Brummer on International Securities Regulation

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.

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Financial Firms Gearing Up to Tackle New Regulations

Financial institutions globally are expecting a wave of new regulations that will require major risk management investments and reforms, according to the results of a survey from global consultancy Accenture published this week.

The report, which surveyed chief risk officers, chief financial officers, and other risk executives from more than 250 of the world’s largest organizations across multiple industries, found that, despite the economic downturn and budget constraints, most financial services firms see an oncoming wave of new regulation and are investing in risk management. Seventy percent of respondents believe regulators are “actively looking at coming up with more stringent compliance requirements,” while 71% have increased or are planning to increase investments in risk management capabilities.

“Financial services risk programs have experienced an unprecedented vulnerability to interrelated events across all risk and asset types,” said Ed Grau, a senior executive and financial services risk expert at Accenture who contributed to the report, noting that risk-based capital allocation decisions, risk based performance measurement, and consistent stress testing across asset classes, positions and business lines must improve in order to ensure appropriate risk.

“Firms will need to bolster their risk management capabilities, which currently are not responsive or flexible enough to meet regulatory needs,” he continued. “Risk must be better aligned to the business strategy and integrated with the firm’s culture and across the various kinds of risk. And risk systems must become more flexible, as regulators increasingly require more specific and detailed information on a firm’s risk profile.”

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The Securities Regulation Code

The Securities Regulation Code (SRC), which replaced the Revised Securities Act, may not have turned the Securities and Exchange Commission (SEC) into a more effective securities regulator. But it was a big blessing for the five members of the commission because it exempted the agency’s officials and rank-and-file from the Salary Standardization Law. The generous senators and congressmen allowed the commission to increase their salaries—the amounts of which our lawmakers may not know until now—if the adjustments made were in accordance with the provisions of the new securities law which they approved five years ago.

Perhaps, it is time for our legislators to take another look at the new securities law to determine if its provisions were enough deterrent against the unscrupulous practices of scam perpetrators who operate beyond their corporate franchises. Our senators and congressmen may also want to review the SRC provisions to see which should be amended to give the SEC more teeth in going after erring companies. Of course, there may be some omissions by the commission as securities regulators. But to find out their infractions, a performance audit of the entire commission should be undertaken to prevent the disasters that have hit the pre-need industry to spread to other registered corporations such as mutual funds and companies whose shares are listed and traded on the Philippine Stock Exchange.

As a matter of fact, if our lawmakers were to review the SRC, they would surely ask how lawyers arrived at contrasting interpretations of the provisions on the issuance of cease-and-desist orders (CDO) by the SEC. It is understandable for practicing lawyers to interpret the law in a way that would favor their clients, who, after all, pay them. The SEC, on the other hand, finds it more convenient to assume jurisdiction over corporate intramurals involving quarreling stockholders despite the purpose of the new law, which was to rid the agency of court powers over board battle and to transfer these to regular courts designated by the Supreme Court (SC). This is the SEC’s stance and will continue to be its stance until the SC shall have ruled with finality if SEC still has the power to hear and decide corporate cases under the Securities Regulation Code as passed by Congress and which took effect in June 2001. Remember the controversial CDO issued by the SEC commissioner Jesus Enrique G. Martinez, whose term is due to end soon, against the Lopezes in connection with the annual stockholders’ meeting of the Manila Electric Co. last year?

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