Harmonization of U.S.-EU securities regulation: The case for a single European securities regulator

Law and Policy in International Business, Winter 2003 by Pan, Eric J

I. EUROPEAN SECURITIES MARKETS

A. Introduction

Europeanists have long dreamt of a single European securities market. As early as 1960, the European Economic Community called on member states to ease the movement of capital for, inter alia, the trading of securities quoted on stock exchanges.1 The European Commission's White Paper of 1995 to the European Council on Completing the Internal Market ("1985 White Paper") reconfirmed the importance of a single European securities market, stating:

Work currently in hand to create a European securities market system, based on Community stock exchanges, is also relevant to the creation of an internal market. This work is designed to break down barriers between stock exchanges and to create a Community-wide trading system for securities of international interest.2

In March 2001, the European Council in Stockholm announced a bold, new initiative to force the integration of the European Union's (EU) financial markets into a single European securities market.3 The European Council asked for the full implementation of the Financial Markets Action Plan, a comprehensive legislative program originally prepared by the European Commission in 1999, to create the legal conditions necessary to achieve: (1) capital raising on an EU-wide basis; (2) a common legal framework for an integrated securities market; (3) a single set of financial statements for listed companies; (4) limitations on systemic risk in securities settlement; (5) a secure and transparent environment for cross-border restructuring; and (6) a single market for investors.4 The impetus behind the European Council's endorsement of the Financial Markets Action Plan came from a report prepared by a panel of non-governmental experts, known as the "Committee of Wise Men," who argued that the EU critically needed reform in the area of securities regulation.5

What made the Committee of Wise Men's report unique, however, was not its diagnosis of the problem that plagued the European financial markets but the recommended cure. As the existence of the Financial Markets Action Plan showed, even the European Commission was aware that market and regulatory fragmentation was keeping the European financial markets weak and lethargic.6 The Committee of Wise Men proposed the establishment of two new, intergovernmental committees: a European Securities Committee (ESC) and a Committee of European Securities Regulators (CESR).7 CESR would have responsibility for the development and implementation of regulations given to the ESC.8

At first glance, the EU project to create a single European securities market through the centralization of regulatory authority appears only as a European affair. The current proposals refer only to European markets and European stock exchanges, and there is little discussion of foreign issuers or foreign investors, as if the European securities market stops at the borders of the EU. But the reason for such a project is anything but domestic. It originated from an envy of the United States and a desire to emulate the success of the U.S. capital markets.9

The U.S. Securities and Exchange Commission (SEC), with its broad rulemaking and enforcement powers, is a frequently cited model for a single European securities regulator.10 The appeal of the SEC is that it has been historically a successful and effective securities regulator, overseeing and nurturing the development of the largest, most sophisticated securities market in the world.

The SEC model, however, deserves closer inspection, especially in the context of Europe. It will be difficult to establish a "European Securities Commission" in the mold of the SEC because of the vast political, economic, and regulatory differences between the EU and the United States. When it was created in 1934, the SEC enjoyed the backing of a strong federal government and supremacy over states' securities regulation.11 At the same time, the United States was a unified country, with a strong, core political and economic ideology. Most importantly, the United States already enjoyed a fully-functioning single market. A European Securities Commission today would have none of these advantages.12 A single European securities regulator would be even more challenged in exerting its authority over the European securities market than the SEC over the U.S. securities market because it would have to compete against the SEC: a powerful, off-shore regulator that wields tremendous influence over the European securities market.

This article sides with those who believe that the EU needs a single securities regulator and recognizes recent progress by the EU in forming a single securities regulator, but it does not treat the EU's movement toward a single securities regulator as a fait accompli. Rather, this article argues that the EU still has a choice as to how it can achieve the benefits of financial integration: one path leads toward a single securities regulator, promulgating mandatory rules; and the alternative path leads to a system of regulatory competition between member states.