The Political Economy of Statutory Reach: U.S. Disclosure Rules in a Globalizing Market for Securities
Posted: 23 Feb 1999
This article addresses the appropriate reach of the United States mandatory securities disclosure regime. For an ever larger portion of the world's 36,000 publicly traded issuers, there will be significant numbers of transactions in their shares with some kind of United States connection. On which of these issuers is it in fact in the enlightened best interest of the United States to impose its regime?
There are three possible approaches to answering this question: the residence of an issuer's investors, the location of transactions in its shares, and the issuer's nationality. The article argues for using the third approach exclusively. This represents a radical departure from what is called for by the articulated goals of the SEC and most academic commentators, and a significant, though less drastic, departure from actual U.S. practice. The SEC has the power to make the recommended switch under current legislation. Unlike the other approaches, the issuer nationality approach would also not in any of its applications risk offending international law.
An appropriate level of disclosure by a country's issuers can, through its positive effects on managerial motivation and the choice of real investment projects, increase the returns generated by capital-utilizing productive activity in that country. The beneficiaries of these increased returns are the country's entrepreneurial talent and labor, not the issuers' investors. Because of capital's greater mobility internationally, competitive forces push capital toward receiving a single global expected rate of return (adjusted for risk) regardless of the disclosure practices of the particular issuers involved. The United States thus has a strong interest in the disclosure behavior of all U.S. issuers, even those whose shares are sold to, or traded among foreigners, but not in that of any foreign issuers, even those that are sold to, or traded among U.S. residents.
The location of transactions in an issuer's shares is simply irrelevant to whether the U.S. has an interest in its disclosure behavior. Use of transaction location to decide the reach of the U.S. regime will injure U.S. interests. By permitting U.S. issuers to determine the disclosure regime governing them, it gives them the option to exercise their preference to disclose at a less than the socially optimal level. It also needlessly reduces the volume of transactions effected in the United States by scaring away foreign issuers.
The choice of approach will not only affect which issuers are covered by the U.S. regime, but also its content. Under the investor residency and transaction location approaches, the increasing globalization of the market for securities will lead to increased political pressures to lower the U.S. requirements. Under the issuer nationality approach, it will not. These increased pressures are likely to succeed in lowering U.S. requirements to a socially suboptimal level. Some commentators disagree, believing that the regulatory competition from which these pressures arise is beneficial. Their arguments are found to be unpersuasive, however, in part because they do not account for the preference of issuers to disclose too little.
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