlocking, overlapping and coordinating corporate and financial regulation in the United States can be confusing to outsiders. The SEC, in particular, is an unusual beast that I see frequently misunderstood in foreign circles. I often see it portrayed as part of the Executive Branch of the United States government, with the Commissioners reporting to either the President or the Treasury Secretary. This is incorrect. The SEC is an independent agency, and although the President appoints the Commissioners, he cannot dismiss them except for cause. Further, the President can appoint no more than three of the five commissioners from the same political party - which, in practice, frequently means SEC Commissioners approach financial regulation with different philosophical and political views. The SEC does report to Congress and Congress sets the SEC's budget and can, by passing a law, direct the SEC to take certain actions. It does not, however, generally control the SEC's rulemaking process otherwise.
The Federal Reserve Board, the primary banking regulator in the US, is similarly independent. And, of course, state regulatory agencies are more or less independent of the federal government. Nonetheless, in the United States, cooperation and coordination among state and federal financial and business regulators still allow for a single integrated market. At the federal level, this coordination takes place at both the informal level and through the Presidents Working Group - a financial regulatory policy group comprising the White House, the Treasury Department, the Federal Reserve, the SEC and other federal financial regulators.
Rather than shedding light on whether a single overarching securities regulator is necessary for an integrated market, I believe the success of securities regulation in the United States is linked to certain fundamental principles.
The first principle is independence. This principle is widely recognized among central bankers but is not yet universal among securities regulators.
Whether by brilliant design or by sheer accident, from its beginnings the US Congress placed buffers between the SEC and outside political pressure. The fact that the President cannot dismiss the SEC's Commissioners or direct them to take certain regulatory actions provides the SEC with a degree of political insulation. This allows the SEC to avoid pressure to take politically expedient, but potentially unwise, regulatory decisions and adds to the SEC's enforcement capabilities by helping remove politics from the enforcement equation.
The second principle is that securities regulators should have robust rulemaking powers. It is important that the SEC -comprised of financial and legal experts - has the authority to determine how securities laws are best implemented. The alternative is to have either ineffective implementation or to have the task of implementation assumed by our legislature. Neither of these alternatives is optimal.
The third principle is that securities regulators should have strong enforcement powers to investigate and prosecute securities law violations. In today's global environment, this also means the ability to share information and cooperate with other securities regulators throughout the world.
None of these principles is controversial, but they are sometimes forgotten when discussing the practical aspects of the integrated US securities market.
CESR and the SEC Going Forward
In support of these principles, the SEC is committed to an ongoing formal dialogue with CESR. Even as CESR's constituent members engage in a dialogue to harmonize regulatory standards and implement new laws passed by the European Parliament, the SEC and CESR are interested in a dialogue for very similar reasons.
As the SEC and European regulators consider new regulations, we frequently find that we share similar concerns even as we adopt different mechanisms to addressing these concerns. A dialogue between the SEC and CESR will help us shape our policies in ways that are similar, where desirable, or at least not conflicting.
Nonetheless, one point we all should keep in mind in this brave new world of convergence and regulatory dialogue is that now, and in the future, different regulations and decisions made by the SEC, by CESR, and by securities regulators around the world, reflect not just different approaches to similar problems, but also deliberate policy choices.
It may not always be feasible to harmonize or converge these differences away, or pretend that vastly different policy choices somehow produce equivalent regulation. Nonetheless, we should, where possible, work to minimize conflicts between them. And regulators should assist each other wherever possible, despite these different policy decisions - a philosophy underlying Section 21(a)(2) of the US Securities Exchange Act, which permits the SEC to assist a foreign regulator in an enforcement investigation, even where the alleged activity would not violate US law were it to occur in the United States.
I believe this combination of dialogue and cooperation will lead to better securities regulation everywhere and, in the long run, better choices for investors.