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

Forcing issuers to list their securities in multiple markets does not make much sense from an economic standpoint. Splitting the trading of an issuer's securities into multiple markets is inefficient. Even with a well functioning mutual recognition passport, the cost of issuing securities is higher due to the additional filing fees, associated legal fees, marketing fees, and other costs associated with duplicated selling efforts in different markets. In addition, issuers will not receive the best possible price for their securities because investors will not see all available buy and sell orders, trading volume per market will be lower, and liquidity will be less than if trading were concentrated in a single market. Only those market participants capable of exploiting arbitrage opportunites between markets would benefit from such a system.122

The EU needs centralized markets that are openly accessible to institutional and retail investors alike. The EU can partially achieve this goal by improving the Investment Services Directive (ISD).123 The ISD creates a single license for investment services providers to do business in all EU member states. So long as a competent authority of one member state authorizes and supervises the service provider, it is qualified to provide investment services in all other member states.124 The EU lists these activities in the annexes to the directive.125

The ISD accomplishes four things. First, the directive extends the investment services passport to specialized investment firms, permitting the communication and execution of transactions in financial instruments and the management of investments.126 Second, the directive establishes procedures for rights of access by investment firms and credit institutions to stock exchanges.127 Third, the directive ensures that no resident of a member state is denied access to the services provided by an investment firm based in another member state.128 Finally, the directive creates a passport for exchanges to extend remote membership and access privileges.129

The ISD has the potential to permit the creation of a single European securities market by enabling the development of pan-European stock exchanges.130 Instead of forcing an issuer to make its shares available across Europe through multiple listings, the issuer can instead list its securities on a single stock exchange that offers remote membership.131 The issuer can then expect investors from across Europe to purchase its shares on that exchange. This possibility will lead to greater competition among exchanges and ultimately consolidation, perhaps to the point where Europe, like the United States, has two dominant stock exchanges and a handful of specialist exchanges.132 More importantly, the development of pan-European stock exchanges will remedy the problems associated with market fragmentation, resulting in better pricing, greater volume, higher liquidity, and other benefits of a more efficient stock exchange.133

The consolidation of stock exchanges in Europe will lead to some form of regulatory competition. In a more competitive environment, stock exchanges will compete against one another on the basis of pricing, volume, efficiency of trading platforms, and prestige.134 Stock exchanges will also compete against each other in terms of regulations. Not only will stock exchanges be able to modify their own market rules, but most likely, member states will modify their own securities regulation to protect their local exchange. The long term result will be closer to the model of regulatory competition described by Romano rather than the one described by Choi and Guzman. The market will eventually settle in a few widely-accepted regulatory regimes (i.e., the Delaware effect). Once a dominant exchange emerges, it will be less likely that issuers will switch to a competing exchange. As a result, the regulations of the dominant market will become the dominant regulatory regime in Europe. Choi, Guzman, and others, however, do offer an alternative. An enterprising stock exchange could dispense with securities regulation altogether and adopt an open regulatory structure where each issuer can select the regulatory regime it wishes to follow. In such a system, hundreds of companies may trade on the same exchange, but each company prepares disclosure documents according to different regulations.135