1997

Securities Disclosure in a Globalizing Market: Who Should Regulate Whom?

Fox, Merritt B.

Since their inception, mandatory disclosure rules have had at least three rationales. One is to protect investors from making poor investment decisions due to lack of knowledge. A second is to protect the reputations of the markets in which investors buy securities. A third is to promote efficiency through better capital allocation and reduced agency costs of management. These rationales coexisted peacefully for many decades because they differed little in their implications for legal choice. Their peaceful coexistence is coming to an end. Technological and political forces are moving us toward a situation where the share market for a large number of the world's issuers is becoming global. This trend raises the issue of statutory reach: Which country's disclosure regime should apply to which issuers? The different rationales give very different answers to this question.

The need to decide on the best approach to statutory reach is thus an occasion to reexamine the three rationales for mandatory disclosure. The reexamination is revealing. Investor protection, while a worthy goal for many aspects of securities regulation, is a surprisingly weak justification for mandatory disclosure rules. As for market protection, it is hard to argue that in a world of competing markets, any one market will enjoy a net gain in trading volume by having strict disclosure rules that give it a better reputation. The only rationale for mandatory disclosure that really holds up is efficiency.

Identification of efficiency as the paramount rationale for mandatory disclosure suggests a clear principle of statutory reach. Each country should regulate the disclosure behavior of issuers of its nationality and no others. It should not be concerned with where an issuer's shares are traded or what the nationality of the buyers is. This approach assigns to each country regulatory authority over the issuers whose disclosure behavior most affects its welfare. Global welfare will be maximized, because each issuer will be regulated by the country that will benefit most by getting the level of required disclosure right. A switch to the issuer-nationality approach will also prevent a kind of regulatory competition that could lead to suboptimally low disclosure levels required by all countries. For similar reasons, the issuer-nationality approach is also the best approach for the United States in terms of promoting its own welfare. This is so even if other countries do not follow suit.