Stock Exchanges and the New Markets for Securities Laws

Stock Exchanges and the New Markets for Securities Laws Chris Brummert INTRODUCTION For nearly a decade, leading scholars have bemoaned the absence of what can be termed a market for securities laws.' Unlike the federal- ist structure of US corporate law, which may incentivize some states to compete for corporate charters, no competition for firms animates the enactment of national securities laws. Instead, the federal government has enjoyed a virtual monopoly over the provision of securities laws. Ever since the passing of the Securities Act of 19332 ("Securities Act") and the Securities Exchange Act of 19343 ("Exchange Act"), firms have generally had to comply with US securities laws when selling their stocks and bonds to American investors. And because US stock exchanges were the most liquid in the world, there was little danger of foreign multinationals going elsewhere to raise capital. As a result, federal regulators have had few incentives to formulate efficient regulatory policies. A revolutionary transformation of global equity markets is, however, currently underway. American stock exchanges are no longer unrivaled venues of capital market activity. Instead, foreign exchanges have developed liquid markets of their own, and now consistently attract over 90 percent of the world's initial public offerings (IPOs) and half of all investor activity.4 The success of foreign exchanges has sparked t Assistant Professor of Law, Vanderbilt University Law School. This Article has benefited from the comments and suggestions of Professors Bobby Ahdieh, Douglas Baird, Margaret Blair, Bill Bratton, William Christie, Steven Davidoff, Gillian Hadfield, Paul Heald, Larry Heifer, Donald Langevoort, David Millon, Erin O'Hara, Bob Rasmussen, Hans Stoll, Bob Thompson, Joel Trachtman, and Todd Zywicki. The Article also benefited from faculty workshops at the University of Georgia, the University of Pennsylvania, the University of Southern California, and Northwestern University. I would also like to thank Murray Teitelbaum, James Duffy, and the staff of the New York Stock Exchange for their time and valuable insight. 1 The notion that such a market is missing in securities regulation was popularized in Roberta Romano's seminal article. See generally Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 Yale L J 2359 (1998) (advocating competitive federalism for securities regulation where states compete for investors by offering different sets of securities laws). 2 15 USC §§ 77a-77bbbb (2000). 3 15 USC §§ 78a-78mm (2000). 4 Committee on Capital Markets Regulation, Interim Report of the Committee on Capital Markets Regulation 2 (Nov 30, 2006), online at http://www.capmktsreg.org/pdfs/11.30CommitteeInterirmReportREV2.pdf (visited Aug 29,2008) ("Interim Report") (stating that the US share of 1435 1436 The University of Chicago Law Review [75:1435 consolidation in the trading industry as US stock exchanges, including the behemoth New York Stock Exchange' (NYSE) and Nasdaq,6 have moved to acquire major European competitors in order to regain market share. These new transatlantic combinations will have significant implications for the regulation of securities. Perhaps most important, US exchanges will be able to provide an alternative through their foreign affiliates' listing services for companies seeking to avoid costly disclosure and corporate governance regulations like the Sarbanes- Oxley Act of 2002' ("Sarbanes-Oxley" or SOX) that attach when securities are traded in the United States. Several scholars have acknowledged that the growing competi- tiveness of foreign exchanges and capital markets may pressure US regulators to provide regulation that more effectively attracts issuers to the United States,' a perspective which is likely to gain currency as American regulators incur significant reputational losses in the wake of the US-generated credit crisis However, virtually no commentator has provided a theoretical framework for assessing these develop- ments in the securities industry.0 Academics have instead largely foglobal IPOs declined from 48 percent in the 1990s to only 6 percent in 2005, and its share of global stock market activity dropped from 60 percent in 2000 to 50 percent in 2005). 5 See NYSE and Euronext in $20bn Merger, BBC News Online (June 2, 2006), online at http://news.bbc.co.uk/2/hi/business/5039412.stm (visited Aug 29, 2008) (reporting that the NYSE agreed to buy the pan-European Euronext exchange in response to competitive pressures). 6 See Nick Clark, Nasdaq Poised to Complete OMX Deal, The Independent (UK) 40 (Jan 3, 2008) (reporting that Nasdaq will take over the Nordic group OMX after it concedes a 19.9 percent stake in the combined company to Borse Dubai). 7 Sarbanes-Oxley Act of 2002, Pub Law No 107-204, 116 Stat 745, codified at 15 USC § 7201 et seq (2006). 8 See, for example, James D. Cox, Rethinking US. Securities Laws in the Shadow of International Regulatory Competition, 55 L & Contemp Probs 157, 157 (1992). See also Eric J. Pan, Why the World No Longer Puts Its Stock in Us *9 (Cardozo Legal Studies Research Paper No 176, Dec 2006), online at http://papers.ssrn.com/abstractid=951705 (visited Aug 29,2008). 9 See Philip Stephens, The Financial Crisis Marks Out a New Geopolitical Order, Fin Times 9 (Asia ed, Oct 10, 2008). Some commentators and leaders have furthermore argued that the United States will lose its superpower status in the world of international finance. See Bertrand Benoit, German Minister Predicts US Will Lose Financial'Superpower Status,' Fin Times 1. See also Andrew E. Kramer, Moscow Says US. Leadership Era Is Ending, NY Times A6 (Oct 3, 2008). As a result, regional financial centers have sought to displace now largely discredited US capital markets. See Ariana Eunjung Cha, FinancialHubs See an Opening Up at the Top, Wash Post DOI (Oct 1, 2008). The degree of success they will have is, however, unclear. 10 Notably, John Coffee has perceptively argued that cross-listings between exchanges may create pressures on regulators to provide credible, and often stringent, regulation. See generally John C. Coffee, Jr., Racing towards the Top?: The Impact of Cross-listings and Stock Market Competition on InternationalCorporate Governance,102 Colum L Rev 1757, 1757 (2002). However, this account focuses primarily on how stricter US regulations may pressure foreign regulators to provide more stringent regulation, not the other way around. See Larry E. Ribstein, Cross-listing and Regulatory Competition, 1 Rev L & Econ 97, 99 (2007) (noting that Coffee's model involves a "limited" form of regulatory competition in which a firm opts into a stricter regime in the United States). Stephen Choi and Andrew Guzman have also emphasized the 2008] The New Markets for Securities Laws 1437 cused on the lack of regulatory competition that has historically informed the process by which US securities laws were for (...truncated)