Are we risking the integrity of our securities markets?

• Author: Sommer, A.A., Jr.
• Position: International securities market standards

Are we risking the integrity of our securities markets? As technology and the movement of capital encourage a worldwide explosion of securities markets, a former SEC commissioner feels that only halting steps have been taken to deal with the regulatory problems caused by these developments. In a world of exciting and constant change, perhaps no phenomenon in the financial world is as important, as far reaching, and as certain as the rapidly increasing internationalization of securities markets. A few years ago a topic for scholarly dissertation, it is daily becoming a fuller and more challenging reality. The extent to which the markets of the world have become intertwined was seen dramatically in the events of October, 1987. Markets with markedly different characteristics impacted one another swiftly and even harshly.

But that reality is seen as clearly every day. As securities firms become increasingly international, as barriers to the movements of funds and securities evaporate, as investors learn more about foreign securities and seek international diversification as well as industry and issuer diversification, the growing interrelation of markets is plain. Today, we have not only specialists on the Midwest Stock Exchange in Chicago competing with their counterparts on the New York Stock Exchange, but traders on the Tokyo Stock Exchange competing with specialists on the New York Stock Exchange and London marketmakers competing with U.S. marketmakers on the NASDAQ system.

The truth is that technology--the computer and sophisticated communications apparatus--and the elimination of barriers to the movement of capital have permitted giant steps in the internationalization of markets, while only halting steps have been taken to deal with the regulatory problems posed by these developments.

This lag is clearly seen in the two areas discussed in this article--insider trading and corporate, especially financial, disclosure.

While we speak more frequently of the internationalization of markets, the simple fact is that securities markets remain preeminently national, as does their regulation, and they are becoming more and more competitive, both in seeking listings and in luring investors. In 1986, there were 150 stock exchanges in 54 countries, and it is likely that since then others have been founded. Developing countries regard the organization of an exchange as a necessary step in the maturing of their economies, and rightly so. And each of these exchanges has its own structure, relationship to its government, trading style and techniques, and rules. As John Phelan, Jr., the chairman of the New York Stock Exchange, has said, "Each of the major stock exchanges not only has its own rules and regulations, but its own personality as well."

The rules of corporate disclosure In each country, the exchanges, the government, or some organization such as an accounting board--or a combination of these--has established some standards for disclosure of information concerning the affairs of issuers. And, as we all know, these standards vary hugely.

First, of course, there are differences in accounting principles--for instance, the consolidation of accounts, depreciation practices, accounting for inflation, foreign currency, and transfer pricing. The standards for the licensing of auditors, and the extent to which independent auditors must be involved with published financial information, vary over a wide range.

The result is a bewildering pattern of disclosure requirements, all ostensibly aimed at assuring that investors have sufficient reliable information on the basis of which they then can make rational investment decisions.

A number of efforts are underway to eliminate, or at least reduce, the dimensions and significance of these differences. These include: * The International Accounting Standards Committee is...