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Talking the Talk, or Walking the Walk? Outcome-Based Regulation of Transnational Investment
This article is forthcoming in the New York University Journal of International Law and Politics (2008).
The Securities and Exchange Commission (SEC) seeks to increase investors' access to foreign markets by negotiating bilateral agreements with foreign regulators pursuant to a policy known as "mutual recognition." Under mutual recognition, a foreign entity seeking to access U.S. capital markets would be permitted to substitute compliance with its home country's regulations for compliance with U.S. regulation, as long as it agrees to submit to SEC antifraud jurisdiction in its dealings with U.S. investors. Similarly, U.S. entities could enter foreign markets without subjecting themselves to a second layer of regulation on top of what the SEC already requires. This article suggests that the best way for the SEC to pursue mutual recognition is to recognize foreign securities regimes that achieve investor protection outcomes comparable to those achieved by the SEC, and provides a concrete and workable approach for the SEC to follow.
• International investing can protect Americans from domestic investment risks by providing access to investments whose risks are less correlated with those of US markets.
• Americans can invest overseas in a variety of ways, but all of these ways involve higher transaction costs and more limited choices than if they invest in domestic companies.
• Mutual recognition would give US investors access to a broader array of international investment opportunities at lower cost.
• US regulators cannot know if a foreign regulatory system adequately protects US investors unless they compare the investor protection outcomes produced by different regulatory systems.
• Mutual recognition based on investor protection outcomes would foster healthy competition among national regulators while avoiding a "race to the bottom" that would diminish the quality of investor protection.
• Full implementation of mutual recognition would allow US firms to choose another nation's regulation instead of US regulation, and vice versa.
The SEC could implement outcome-based mutual recognition in one of four ways:
• Harmonized outcome measurement: Assess other regulatory systems based on the same outcome measures the SEC uses in its own annual performance report.
• Comparable outcomes: Assess how well other regulatory systems advance investor protection outcomes that are reasonably comparable to those the SEC is responsible for under US law.
• Comparable regulatory effectiveness: Use the Office of Management and Budget's Program Assessment Rating Tool to assess the strategy, measures, and outcomes produced by foreign regulatory systems.
• Comparable regulatory transparency: Assess only whether the foreign regulatory system is sufficiently transparent that scholars, investment analysts, and the financial press can evaluate the risks to investors.