Norris, today, devotes his column to a recent paper from a senior SEC executive,
Ethiopis Tafara. He’s so unimpressed, indeed, that he doesn’t either link to
it or give us its name. Well, I’m here to help: it’s called "A Blueprint
for Cross-Border Access to U.S. Investors: A New International Framework",
the abstract is here, and
the paper itself is here.
Here’s Norris summarizing the paper:
The idea, proposed in an article in The Harvard International Law Journal
by Ethiopis Tafara, the director of the commission’s office of international
affairs, and Robert J. Peterson, a lawyer in that office, is that the commission
would reach deals with other regulators to recognize each other’s regulation,
and to cooperate in providing information.
Once that was done, stock exchanges in the affected countries, and brokers
from those countries, could sell securities directly to all American investors
without having to conform to American rules.
Norris isn’t impressed:
At worst, such a move could expose American investors to added risk and less
protection, while leaving American stock markets at a new competitive disadvantage…
technology has progressed, and the S.E.C. and other regulators are going to
have to design an international regulatory regime to deal with the new realities.
How well they succeed may determine whether future investors have adequate
protection, or whether an international regulatory race to the bottom ends
up making it easy for crooks in jurisdictions with little effective regulation
to prey on people the world over.
There are three things which rub me the wrong way here. The first is the implicit
idea that the SEC, at present, has the best regulatory structure in the world,
and that if the US system moves towards, say, the UK system, then that would
be a move in the wrong direction, away from investor protection and towards
corporate impunity. No one, to my knowledge, has come close to demonstrating
such a thing.
The second is that a "regulatory race to the bottom" is really something
which anybody needs to worry about. Again, is there any evidence that regulators
in developed countries have competed with each other to have the most market-friendly
and consumer-unfriendly regulations?
And third is the zero-sum assumption: that anything which is good for consumers
is bad for companies, and vice versa. Not at all. Here’s Tafara:
Investors now search beyond their own borders for investment opportunities
and, unlike the past, many of these investors are not large companies, financial
firms, or extremely wealthy individuals. A good number are “typical”
retail investors—individuals with normal jobs and average incomes—who
save for retirement and their children’s education, and who may be well-educated,
but nonetheless are not “sophisticated investors” in the legal
sense. Investors (whether retail or professional) and large firms pursue international
opportunities for the same reasons: higher investment returns and the reduction
in risk offered by portfolio diversification.
In other words, there’s a very real cost to preventing retail investors from
being able to participate in the same markets that more sophisticated investors
play in. And I’m not talking about structured products here: I’m talking about
foreign stock markets, which are all completely open to retail investors in
their respective countries. There are many more stocks in the world than those
listed in New York, and anything which increases the number of stocks available
to US investors might well help them reduce their investment risks,
through diversification, rather than increase them, through decreased regulation.