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

Second, entity mobility must exist. Regulated entities must be able to shift between regimes.28 In the European context, entity mobility means a true single market. Currently, in the case of securities regulation, issuers must comply with their home country regulations, creating a barrier to regulatory competition.29 In addition, full faith and credit must exist between member states. When an entity chooses its regulatory home and satisfies the regulatory requirements in that country, other jurisdictions must honor this choice and cannot impose additional requirements.

Finally, there must be governmental responsiveness. Governments must care that entities are choosing other regulatory regimes.30 They must be willing to compete for these entities and reconfigure their regulations to make their legal regimes more attractive.31 Proponents of regulatory competition argue that governments want to attract more entities to their regulatory regime because of the additional filing and registration fees, tax revenue, and other benefits of being an attractive financial center.32

From the perspective of investors, disclosure is desirable, but certain companies may need to provide less information than others because investors may already understand a great deal of the company's business or value certain pieces of information more than others.33 For example, in the case of a new company trying to bring to market a new technology, the most important pieces of information relate to the experience of management, the business plan, technology, and ownership of relevant patents and other intellectual property. Consequently, there may be less urgency for current profit statements or U.S. Generally Accepted Accounting Principles (U.S. GAAP) reconciliation. In short, a mandatory disclosure regime is inefficient because it assumes that all investors value the same mix of information.

Under a regulatory competition regime, the amount of information provided by the issuer would be reflected in the price of the issuer's shares.34 Issuers that do not disclose enough information about themselves would receive a "worse" or discounted price for their securities compared to more forthright companies.35 This discount reflects the higher risk of investing in a company that the investor knows less about.36 This interaction between investor risk and share price is market efficient. An issuer has an incentive to provide enough information to the marketplace to achieve the highest price for its securities. In addition, the issuer's decision to disclose information is a function of the cost to the issuer for disclosing such information.37 Therefore, an issuer may accept a discounted price for its shares if the marginal cost of disclosing more information is higher than the discount. In a mandatory disclosure regime, the SEC imposes requirements which seem too costly compared to the benefit the issuer receives in providing such information.38

The major criticism of regulatory competition is that unfettered regulatory competition would lead to a "race to the bottom" where regulators, competing for constituents, minimize their regulations to such a degree that their regulations provide less than adequate regulatory protection.39 Proponents of regulatory competition deny this would happen.40 Whereas issuers have an incentive to withhold information from the marketplace, investors have an incentive to demand greater information from issuers.41 As a result, issuers that provide more information to investors than their competitors will benefit from higher prices for their securities.42 In this respect, Romano, Choi, and Guzman believe that investors' needs are strong enough to avoid a race to the bottom.