Remarks on the US-EU regulatory relationship

28 January 2004

William Donaldson, chairman of the US Securities and Exchange Commission, addressed an EPC breakfast briefing on the EU-US regulatory relationship on 26 January 2004. The meeting was chaired by EPC Senior Policy Advisor Graham Bishop. A question and answer session followed.  This is not an official record of the proceedings, and specific remarks are not necessarily attributable.

Globalisation means global integration for financial markets, said Mr Donaldson. Increasing cooperation, not just between the US and EU but across the world, would increase transparency, investor choice and protection, and produce the free flow of capital throughout the world.

The fundamental issue for everyone involved in financial markets today, regardless of company or country, had to be the maintenance of high legal, regulatory, and ethical standards, which would breed trust and confidence.

This, said the SEC chairman, became increasingly important “at a time when money managers can move capital around the globe with a few clicks of a mouse.”

Mr Donaldson began by praising the EU for modernising financial laws to reflect capital market realities.

He described the Financial Services Action Plan as a "truly remarkable achievement", a "Herculean project" which would integrate the financial markets of the EU-25, reduce the cost of capital, increase investor and consumer choice, and promote economic opportunity.

The US and particularly the SEC was also making the globalisation of financial markets a top priority and there was much to celebrate about the level of integration among world capital markets and the benefits, which this offered.

The US had been benefiting from European innovations and investment before it became an independent nation – ever since the trading of stocks and bonds on the European stock exchanges was launched in the Netherlands in the early 1600s. It was foreign capital, which set the standard for the US: without it, US growth would have been seriously impaired.

Globalised financial markets were not just about investor opportunities:  they helped promote common standards of law, regulation and accounting, while also improving corporate governance, investor protections and market efficiencies.
There were everyday benefits, too - peaceful partnerships that were a cornerstone of a prosperous world.
Mr Donaldson promised that under his tenure, the SEC would build on its history of good relations with the world's other securities regulators.

The US approach to financial markets was guided by faith in free markets, and the aim was to promote transparency, competition and respect for national traditions while building cross-border confidence in the world's capital markets.
But things were not all positive: the discovery late last year of so-called late trading, market timing and insider trading abuses at mutual funds and broker-dealers highlighted just how far America's fund industry had strayed from the basic principle of putting the interests of investors first.

Such abuses were a fundamental betrayal of investors and the SEC would take civil and criminal action if necessary, while introducing reforms to improve protection for future mutual fund investors, including codes of ethics for fund advisers and personal trading disclosure by fund managers.

The SEC was also determined that, in future, 75% of all mutual fund directors and board chairmen should be independent. "We are committed to preventing this unfortunate period in the history of America's fund industry from being repeated," said Mr Donaldson.

Meanwhile, the SEC was backing the New York Stock Exchange's reform agenda and tackling the phenomenon of "unresponsive boards," sometimes the result of weaknesses in corporate governance.

International Issues

On the international front, the enactment of the Sarbanes-Oxley corporate-reform law in July 2002 marked the beginning of a new era in American business. The law promotes greater transparency and better accounting, and is aimed at preventing a repeat of recent corporate failures such as Enron and WorldCom.
But the SEC is still working with European governments, the European Commission and regulators to tackle potential conflicts between this legislation and the domestic laws in the home jurisdictions of the foreign players on US markets such as multinational issuers and audit firms. The aim, he promised, was to resolve differences "consistent with the spirit and intent of the Act."

There was US collaboration with the Commission on other issues too:

  • on possible difficulties for non-US firms from the monitoring of foreign audit firms by the new Public Company Accounting Oversight Board.
  • on the Financial Conglomerates Directive, which requires that non-EU holding companies of financial firms operating in the EU be subject to consolidated supervision.
  • on converging our Generally Accepted Accounting Principles with the IASB's International Financial Reporting Standards. This project would see the creation of a common language for the financial reporting of companies around the world, holds out tremendous potential for investors, companies, and regulators.

A bigger stumbling block was in talks on allowing non-US exchanges to place trading screens in the US without registering with the SEC.

The move would result in disparate regulatory treatment of exchanges and companies already registered with the SEC, as compared to their non-US counterparts, argued Mr Donaldson, and advocates of mutual recognition seemed to be ignoring the impact of such disparities.

The issue had to be considered in connection with broader examination of the US national market structure. Once that was done, the SEC would look at the possibility of "exemptive relief" for non-US exchanges wanting to place trading screens in the US.

Meanwhile, the SEC would consider any application from a European exchange to register under the existing framework.

Cooperation on Enforcement

Global markets required global enforcement of securities statutes and the Parmalat affair demonstrated the possibilities, said Mr Donaldson. The SEC had brought an action charging Parmalat with fraudulently offering securities in the US and the investigation was proceeding in "superb" cooperation with the Italian securities regulator, while the Committee had also established a productive working relationship with Italian criminal authorities.

The future U.S.-EU regulatory relationship

Mr Donaldson said the SEC's close working relationship with Europe's financial services regulators was built on a common commitment to investor protection and the integrity of all markets. But he believed more could be done as efforts continued to develop global accounting standards.

That was why, he said, he had asked the SEC's Office of International Affairs to explore a more formal framework for collaboration and cooperation with the Committee of European Securities Regulators (CESR), whose members represent all EU countries.

This "enhanced cooperation", involving increased information-sharing, more effective trouble-shooting and better monitoring of players in the markets, would help the US and EU regulators to better carry out their mandates in today's financial markets. And greater convergence of regulatory approaches would reduce the regulatory burden on cross-border business while maintaining high standards of investor protection.

The goal was a relationship, which was "less reactive and more pro-active." This would be critical in an era of increasing cross-border fraud, requiring the involvement of multiple regulators and law enforcement bodies.

Mr Donaldson expressed confidence that the US-EU regulatory relationship would continue to grow stronger as shared challenges were addressed in a changing capital markets landscape. He said experience showed that the free flow of capital throughout the world markets was in the long-term interest of the United States, the nations of the EU, and the nations of the world. It also showed that international capital flows could dry up in response to external events.

Capital would flee environments, which were unstable or unpredictable, whether that was a function of lax corporate governance, ineffective accounting standards, or a lack of transparency.

Investors must see for themselves that companies were living up to their obligations and embracing the spirit underpinning all securities laws. Only then, said Mr Donaldson, would the place of world's securities markets as an engine of prosperity be assured in America, in Europe and throughout the world.