Person:

Jackson, Howell

Stock exchanges around the world have recently discarded their traditional mutual membership structure in favor of a for-profit corporate format. This development increased fears of conflicts of interest, as for-profit exchanges are more sensitive to pressures from their constituents and more likely to abuse their regulatory powers. In this Article, we explore the allocation of regulatory responsibilities to market infrastructure institutions, administrative agencies, and central government entities in the eight most influential jurisdictions for securities regulation in the world. Examining how different jurisdictions answer this question is particularly pressing given the December 2006 transatlantic stock exchange merger activity. After discussing the role of self-regulatory organizations in the oversight of modern stock exchanges, we report the results of a survey of the allocation of regulatory powers in a sample of eight key jurisdictions. In that survey, we examine the allocation of such powers at three levels: rulemaking, monitoring of compliance with these rules, and enforcement of rules violations. Based on our findings, we categorize these jurisdictions in three distinct models of allocation of regulatory powers: a Government-led Model that preserves significant authority for central government control over securities markets regulation, albeit with a relatively limited enforcement apparatus (France, Germany, and Japan); a Flexibility Model that grants significant leeway to market participants in performing their regulatory obligations, but relies on government agencies to set general policies and maintain some enforcement capacity (United Kingdom, Hong Kong, and Australia); and a Cooperation Model that assigns a broad range of power to market participants in almost all aspects of securities regulation, but also maintains strong and overlapping oversight of market activity through well-endowed governmental agencies with more robust enforcement traditions (United States and Canada).

Ascertaining which enforcement mechanisms work to protect investors has been both a focus of recent work in academic finance and an issue for policy-making at international development agencies. According to recent academic work, private enforcement of investor protection via both disclosure and private liability rules goes hand in hand with financial market development, but public enforcement fails to correlate with financial development and, hence, is unlikely to facilitate it. Our results confirm the disclosure result but reverse the results on both liability standards and public enforcement. We use securities regulators' resources to proxy for regulatory intensity of the securities regulator. When we do, financial depth regularly, significantly, and robustly correlates with stronger public enforcement. In horse races between these resource-based measures of public enforcement intensity and the most common measures of private enforcement, public enforcement is overall as important as disclosure in explaining financial market outcomes around the world and more important than private liability rules. Hence, policymakers who reject public enforcement as useful for financial market development are ignoring the best currently-available evidence.