VideoDiplomatic and trade relations between Europe and the US may be somewhat frosty these days, but there's one area where transatlantic bonhomie is at an all-time high: securities regulation. In January William Donaldson, chairman of the US Securities and Exchange Commission (SEC), paid a visit to Brussels to meet senior members of the committee of European Securities Regulators (CESR), a body of national regulators and the closest thing that the European Union has to an SEC-like watchdog. It was Donaldson's first European tour of duty since assuming the SEC Chairmanship in early 2003. What was striking was that he used the visit to reverse recent unilateralist American policy in securities regulation, fixing his focus firmly on teamwork.
Reforming securities regulation across the EU is far from a done deal. The debate now is whether Europe will end up with too little, too late.
In a 3,000-word keynote speech announcing the start of a working relationship with CESR, Donaldson used the word "collaboration" five times and "co-operation" a dozen times. The chairman even hinted at the possibility of mutual recognition, which would allow stocks regulated under European rules to be admitted on US markets.
It was a landmark speech for regulators on both sides of the Atlantic. Formerly, any public talk of mutual recognition had been a "complete no-no," notes Paul Arlman, secretary general of the Federation of European Stock Exchanges.
But it didn't come as a complete surprise to Arthur Docters van Leeuwen, who's been chairman of CESR (pronounced "Caesar") since it was founded in 2001 as part of the EU's Financial Services Action Plan (FSAP). A few months earlier he'd met Donaldson and other SEC officials at their headquarters in Washington, DC, where they laid the groundwork for greater co-operation. Yet Docters van Leeuwen was understandably pleased with Donaldson's speech in January. "[His] coming here and using those terms was gratifying," he recalls today from his home in The Hague. As he notes, there's a new-found sense of kinship. "When I asked why we should collaborate on Capitol Hill last October, the best answer came from Maryland Senator Paul Sarbanes: 'We are both big economies but we are connected. We can see that when a few people really misbehave then both markets shiver'."
So does the recent rapprochement mean that CESR is positioning itself to become Europe's de facto SEC? If so, it's a move welcome in many European business circles. In an on online poll in February of CFO Europe readers, nearly 75% of respondents said that Europe needs a single securities market super-regulator.
Others agree. As Jonathan Marsh, head of the financial services and markets group at Hammonds, a UK-based law firm, puts it: "There's more appetite for a pan-European FSA [the UK's enforcer] than just another talking shop for European regulators."
Some critics of the current approach even go so far as to say that the EU's current fragmented approach to regulation, in which individual national regulators have autonomy in implementing European Commission-approved directives, makes it a soft target for corporate malfeasance—Parmalat being the most recent example.
Yet building an SEC-like body for Europe isn't done lightly. The big debate now is whether CESR can, or indeed should, evolve from its current consulting role into an umbrella organisation that has the regulatory might to regain and sustain investor confidence in Europe's capital markets.
Hail CESR
So far, CESR's track record has been promising. Designed to steer the EU through the tricky execution of Baron Lamfalussy's FSAP of 1999, CESR has helped the Commission hammer out a handful of directives that will have a big impact on corporate Europe. For CFOs, the most noteworthy are the Prospectus Directive (whereby when a prospectus for a company issuing equities or bonds is approved in one member state, it will be able to market to investors in all member states) and the Transparency Directive (which aims to standardise the information that issuers must disclose).
But to say that CESR is low-key is an understatement. Even now, two-and-a-half years since its formal launch, few people outside the small coterie of exchange officials have even heard of it. Docters van Leeuwen admits he still has a hard time selling the idea of a "virtual network" of regulators. "People normally think of a huge building with nice floors and wood and steel, with lots of people inside working very hard. I still get asked, 'Where the hell is this CESR, and where does it come from?'"
CESR is certainly on a very different footing from the SEC, which was set up under radically different circumstances. Founded in the 1930s in the wake of the Wall Street crash that led to the Great Depression, the SEC today has over 3,100 staff, and its 2003 budget—entirely publicly funded—was $716m (€583m). The SEC also has powers to impose financial sanctions on wrongdoers, and has a long history of co-operating with the US Department of Justice to bring criminal prosecutions for violations of securities laws.
By contrast, as an advisory group to the commission, CESR has no constitutional powers. Funded by annual subscriptions from members, it's run on a tight budget of €2.2m a year from spartan offices in Paris, with a permanent secretariat of only 14 people.
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