Abstract
This chapter presents the framework for the regulation of financial markets, a framework which in part includes the aim to enhance disclosure in the market. Arguing that more disclosure regulation does not lead to more useful information, it discusses the paradox that although more disclosure regulation may lead to the production of more information, more disclosure regulation is more likely to lead to the production of more but less meaningful information.
We argue that disclosure regulation by commission alone has good intentions, but that the regulation is incomplete because the market remains not fully informed. Regulation by commission gives stakeholders false confidence in market information. Regulation for full disclosure will be improved with coregulation by the securities commission (Chap. 6) working with the financial services sector (and stock exchanges: Chap. 7), underpinned with a principles-based plain English requirement of full disclosure (as we discuss in Chap. 4).
The opening of free markets after the application of competition laws (Big Bang in the 1980s) has not improved disclosure failures. To these failures can be added failures to promote information due to the overlapping and inconsistent regulation in consumer law, the prohibition of undesirable and fraudulent practices, the rules of conduct (such as priority, principal trading), market misconduct, fraud and consumer protection laws. These provide scope for loopholing, further undermining our recommendation for a principles-based plain English requirement of full disclosure (as we discuss in Chap. 4).
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Notes
- 1.
Paredes (2003a), pp. 417 and 484. Paredes was an SEC Commissioner from 2008 to 2013.
- 2.
- 3.
See, e.g., Australian Law Reform Commission (2002), para 3.28.
- 4.
Sheehan (2009), pp. 273 and 274.
- 5.
See, e.g., Stenning et al. (1990), p. 92.
- 6.
Introduction in Parker et al. (2004), p. 1.
- 7.
Baldwin and Cave (1999), p. 2 (footnotes omitted).
- 8.
Braithwaite and Drahos (2000), chapter 9 (Corporations and securities).
- 9.
International Organization of Securities Commissions (IOSCO) (2010), p. 3. In response to the Global Financial Crisis (2007–2009) the reduction of systemic risk has been introduced as a third principle.
- 10.
Gilligan (2000), p. 21.
- 11.
See, e.g., Baldwin and Cave (1999), p. 12.
- 12.
Mann (1993), p. 178.
- 13.
- 14.
- 15.
The Fainsod model of a regulatory commission is set out in Chap. 6.
- 16.
Rajan and Zingales (2003), pp. 5 and 6.
- 17.
La Porta et al. (2000), pp. 3, 9, and 21.
- 18.
This is discussed below in Chap. 7 dealing with stock exchanges.
- 19.
See, e.g., Banner (1997), pp. 849 and 850.
- 20.
Mahoney (1997), p. 1453.
- 21.
- 22.
E.g., Banner (1998), pp. 117 (fraud in UK equity law) and 236–238 (fraud in the USA).
- 23.
An act … for restraining several extravagant and unwarranted practices (1720) 6 Geo I, chapter 18. Banner (1998), reported that there was only one prosecution (successful) under the Act before it was repealed in 1825.
- 24.
- 25.
The Companies Statute 1864 (Victoria) and equivalent colonial legislation was modelled on the English Companies Act 1862 (UK). It required the lodging of a memorandum and articles of association on registration, and the later lodging of the register of members and summary of capital. See, e.g., Lipton (2007), p. 805.
- 26.
- 27.
See, e.g., Morris (1984).
- 28.
- 29.
http://www.archives.gov/legislative/guide/senate/chapter-05.html#1913. Accessed 10 June 2014.
- 30.
Pecora (1939).
- 31.
- 32.
See, e.g., Baumol and Malkiel (1993), pp. 19 and 24–27.
- 33.
Commonwealth of Australia and Senate Select Committee on Securities and Exchange (1974) (Rae Report) para 2.1.
- 34.
Sykes (1978), Introduction.
- 35.
For example, Dr Max Anderson of Perth wrote to the then leader of the Opposition in the Senate, Senator Lionel Murphy QC, in November 1969 about the losses he made by selling his 4,200 Poseidon shares on his broker’s advice on 26 September 1969 for AUD1.50 (AUD6300). The broker’s advice in a statement on 25 September 1969 by Poseidon was that no drill results were available and that the broker could not explain why the share price was increasing. Had Dr Anderson not sold, the shares would have been worth AUD1, 176,000. In his letter, he expressed concern about ‘bushrangers’ in the financial services industry, and the necessity for improving current regulation and ensuring fairer deals for the public. Senator Murphy moved the appointment of a Senate Select Committee on Share Trading in Public companies (Hansard, 19 March 1970, 489), which produced the Rae Report, Commonwealth of Australia and Senate Select Committee on Securities and Exchange (1974), the document which transformed financial market regulation in Australia.
- 36.
The Rae Committee held the first of its 86 meetings on 21 April 1970. Evidence amounted to 12,000 pages: Rae Report, Commonwealth of Australia and Senate Select Committee on Securities and Exchange (1974), p. vii.
- 37.
Securities Industry Act 1970 (NSW), which was followed by equivalent legislation at about the same time in Victoria, Western Australia, Queensland, Hong Kong (1974), Malaysia (1976) and Singapore (1973).
- 38.
- 39.
Rae Report, Commonwealth of Australia and Senate Select Committee on Securities and Exchange (1974), para 2.124, 2.125.
- 40.
AASE, the predecessor of ASX, was the coordinating body for the six former independent capital city stock exchanges such as the Melbourne Stock Exchange and the Sydney Stock Exchange. These merged into ASX in 1987.
- 41.
Rae Report, Commonwealth of Australia and Senate Select Committee on Securities and Exchange (1974), 16.12.
- 42.
Rae Report, Commonwealth of Australia and Senate Select Committee on Securities and Exchange (1974), Part 1, 16.15.
- 43.
Sykes (1978), ch 20.
- 44.
Commencing with the pioneering authority of Hedley Byrne v Heller & Partners Ltd [1964] Appeal Cases 465.
- 45.
See, generally, Slater (2002), p. 5. Other major collapses (although not directly related to the dotcom industry) were Enron and Arthur Andersen.
- 46.
- 47.
The Telegraph, Frankfurt to Close Ailing New Market (2012).
- 48.
See, e.g., Lowenstein (2004), pp. 114 and 115.
- 49.
- 50.
Pub. L. No. 107–204, 118 Stat 745 (2002). See, e.g., Paredes (2003b), p. 229.
- 51.
Reinhart and Rogoff (2008), pp. 339 and 342.
- 52.
Withdrawals by clients exposed the Madoff ponzi scheme, not action by coregulators. See, e.g., Markopoulos (2010) (whistleblower’s account of his investigation into the Madoff investment scandal and how the US Securities and Exchange Commission failed to take action on his warnings). Where were the whistleblowers during GFC? see, e.g., Latimer (2002), p. 39; Latimer (2004), p. 176.
- 53.
See, e.g., Avgouleas (2009) (the risks were disclosed but no one listening).
- 54.
See United States Financial Crisis Inquiry Commission (2011).
- 55.
Reinhart and Rogoff (2008).
- 56.
United Kingdom Financial Services Authority (2009).
- 57.
Froud et al. (2012), p. 35.
- 58.
Claessens et al. (2010), p. 7.
- 59.
Gucva (2011), pp. 245 and 248.
- 60.
This was not always the case as a large percentage of potentially dangerous trading was conducted by shadow banks which were not or only partly covered by banking regulation, see Sharfman (2011), pp. 607 and 609.
- 61.
United States Securities and Exchange Commission (2009), pp. 49 and 50.
- 62.
See Ford (2010), pp. 257 and 290.
- 63.
See Avgouleas (2009).
- 64.
Seligman (1983), pp. 1 and 2.
- 65.
Rock (2002), p. 675.
- 66.
Fox (1999).
- 67.
Stigler (1964), p. 117.
- 68.
Compare, e.g., Malani (2008), p. 411.
- 69.
- 70.
- 71.
Buiter (2009).
- 72.
The foundation for these principles at common law was handed down two centuries ago in R v De Berenger (1814) 3 M & S 67, 105 English Reports 536, referred to colloquially as the ‘Great Stock Exchange Fraud of 1814’.
- 73.
For example, in Germany: Wertpapierprospektgesetz [Securities Offering Act] (Germany) § 3(1) (‘WpPG’); in the United States: Securities Act of 1933 (US) s 10. Ironically, New Zealand recently introduced a ‘product disclosure statement’ (PDS) as the main disclosure document (Financial Markets Conduct Act 2013 (NZ) Pt 3), copying the term used in Pt 7.9 of the Australian Corporations Act 2001 (Cth). However, the Australian term only refers to disclosure required from financial intermediaries to retail investors. This is another good example of confusion created by imprecise legal transplants.
- 74.
IOSCO, set out above in Chap. 2.
- 75.
For example, WpPG § 3(1). The European Directive on the prospectus to be published when securities are offered to the public or admitted to trading (2003/71/EC, 4 November 2003, OJ L 345, 64) only regulated ‘offers to the public’. In New Zealand the ‘offer to the public’ test was abolished by the introduction of the Financial Markets Conduct Act 2013 (NZ).
- 76.
For example, Wertpapierhandelsgesetz [Securities Trading Act] (Germany) § 20a (‘WpHG’).
- 77.
Continuous disclosure is either required under statute or under the exchange listing rules, see the discussion of the Australian regime in Chap. 2.
- 78.
In the United States, e.g., Zweig v Hearst Corporation (1979) 594 F 2d 1261, 1268.
- 79.
Securities Exchange Act of 1934 (US) s 9; in Australia: Corporations Act 2001 (Cth) Part 7.10 (Market misconduct and other prohibited conduct relating to financial products and financial services); in Hong Kong, Securities and Futures Ordinance 2002 (Hong Kong) s 277 (Disclosure of false or misleading information inducing transactions); in Germany: WpHG § 20a; in New Zealand: Financial Markets Conduct Act 2013 (NZ) s 262.
- 80.
Template include Securities Exchange Act 1934 (US) ss 9(a)(3) and 9(a)(5) (Prohibition Against Manipulation of Security Prices’).
- 81.
Commodity Exchange Act 1936 (US) ss 9(a)(2)(A), 9(a)(2)(B).
- 82.
This law is based on the Securities Exchange Act 1934 (US) s 9(a)(2), a section considered to be at the very heart of the Act.
- 83.
A buyer could accumulate a large holding of contracts of a particular maturity date, and at the same time gain control of the major part of the physical commodity. The buyer could then demand delivery and squeeze the sellers of the futures contracts as the delivery date approached: National Companies and Securities Commission (NCSC) Media Release 88/68, Sydney Futures Exchange September (1988) Ten Year Bond Contract; the Hunt Brothers and the silver market: Fay (1982). From 1 August 2010, Sydney Futures Exchange is called ASX 24.
- 84.
See, e.g., McDermott (1979), p. 202.
- 85.
Ernst & Ernst v Hochfelder (1976) 425 US 185,199; 47 L Ed 2d 668, 680.
- 86.
E.g., Wang and Steinberg (2010), p. 5.
- 87.
E.g., Osode (2000), p. 239.
- 88.
- 89.
For an overview of the debate see Stephen Bainbridge, Insider Trading in: Bouckaert and de Geest (2000), p. 772.
- 90.
International Organization of Securities Commissions (IOSCO) (2010).
- 91.
Bhattacharya and Daouk (2002), pp. 75, 88 and 90.
- 92.
Law number 6.385 of 7 December 1976, Article 27-D: ‘To use relevant information not yet disclosed to the market, which one may know and which must remain confidential, so as to create undue advantages, for oneself or others, through the negotiation of securities, in one’s behalf or on behalf of others’.
- 93.
Iran criminalizes insider trading in article 46(1) of the Securities Market Act when it provides for imprisonment up to 1 year or for cash penalties equal to two or five times of the profit gained or the non-incurred loss or to both punishments to ‘any person who, prior to the public offering, takes advantage of the inside information relating to the securities subject of this law being available to him ex-officio’, see Iran Securities Commission Website. http://en.seo.ir/. Accessed 10 June 2014.
- 94.
Fischel and Grossman (1984), pp. 273, 289 and 290.
- 95.
- 96.
For example, § 15(3) of the German WpHG allows not to disclosure information if it is necessary to safeguard the firm’s legitimate interest (e.g., trade secrets). This link between securities trading laws and the protected trade secret has not been fully explored yet.
- 97.
Houthakker (1982), p. 481.
- 98.
See, e.g., Fischel and Grossman (1984), p. 280.
- 99.
International Organization of Securities Commissions (2000), p. 5.
- 100.
- 101.
Stock exchange deregulation included e.g., ‘May Day’ on NYSE (mandated by the SEC from 1 May 1975); Big Bang on the LSE (27 October 1986); Little Big Bang in Paris (1989); Japan (2001); Frankfurt (Demutualisation in 2001; introduction of the electronic trading system XETRA in 1997 as a response to Big Bang): see, e.g., Thomas (1986); Gower (1988), p. 1; Moran (1991). Big Bang in Australia followed the refusal of the former Trade Practices Commission (now ACCC) in 1982 to grant authorization to certain rules of the former AASE (Australian Associated Stock Exchanges; ASX replaced AASE in 1987). There have been many later authorizations of potentially anti-competitive rules, including at Australian Associated Stock Exchanges (1982) ATPR (Com) ¶50-049. In the United States, fixing of commission rates by brokers (price fixing) was regulated by the SEC, not by the competition authorities: Gordon v New York Stock Exchange (1975) 422 US 659.
- 102.
The third pillar (merger control) is not relevant in this book.
- 103.
E.g., in Australia: Competition and Consumer Act 2010 (Cth) s 45(2); in the European Union: Treaty on the Functioning of the European Union Art. 101(1) (‘TFEU’); in Germany: Gesetz gegen Wettbewerbsbeschränkungen [Act Against Restraints of Competition] (Germany) § 1 (‘GWB’); in Hong Kong: Competition Ordinance 2002 (Hong Kong) s 6; in the United States: Sherman Antitrust Act s 2 (US).
- 104.
Such as the ‘rule of reason’, see Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911).
- 105.
In the EU: TFEU Art. 101(3) and relevant block exemptions.
- 106.
Unless necessary for the protection of relevant (technical) know-how. See eg Commission Regulation (EU) No 330/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices (20 April 2010) Art 5(2).
- 107.
Competition and Consumer Act 2010 (Cth) s 45(2); TFEU Art. 102 (EU); Sherman Antitrust Act § 2 (US); GWB §§ 19, 20.
- 108.
A dominant position relates to the firm’s market share and to the structure of the relevant market. The European Court of Justice has stipulated a rebuttable assumption for a dominant position if the market share of the firm is above 50 %, see Akzo (C-62/86) [1991] ECR I-3359, para 60. German competition law prescribes a rebuttable assumption for market shares above 40 %, see GWB § 18(4).
- 109.
See, e.g., the enumeration in TFEU Art. 102.
- 110.
See, generally, Rose and Bailey (2013), para 5.084.
- 111.
European Commission (2011), para 57.
- 112.
John Deere v European Commission (European Court of Justice, C-7/95, 28 May 1998) [1998] ECR I-3111, para 88.
- 113.
UK Agricultural Tractor Registration Exchange v European Commission (COMM, 17 February 1992) [1992] OJ L-68, 19.
- 114.
See Jacobsen (2009–2010), pp. 459 and 461.
- 115.
European Commission (2011), para 286.
- 116.
See Jacobsen (2009–2010), discussing a possible breach of the Sherman Antitrust Act (US).
- 117.
For an overview, see McConnell (2013), p. 59.
- 118.
E.g., FTC and SEC in the United States, Bundeskartellamt and BaFin in Germany, ACCC and ASIC in Australia.
- 119.
Australian Associated Stock Exchanges (1982) ATPR (Com) ¶50-049, para 69.
- 120.
Australian Associated Stock Exchanges (1982) ATPR (Com) ¶50-049, para 178.
- 121.
In a lot of countries the financial markets are focused on one financial marketplace, such as London (UK), Frankfurt (Germany), Sydney (Australia) or New York (US). Operators of securities exchanges will regularly have a market share which is sufficient for market domination.
- 122.
International Organization of Securities Commissions (2011), p. 56.
- 123.
For example, Börsengesetz [Stock Exchange Act] (Germany) § 9.
- 124.
Fiduciary duty is a core concept in Anglo-American corporate law for delineating the rights and responsibilities of directors and managers, as well as dominant shareholders in relation to other shareholders.
- 125.
Aberdeen Rly Co v Blaikie Bros (1854) 1 Macq 461, at 471.
- 126.
Regal (Hastings) Ltd v Gulliver [1942] 1 All England Law Reports 378.
- 127.
In Australia: Corporations Act 2001 (Cth) s 191; in New Zealand: Companies Act 1993 (NZ) s 140; in the United Kingdom: Companies Act 2006 (UK) s 175.
- 128.
Eg, under German law the concept of disclosure only applies indirectly to members of business partnerships (‘oHG’, see Handelsgesetzbuch [Commercial Code] (Germany) §§ 112, 113), liable members of partnerships by shares (‘KGaA’, see Aktiengesetz [Stock Companies Act] (Germany) § 284) and company directors (see Aktiengesetz § 88), who are prohibited from competing with the company/the partnership in its line of business.
- 129.
- 130.
According to IOSCO Principle No 18, accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality.
- 131.
See Osode (2000), p. 239.
- 132.
Großfeld and Hoppe (2009), p. 713.
- 133.
International Organization of Securities Commissions (IOSCO) (2010), p. 3.
- 134.
Bürgerliches Gesetzbuch [Civil Code] (Germany) § 312 (‘BGB’).
- 135.
BGB § 355(4).
- 136.
The example given in the relevant regulation (BGBInfoV) did not meet the requirements as set out in the BGB, see Landgericht Koblenz [District Court Koblenz], 12 S 128/06, 20 December 2006.
- 137.
Cafretz and Tene (2003), p. 173.
- 138.
Fraser (2008), p. 89.
- 139.
Walker (1986), p. 23.
- 140.
Securities Regulation 1999 (Papua New Guinea) reg 13, made under the Securities Act 1997 (Papua New Guinea).
- 141.
Competition and Consumer Act 2010 (Cth) Sch 2.
- 142.
There is a similar version in Corporations Act 2001 (Cth) s 1041H (Misleading or deceptive conduct [civil liability only]); in Hong Kong: Trade Descriptions Ordinance 1981 (HK) s 13E (Misleading omissions).
- 143.
For example, in Germany: Gesetz gegen den unlauteren Wettbewerb [Unfair Competition Act] (Germany) § 5; in New Zealand: Fair Trading Act 1986 (NZ) s 9.
- 144.
Although insider trading is not covered by §10b-5, see Chiarella v. United States, 445 U.S. 222 (1980).
- 145.
E.g., in New Zealand, Financial Markets Conduct Act 2013 (NZ) Pt. 6 (Licensing and other regulation of market services).
- 146.
E.g., in Australia, Corporations Act 2001 (Cth) Pt. 7.8 Div 7 (Other rules about conduct).
- 147.
Corporations Act 2001 (Cth) s 991B(3): for example, an order to buy at $2 could not be filled if the shares are trading at $2.01.
- 148.
This will be discussed in more detail in Chap. 4.
- 149.
See, e.g., Kapitalanlagegesetzbuch [Capital Markets Investment Code] (Germany) §§ 26, 27.
- 150.
Directive 2004/39/EC of the European Parliament and of the Council on Markets in Financial Instruments (21 April 2004) [2004] OJ L-145 1. For discussion, see Blair et al. (2012), para 14.24–14.81.
- 151.
MiFID Art 19. See, e.g., Moloney (2008), p. 1.
- 152.
MiFID Art 18.
- 153.
MiFID Art 21.
- 154.
MiFID Art 22.
- 155.
See, e.g., Morgan Stanley Smith Barney Australia, Financial Services Guide 2013.
- 156.
See, e.g., Aitken and Latimer (1995), p. 1.
- 157.
See, e.g., Emirates Securities and Commodities Authority, The Regulations as to Brokers, Decision No (1/R) of 2000 Concerning the Regulation of Brokers, Article (17) bis (Trading in securities by the broker in its own name and for its own account). http://www.sca.gov.ae/English/legalaffairs/LegalLaws/AmendedRules/2000_1_R.pdf. Accessed 10 June 2014.
- 158.
Loss (1947–1948), pp. 516 and 526.
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Latimer, P., Maume, P. (2015). How Should Financial Markets Be Regulated to Ensure That Information Is Provided?. In: Promoting Information in the Marketplace for Financial Services. Springer, Cham. https://doi.org/10.1007/978-3-319-09459-5_3
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