Thursday, January 01, 2009

Historic Securities Regulation Reform Coming in 2009; But Will it be Globally Integrated

The year 2009 promises to be a year for massive and possibly revolutionary reform of federal securities and commodities regulation, and more broadly reform of domestic and global financial regulation. We cannot know the exact contours of this reform, just that it will and must occur. In one sense, the financial crisis was caused by a failure of regulation, and more specifically a massive failure of effective risk management. I recently wrote a white paper on what financial regulatory reform we can expect from President Obama and the 111th Congress.

To use an overworked phrase, the election was a mandate for dramatic and bold change, especially in the area of securities and financial regulation. There now exists the possibility of creating an entirely new global zeitgeist of regulation for the securities markets to replace the outdated regulation erected during FDR’s New Deal. The federal securities laws passed during the New Deal, and the SEC regulations adopted under them, have served us well for many decades. Although amended many times through subsequent legislation, they remain the core of federal securities regulation. But this patchwork of many acts and statutes is groaning under its own weight. With due respect to Professor Louis Loss, it may be time for the creation of an integrated and globally coordinated federal securities and commodities code for the international markets of the 21st century.

Recently, an eminent group, including former SEC Chairs William Donaldson and Richard Breeden, explored the possibilities of the coming financial regulatory reform. One very interesting question is how to achieve comprehensive and coordinated global financial regulation. Everyone admits that this is a global financial crisis that finally revealed how intertwined the financial markets really are. The corollary to that revealed truth is the need for coordinated global regulatory reform. A further corollary is that domestic securities regulation reform will not be enough this time, given the globalized nature of the financial markets. But how to achieve this goal at a time when national priorities still command our attention, that is the problem. The recent credit rating agency reforms adopted by the SEC and proposed by the European Commission did not give comfort in this regard, with the EC proposing differentiation and the SEC deferring it to another day.

The participants found that, while a coordinated global effort is extremely important, that goal will be difficult to attain. Though there is a need for a single sensible global regulatory environment, as well as a need to address institutional engagement and proxy voting at the international level, participants urged a need to retain awareness regarding differences in international markets. Given that coordinating international regulation is critical, however, the group mentioned that there are some international models that can be used as examples, including the Committee of European Securities Regulators (CESR). The group even suggested the creation of an international judicial body to host global market litigation, the “World Chancery Court.”

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