National laws, international money: Regulation in a global capital market

Fordham Law Review

Volumn 65, Issue 5, 1997, Pages 1855-1906

  Choi, Stephen J ^a   Guzman, Andrew T ^b,c,d  

^a UNIVERSITY OF CHICAGO LAW SCHOOL   (United States)

^b States Ct Appeals First Circuit J ^*

^c HARVARD LAW SCHOOL   (United States)

^d HARVARD UNIVERSITY   (United States)

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EID: 0031476662     PISSN: 0015704X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (112)

1. 15 U.S.C. §§ 77a-77bbbb (1994).
2. 15 U.S.C. §§ 78a-78ll (1994).
3. See Elisabeth Keller & Gregory A. Gehlmann, Introductory Comment: A Historical Introduction to the Securities Act of 1933 and the Securities Exchange Act of 1934, 49 Ohio St. L.J. 329, 329 (1988).
4. Other Acts which also form part of the United States securities regime include: the Public Utility Holding Company Act of 1935, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and the Securities Investor Protection Act of 1970. See Louis Loss & Joel Seligman, Fundamentals of Securities Regulation 35-46 (3d ed. 1995) (describing these Acts).
5. For example, the Japanese securities regime, at least in its framework, is patterned after the United States's system. See James D. Cox, Regulatory Competition in Securities Markets: An Approach for Reconciling Japanese and United States Disclosure Philosophies, 16 Hastings Int'l & Comp. L. Rev. 149, 149 (1993).
6. The world-wide movement towards market-based regimes as well as the growth of international currency markets accelerated the trend towards globalization. See, e.g., Andrew X. Qian, Riding Two Horses: Corporatizing Enterprises and the Emerging Securities Regulatory Regime in China, 12 UCLA Pac. Basin L.J. 62, 63 (1993) (describing the formation of China's securities markets).
7. Through American Depository Receipts, for example, hundreds of foreign companies have gained access to the liquidity and capital of United States stock exchanges over the past decade. See Joseph Velli, American Depository Receipts: An Overview, 17 Fordham Int'l L.J. S38, S46-50 (1994).
8. Countries may seek to regulate transactions that take place abroad if those transactions have an effect within that country. Under Regulation S, for example, the United States may seek to impose the registration requirements of section 5 on foreign issuers selling securities to foreign nationals where selling efforts take place in the United States. See Securities Act Rule 903(b), 17 C.F.R. § 230.903(b) (1996).
9. See Jeffrey Taylor, SEC Seeks Buyers of Duracell Options with Inside Knowledge of Gillette Deal, Wall St. J., Sept. 17, 1996, at A2 (reporting that Swiss and Bahaman financial institutions refused to identify possible insider traders to the SEC).
10. See James D. Cox, Rethinking U.S. Securities Laws in the Shadow of International Regulatory Competition, 55 Law & Contemp. Probs. 157, 175 (Autumn 1992).
11. For a discussion of state regulatory competition, see Lucian A. Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 Harv. L. Rev. 1435, 1444-46 (1992); Ralph K. Winter, Jr., State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. Legal Stud. 251, 254-62 (1977).
12. For a discussion of state regulatory competition, see Lucian A. Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 Harv. L. Rev. 1435, 1444-46 (1992); Ralph K. Winter, Jr., State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. Legal Stud. 251, 254-62 (1977).
13. See Velli, supra note 7, at S46.
14. See Thomas E. Copeland & J. Fred Western, Financial Theory and Corporate Policy 193-217 (2d ed. 1983) (deriving and discussing the capital asset pricing model of securities pricing).
15. See Frank H. Easterbrook & Daniel R. Fischel, Mandatory Disclosure and the Protection of Investors, 70 Va. L. Rev. 669, 675 (1984). But see John C. Coffee, Jr., Market Failure and the Economic Case for a Mandatory Disclosure System, 70 Va. L. Rev. 717, 722-23 (1984) (arguing for the necessity of a mandatory disclosure system).
16. See Frank H. Easterbrook & Daniel R. Fischel, Mandatory Disclosure and the Protection of Investors, 70 Va. L. Rev. 669, 675 (1984). But see John C. Coffee, Jr., Market Failure and the Economic Case for a Mandatory Disclosure System, 70 Va. L. Rev. 717, 722-23 (1984) (arguing for the necessity of a mandatory disclosure system).
17. Additionally, because information is a public good, corporations acting privately may under-provide this information. See Coffee, supra note 14, at 722.
18. For example, consider the situation where a high-value firm is worth $20 per share but a low-value firm is worth only $10 per share. Where investors are unable to distinguish between the two types of firms, investors will pay $15 per share for the shares of each firm. This, in turn, may lead high-value firms to either seek out means of credibly distinguishing themselves from low-value firms or to simply exit the market.
19. Cf. James Bohn & Stephen Choi, Fraud in the New-Issues Market: Empirical Evidence on Securities Class Actions, 144 U. Pa. L. Rev. 903 (1996) (providing evidence on the presence of frivolous securities fraud class action suits).
20. The curves representing the demand (D) and supply (S) of securities will also depend on a variety of other factors that are not explicitly represented in the figure. When these factors (i.e., the overall economic climate) change, the curves will shift accordingly.
21. In the context of full information, issuers would gain nothing by representing their issues in a misleading fashion, because the investors already know the true value of the issue.
22. We label this level the "regulatory ideal" because it is the preferred regulatory situation from the point of view of all three parties to the transaction: the firm, the investor, and the government.
23. This is relative to the open economy case.
24. This assumes that the domestic non-securities alternatives are neither too numerous nor attractive.
25. For example, in the domestic context, after a securities regulatory regime is instituted, whether the regime actually achieves the socially optimal level of regulation depends on the makeup of the regulatory agency and the regulated bodies. Bureaucrats within an agency, for example, may have an incentive to expand their power and influence through the promulgation of numerous and complex rules requiring constant agency monitoring. See Jonathan R. Macey, Administrative Agency Obsolescence and Interest Group Formation: A Case Study of the SEC at Sixty, 15 Cardozo L. Rev. 909, 913-16 (1994). Bureaucrats may also seek to enhance their job prospects by catering to the interests of issuers or investment professionals. Agencies, finally, may make mistakes in their regulatory designs which take time and experience to uncover and correct. To the extent this occurs, individual countries may impose levels of regulation that are too high.
26. By assuming that the two countries are identical, we are able to abstract away the effect that different regimes can have on one another and isolate the impact of internationalization.
27. In other words, the demand and supply curves of each country become more sensitive to changes in the discount level. Both curves are more elastic.
28. See supra part I.A.
29. See Joel P. Trachtman, Unilateralism, Bilateralism, Regionalism, Multilateralism and Functionalism: A Comparison with Reference to Securities Regulation, 4 Transnat'l L. & Contemp. Probs. 69, 82-85 (1994) (discussing reasons why countries may differ in their securities regulatory goals).
30. Debate exists over the optimal level of regulation in a purely domestic situation. See, e.g., Coffee, supra note 14, at 722-23; Easterbrook & Fischel, supra note 14, at 672-73. In order to focus on the international issues, we will abstract from the domestic issues and assume that there is some agreement as to what constitutes the efficient level of regulation at the global level. We will then ask if that is the amount of regulation that is likely to occur.
31. Part I.C. discusses whether all countries will move to a common regulatory regime or whether they will adopt different regimes.
32. In the context of state corporate law, several commentators have debated whether a race-to-the-bottom or a race-to-the-top exists. See generally Bebchuk, supra note 11, at 1444-46 (noting shortcomings of both theories).
33. See generally Frank H. Easterbrook & Daniel R. Fischel, The Corporate Contract, 89 Colum. L. Rev. 1416 (1989) (discussing the contractual basis of corporations).
34. This assumption will be relaxed in part I.B.2.b.
35. See supra part I.B.1.
36. See, e.g., Cox, supra note 10, at 164-73 (describing how managerial opportunism may result in countries rushing to reduce their insider trading laws and dilute the breadth and depth of their disclosure regulations in order to attract such managers).
37. See id.; Coffee, supra note 14, at 738-43.
38. The race-to-the-bottom is constrained by the limits to managerial opportunism. These include: (i) corporate law, (ii) corporate structure and compensation schemes, and (iii) inertia, i.e., there is pressure to issue in the market one is already in. This may explain why corporations are not as mobile in some countries. Nevertheless, at the margin, we expect opportunism to play a role.
39. Note that this observation is not, by itself, sufficient reason to discourage capital mobility. Benefits of capital mobility extend far beyond the area of securities regulation and include the efficient pricing of investment opportunities, increased liquidity in foreign exchange markets, and increased opportunities for foreign direct investment. The related benefits include technology sharing, more efficient production, and gains from trade.
40. Of course, a race-to-the-bottom may not occur to the extent the original share-holders of the company realize the incentive of managers to act opportunistically and either impose controls on such managers or else seek managers with non-opportunistic reputations. See, e.g., Daniel R. Fischel, Organized Exchanges and the Regulation of Dual Class Common Stock, 54 U. Chi. L. Rev. 119, 127-32 (1987). Because investors are unable to determine whether managers' selections of another jurisdiction are due to opportunism or another advantage of the jurisdiction - i.e., lower issuing costs - investors may not be able to control such opportunism ex ante. 39. See supra note 30.
41. See Robert C. Clark, Corporate Law 141-50 (1986) (describing the corporate duty of loyalty).
42. See id. at 123-25.
43. For example, fund managers in certain countries may be constrained by industry-driven limits on their ability to conduct their own trades. See Sara Calian, Fund Industry to Unveil Rules on Personal Trades, Wall St. J., May 9, 1994, at C1, C11 (discussing possible proposals being considered in the United States).
44. It may also be the case that the management has few opportunities to engage in opportunism - implying that the additional constraint of high disclosure is not costly.
45. In addition, high disclosure would be costly to managers who would lose certain opportunities to extract value from the firm.
46. Of course, an individual country may attempt to devise a separate regime for each type of security. Such efforts will not succeed, however, to the extent that a wide range of different types exist or no easy means exist for regulators to distinguish between the types.
47. See Cox, supra note 10, at 158.
48. See id. at 158-59.
49. Of course, too great a range of regimes may result in added costs of compliance for companies seeking to issue securities in multiple jurisdictions. See, e.g., Trachtman, supra note 27, at 79 (advocating reduction of barriers to international issues). Particularly where two different countries' regimes are radically different, such added costs may pose a significant barrier to capital formation. Smaller countries may in fact respond to this pressure by adjusting their own regime to match that of a larger neighbor. Canada, for example, in recent years has moved its own regime much closer to that of the United States. See Cally Jordan, Regulation of Canadian Capital Markets in the 1990s: The United States in the Driver's Seat, 4 Pac. Rim L. & Pol'y J. 577, 590-95 (1995) (discussing how the adoption of the Multi-Jurisdictional Disclosure System between the United States and Canada has resulted in a shift in Canada's securities regime toward that of the United States). Nevertheless, the benefit still exists from the competitive pressure that some amount of diversity entails. The increased compliance cost that may result from diversity simply means that some middle level of diversity is desirable and will result in world equilibrium.
50. One caveat is in order. If several countries have similarly stringent regimes but differ in the details of those regimes, a firm may be able to choose to issue its shares in the country that is least likely to require disclosure of the particular information the issuer would prefer to keep hidden. An important problem with any system of diverse regulations or diverse intermediaries is that it allows the issuer to decide where to issue. This would not present a problem if regulation were simply a matter of "more" or "less" disclosure, but it is not. Because two regimes may have very similar disclosure requirements when taken in the aggregate, but may differ in significant details, management may benefit from forum shopping. For example, if country 1 has relatively tough insider trading rules but relatively lax rules regarding disclosure of, say, potential future liability, while country 2, which features an overall system of securities regulation that is very similar to country 1's, has relatively lax insider trading rules but tough liability disclosure rules, we would expect issuers to take advantage of these differences. Issuers would choose - on the margin - to issue in the country that requires less disclosure in the areas in which they are "weak." Insiders who are dealing in the firm's stock will issue in country 2 while firms that anticipate the future liability claims against them will issue in country 1.
51. For example, domestic investors may have more information on domestic issuers and therefore discount offerings by less. Domestic issuers may also be more familiar with their home country securities laws and clearance and settlement system. Greater numbers of domestic shareholders may also increase the market overall for the issuer's products.
52. Joel P. Trachtman, among others, argues that some international cooperation is necessary to enforce even one country's securities laws. See Trachtman, supra note 27, at 70-71. As we argue in part ILB, infra, however, certain forms of cooperation may be harmful.
53. See 17 C.F.R. § 240.10b-5 (1996). In 1948, the Commission adopted Rule 10b-5, which provides an enforcement mechanism for section 10(b). The reach of the Securities Act antifraud rules, including section 11 and 12(a)(2), are governed under Regulation S. See Stephen J. Choi & Andrew T. Guzman, The Dangerous Extraterritoriality of American Securities Laws, 17 Nw. J. Int'l L. & Bus. 207, 214-16 (1996).
54. 15 U.S.C. § 78j (1994).
55. See 15 U.S.C. § 78c(a)(17) (1994).
56. 15 U.S.C. § 78dd(b) (1994).
57. Additionally, the Restatement Third of Foreign Relations Law of the United States provides guidance on extraterritoriality. See Restatement (Third) of Foreign Relations Law of the United States (1987); see also Gary B. Born, A Reappraisal of the Extraterritorial Reach of U.S. Law, 24 Law & Pol'y Int'l Bus. 1, 37-39 (1992) (analyzing the Third Restatement).
58. Additionally, the Restatement Third of Foreign Relations Law of the United States provides guidance on extraterritoriality. See Restatement (Third) of Foreign Relations Law of the United States (1987); see also Gary B. Born, A Reappraisal of the Extraterritorial Reach of U.S. Law, 24 Law & Pol'y Int'l Bus. 1, 37-39 (1992) (analyzing the Third Restatement).
59. 213 U.S. 347 (1909).
60. Id. at 354-55.
61. Id. at 356.
62. 519 F.2d 974 (2d Cir. 1975).
63. Id. at 993.
64. Id. at 992; see also IIT v. Cornfeld, 619 F.2d 909, 920-21 (2d Cir. 1980) (clarifying the distinction between acts that are merely preparatory and those that directly cause injury).
65. 824 F.2d 27, 33 (D.C. Cir. 1987) (stating that "we adopt what we understand to be the Second Circuit's test"). The D.C. Circuit interprets the Second Circuit test to mean that "jurisdiction will lie in American courts where the domestic conduct comprises all the elements of a defendant's conduct necessary to establish a violation of section 10(b) and Rule 10b-5." See id. at 31.
66. See Continental Grain (Australia) Pty., Ltd. v. Pacific Oilseeds, Inc., 592 F.2d 409, 421 (8th Cir. 1979) (finding that "where defendants' conduct in the United States was in furtherance of a fraudulent scheme and was significant with respect to its accomplishment . . . the district court has subject matter jurisdiction"); SEC v. Kasser, 548 F.2d 109, 114 (3d Cir.), cert. denied, 431 U.S. 938 (1977) (requiring that "at least some activity designed to further a fraudulent scheme occurs within this country"). The Ninth Circuit adopted the Continental Grain test in Grunenthal GmbH v. Hotz, 712 F.2d 421, 425 (9th Cir. 1983). For a more detailed discussion of the conduct test in the context of securities regulation, see Kelley Y. Testy, Comity and Cooperation: Securities Regulation in a Global Marketplace, 45 Ala. L. Rev. 927, 934-35 (1994).
67. See Continental Grain (Australia) Pty., Ltd. v. Pacific Oilseeds, Inc., 592 F.2d 409, 421 (8th Cir. 1979) (finding that "where defendants' conduct in the United States was in furtherance of a fraudulent scheme and was significant with respect to its accomplishment . . . the district court has subject matter jurisdiction"); SEC v. Kasser, 548 F.2d 109, 114 (3d Cir.), cert. denied, 431 U.S. 938 (1977) (requiring that "at least some activity designed to further a fraudulent scheme occurs within this country"). The Ninth Circuit adopted the Continental Grain test in Grunenthal GmbH v. Hotz, 712 F.2d 421, 425 (9th Cir. 1983). For a more detailed discussion of the conduct test in the context of securities regulation, see Kelley Y. Testy, Comity and Cooperation: Securities Regulation in a Global Marketplace, 45 Ala. L. Rev. 927, 934-35 (1994).
68. See Continental Grain (Australia) Pty., Ltd. v. Pacific Oilseeds, Inc., 592 F.2d 409, 421 (8th Cir. 1979) (finding that "where defendants' conduct in the United States was in furtherance of a fraudulent scheme and was significant with respect to its accomplishment . . . the district court has subject matter jurisdiction"); SEC v. Kasser, 548 F.2d 109, 114 (3d Cir.), cert. denied, 431 U.S. 938 (1977) (requiring that "at least some activity designed to further a fraudulent scheme occurs within this country"). The Ninth Circuit adopted the Continental Grain test in Grunenthal GmbH v. Hotz, 712 F.2d 421, 425 (9th Cir. 1983). For a more detailed discussion of the conduct test in the context of securities regulation, see Kelley Y. Testy, Comity and Cooperation: Securities Regulation in a Global Marketplace, 45 Ala. L. Rev. 927, 934-35 (1994).
69. Kasser, 548 F.2d at 111-12.
70. See John C. Maguire, Regulatory Conflicts: International Tender and Exchange Offers in the 1990s, 19 Pepp. L. Rev. 939, 949 (1992); Offshore Offers and Sales, 53 Fed. Reg. 22,661, 22,662 (1988) (codified at 17 C.F.R. § 230).
71. 405 F.2d 200 (2d Cir.), aff'd in part rev'd in part, 405 F.2d 215 (2d Cir. 1968), cert. denied, 395 U.S. 906 (1969).
72. Id. at 204. Specifically, the plaintiff alleged that the insiders had purchased the shares based on information not yet disclosed to the public. Id. 69. Id. at 208.
73. See id. at 208-09.
74. See, e.g., SEC v. Unifund SAL, 910 F.2d 1028, 1033 (2d Cir. 1990) (stating that trading "on the basis of inside information, options of a United States corporation listed exclusively on a United States stock exchange . . . created the near certainty that United States shareholders . . . would be adversely affected"); Des Brisay v. Goldfield Corp., 549 F.2d 133, 136 (9th Cir. 1977) ("[T]he transaction in question . . . involved the improper use of securities . . . registered and listed on a national exchange and adversely affected not only the plaintiffs but also the American market . . . .").
75. Note also that the cost of applying one's laws extraterritorially varies from country to country. In particular, countries with smaller domestic securities markets will experience a greater cost when applying their laws extraterritorially through a broad effects test than larger countries. To see why this is so, suppose that all countries except country 1 allow the sale of securities to their citizens without compliance with their own securities laws, so long as the transaction takes place in a foreign country's market. Country 1, on the other hand, allows the sale of securities to its citizens only if its securities laws are satisfied, regardless of where the transaction takes place. If country 1 is a small country, the issuer is likely to prefer the small loss of liquidity that comes from simply not selling to citizens of country 1 to the costs of satisfying the regulatory regime in country 1. On the other hand, if country 1 represents a large capital market, refusing to sell to its citizens may reduce the market that is available to the issuer and make it more difficult to sell the issue. It may be cheaper to comply with the regulations in country 1 than to lose citizens of country 1 as potential investors. Countries with larger domestic securities markets, therefore, will have greater success in extending their jurisdiction abroad.
76. Canada and the United States also entered into a bilateral agreement in 1991, the Multijurisdictional Disclosure System, with respect to offering information disclosure requirements. Under the Multijurisdictional Disclosure System, Canadian issuers may issue securities in the United States while complying with Canadian registration and disclosure requirements so long as the issuer's financial statements conform to the United States's generally accepted accounting principles. Note, however, that even under the Multijurisdictional Disclosure System, Canadian issuers in the United States are still subject to United States antifraud laws. See SEC Release No. 33-6902, 56 Fed. Reg. 30,036 (1991) (codified at 17 C.F.R. §§ 200, 201, 210, 229, 230, 239, 240, 249, 260, 269).
77. Evidence exists, for example, that neither Japan nor Switzerland actively enforce their United States-styled insider trading laws. See Tokyo Exchange Puts Out Insider-Trading Warning, Wall St. J., June 18, 1987, at 45 ("While insider trading in a broad sense is illegal under Japanese law, regulations and enforcement mechanisms lag behind those of other countries.").
78. See James A. Kehoe, Exporting Insider Trading Laws: The Enforcement of U.S. Insider Trading Laws Internationally, 9 Emory Int'l L. Rev. 345, 358 (1995) ("Clearly the SEC has every incentive to expand its influence and ideology globally. By extending the U.S. insider trading laws globally, the SEC increases its own international prestige and responsibility, especially in the area of enforcement.").
79. But see Joel P. Trachtman, Recent Initiatives in International Financial Regulation and Goals of Competitiveness, Effectiveness, Consistency and Cooperation, 12 Nw. J. Int'l L. & Bus. 241 (1991) (arguing for greater international securities regulatory cooperation).
80. See, e.g., Manning Gilbert Warren III, Global Harmonization of Securities Laws: The Achievements of the European Communities, 31 Harv. Int'l L.J. 185, 187 (1990) (arguing that a supranational organization may "promote regulatory harmony through the coordination, development, and implementation of common standards").
81. Some examples of organizations that may eventually act as supranational securities regulatory bodies include the World Trade Organization, the International Organization of Securities Commissions, and the European Community. The Council of the European Community, for example, has sought to further the free-flow of capital within the European Community and to harmonize disclosure standards for companies to list securities on European Community Exchanges. See Trachtman, supra note 27, at 96 & nn.83-84. The Council of the European Community has also issued a directive on minimum standards for insider trading laws within the European Community. See Warren, supra note 77, at 219-21.
82. Similarly, national securities regulations were optimal when capital flow was primarily domestic. In the United States, for example, state law was found to be inadequate in the 1930s, and national regulations were adopted in their place. The move from national laws to international laws is analogous to the American move from state laws to national laws.
83. For a detailed discussion of why extraterritoriality does not succeed in protecting national markets or investors, see Choi & Guzman, supra note 52, at 219-30.
84. See id. (discussing the role for extraterritorial jurisdiction in detail). Even in situations that include the joint listing of securities there is rarely a justification for extraterritorial application of a country's laws. Almost all legitimate regulatory concerns can be addressed with less intrusive regulation. See id.
85. This test would inevitably involve significant questions of comity.
86. See Choi & Guzman, supra note 52, at 228-38.
87. It appears that countries are already trying to encourage international mobility in capital markets. "[D]e-regulation is emerging as the approach of choice among national securities regulators, although it is a de-regulation focused not on domestic standards but rather on impediments to cross-border transactions that national regulators have been pursuing with studied persistence." Samuel Wolff, Recent Developments in International Securities Regulations, 23 Denv. J. Int'l L. & Pol'y 347, 351 (1995).
88. See S. Jane Rose, The New Wave of International Funds, 582 P.L.I. Corp. 123, 127 (1987).
89. See id.
90. See Choi & Guzman, supra note 52, at 215-16.
91. Regulation S provides a safe-harbor only for transactions not made with persons in the United States. See Securities Act Rule 903(b), 902(i).
92. The justification for the international application of American laws is rarely stated clearly, but is normally considered to focus on protection of American investors and American markets. For a discussion of why extraterritorial application as currently practiced achieves neither of these goals, and why a regime with only very limited exceptions to territoriality could achieve them, see Choi & Guzman, supra note 52, at 219-30.
93. See Richard C. Breeden, Foreign Companies and U.S. Securities Markets in a Time of Economic Transformation, 17 Fordham Int'l L.J. S77, S89 (1994). [I]f the SEC were to adopt a system of home country exemptions, then U.S. investors would be confronted even today with financial statements prepared under at least forty different sets of accounting principles. That approach actually has been tried in the past, and the results are chronicled in the Bible in the story of the Tower of Babel. Id.
94. See Securities Act Rule 903(b).
95. See Securities Act Rule 902(b)(1).
96. Indeed, agreements dealing with securities enforcement and information sharing are the most prevalent of cooperative agreements among countries today. See Trachtman, supra note 27, at 75.
97. See, e.g., id. at 85-86 (stating enforcement assistance "provides the least troublesome . . . intrusions on domestic sovereignty").
98. An example of such enforcement agreements are the series of bilateral memoranda of understandings that the SEC has negotiated with various foreign governments. While not formal treaties, the memoranda of understandings serve as mutual expressions of intent that different country regulators will assist one another with both information and enforcement cooperation. See Id. at 86-87. In particular, memoranda of understandings have been used in the area of insider trading enforcement. See Kehoe, supra note 75, at 359-62. Other agreements may also be desirable in order to achieve various objectives that are not the primary goals of the securities regime. For example, if company X has investors all in country 1 but has some minor activities in country 2 that cause substantial tort harms, the assets in country 2 may be insufficient to pay damages - and therefore X may have great incentives ex ante to engage in hazardous activities in foreign countries. This problem would be a case in which an international tort agreement may be useful.
99. Note that this assumes that the number of shares of both companies X and Y traded in the market are equivalent.
100. Of course, Easterbrook and Fischel argue that higher-value companies will voluntarily disclose information. See Easterbrook & Fischel, supra note 14, at 672-75. Without a standardized mechanism to disclose this information, however, investors may not be able to interpret correctly the value of the company. Furthermore, where antifraud regimes are lax, higher-value companies will still face a credibility problem in conveying their true value.
101. For a general discussion of the role of certification intermediaries, see Stephen Choi, Market Lessons for Gatekeepers, (working paper on file with authors); see also Reinier H. Kraakman, Gatekeepers: The Anatomy of a Third-Party Enforcement Strategy, 2 J. Law Econ. & Org. 53 (1986) (describing how legal liability may be used to encourage third-party intermediaries to certify the value of another's products).
102. For a general discussion of the role of certification intermediaries, see Stephen Choi, Market Lessons for Gatekeepers, (working paper on file with authors); see also Reinier H. Kraakman, Gatekeepers: The Anatomy of a Third-Party Enforcement Strategy, 2 J. Law Econ. & Org. 53 (1986) (describing how legal liability may be used to encourage third-party intermediaries to certify the value of another's products).
103. Of course, where no international certifier is associated with the foreign company, investors lack this certification information.
104. See, e.g., Kevin Rock, Why New Issues Are Underpriced, 15 J. Fin. Econ. 187 (1986) (providing a model of initial public offering discounting based on an asymmetry of information between sophisticated and unsophisticated investors).
105. See I.R.C. § 401(k) (1997).
106. See generally Mark J. Roe, Political Elements in the Creation of a Mutual Fund Industry, 139 U. Pa. L. Rev. 1469 (1991) (describing the effects of regulation on the mutual fund industry).
107. 15 U.S.C. §§ 80a-1 to 80a-64 (1994).
108. See Roe, supra note 102, at 1474-80 (detailing the prohibitions and penalties within the Investment Company Act and the Internal Revenue Code against nondiversified funds).
109. See id.
110. Indian regulators currently are considering reforms to encourage the growth of their mutual fund industry. Among other areas, the reforms may target Indian regulations governing the ability of funds to concentrate investments in one industry or one company. See Sumit Sharma, India Mulls Steps to Polish Image of Mutual Funds, Asian Wall St. J., June 27, 1996, at 1.
111. See Richard G. Ketchum & Beth E. Weimer, Market 2000 and the NASDAQ Stock Market, 19 J. Corp. L. 559, 577-78 (1994) (describing recent NASD changes to the NASDAQ short order execution system to curb misuse of the system).
112. See Note, Investor Liability: Financial Innovations in the Regulatory State and the Coming Revolution in Corporate Law, 107 Harv. L. Rev. 1941 (1994) (discussing the use of financial derivative securities in international transactions). Despite the advantages of institutional investors in promoting an optimal global regulatory regime, governments, nevertheless, should remain wary of too much concentration of investment power within the hands of a few institutional investors. Principal-agent problems may exist between the fund trustees and the investors into the fund. Trustees, for example, may short sell stocks within their funds and then dump the stocks in an attempt to reduce the stock price at a gain for themselves. Furthermore, funds themselves may become privy to insider information and engage in insider trading. Finally, although large concentrations of stock ownership may ameliorate corporate governance problems between management and ownership, extensive fund ownership may actually lead to more collusion between companies with cross-linking ownership patterns.