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SEC Punishing “Old Europe” on Access Issue

Author: Benn Steil, Senior Fellow and Director of International Economics
April 14, 2003
Securities Industry News


Poor Colin Powell. If it’s not Donald Rumsfeld freelancing in diplomacy, it’s the Securities and Exchange Commission.

Apparently, officials at the Commission feel it is their patriotic duty to punish Old Europe for its anti-war stance. In the March 31st edition of Securities Industry News, reporter Michael Forman revealed that SEC staffers are linking governmental cooperation on Iraq with cross-border exchange access. In the words of an anonymous market regulation official interviewed by Forman, “To be frank, it is understood that there is little enthusiasm to open the door for French and German exchange technology. This just isn’t the time for Deutsche Borse or Euronext to come knocking at our door.”

Actually, French and German exchange technology penetrated American borders years ago. With the collaboration of the Commodity Futures Trading Commission, Deutsche Borse liberated Chicago in 1997, freeing their traders from having to pay redundant mittelfolk to buy and sell bund futures in Frankfurt. The shock and awe of waves of trades firing across the Atlantic prompted the democratization of exchanges worldwide, as floor-based clubs gave way to screens for the masses. Although a brief period of protectionism subsequently reigned under CFTC chair Brooksely Born, regime change in 1999 opened the American gates for Euronext and other foreign derivatives exchanges.

Stock exchanges are another matter. The SEC has a history of using its authority in that arena for purely political purposes. In 2001, for example, they unilaterally imposed a new disclosure regime on US-listed foreign companies doing business in countries subject to American sanctions. Whereas such companies were already required to disclose material financial facts about their activities, the SEC decided to tar them with them with a false hint of illegality by requiring them to disclose all dealings, even if non-material, in countries which Congress put off limits to US companies. Note that the SEC did not similarly require companies to disclose their assumption of political risks arising under the policies of countries other than the US (such as the Arab boycott of companies doing business with Israel). This makes it patently clear that the SEC was acting as a self-appointed agent of US foreign policy, rather than in its designated capacity as a politically neutral market regulator.

Now it is foreign exchanges which are being targeted. Although former SEC Chairman Harvey Pitt had suggested publicly that US market access for European exchanges could be accommodated on the basis of “reciprocity”, the new notion that reciprocity should be based not on European access for US exchanges but on European backing for US foreign policy represents an outlandish arrogation of power which Bill Donaldson would be wise to disclaim quickly.

That SEC officials should choose mercantilism as a foreign policy lever is doubly worrying. It implies that access in the US for “French and German exchange technology” is a gift to France and Germany, rather than a clear and unambiguous benefit to American investors. The US brokers and money managers who wish to access such technology cannot possibly be protected by the regulatory status quo, which requires that their orders be funneled to foreign brokers, as SEC policy ensures that only foreigners can have legal access to the technology. These foreign brokers have no fiduciary obligation to US entities under US law, and are obviously beyond the regulatory jurisdiction of the SEC.

Bill Donaldson was called to Washington to oversee implementation of the Sarbanes-Oxley Act and to restore the faith of American investors in the integrity of US capital market regulation. But given the latest thinking from the SEC, Europeans can be forgiven for wondering just whose Oxley’s being gored.

Benn Steil is the Andre Meyer Senior Fellow at the Council on Foreign Relations and author of “Building a Transatlantic Securities Market” (

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