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Effective Policy Design for the Retail Investment Services Market: Challenges and Choices Post FSAP

Niamh Moloney

in Investor Protection in Europe: Corporate Law Making, The MiFID and Beyond

This chapter considers the choices and risks faced by the EU in designing policy for the retail investment services market in the wake of the large-scale regulatory reforms introduced by the FSAP. It ... More

This chapter considers the choices and risks faced by the EU in designing policy for the retail investment services market in the wake of the large-scale regulatory reforms introduced by the FSAP. It argues that a multi-stranded, evidence-based strategy, which incorporates nuanced, non-regulatory policy design initiatives, is essential for the achievement of the EU's objective of promoting an effective retail investment services market through the support of rational and informed investor choice.Less

How Should Market Infrastructure Institution Governance Be Regulated?

Ruben Lee

in Running the World's Markets: The Governance of Financial Infrastructure

This chapter explores what regulatory intervention in the governance of market infrastructure institutions is optimal. Attention is focused on how such intervention can enhance the realization of the ... More

This chapter explores what regulatory intervention in the governance of market infrastructure institutions is optimal. Attention is focused on how such intervention can enhance the realization of the three core objectives of securities markets regulation identified by International Organization of Securities Commissions (IOSCO), namely the protection of investors, ensuring that markets are fair, efficient, and transparent, and the reduction of systemic risk. The chapter is divided into five sections. In the first, some preliminary comments are presented. In the next three sections, the manner in which regulatory intervention in the governance of market infrastructure institutions may promote each of the IOSCO core objectives in turn is examined. The last section encapsulates these discussions and presents key lessons about how best to regulate the governance of market infrastructure institutions. In order to do so, 16 general propositions are articulated.Less

Investor Protection and Capital Market Regulation in Germany

Eric Nowak

in The German Financial System

La Porta et al . have shown that differences among countries in legal codes and enforcement of investor protection account for much of the disparity in the size and development of their financial ... More

La Porta et al . have shown that differences among countries in legal codes and enforcement of investor protection account for much of the disparity in the size and development of their financial markets. According to their empirical measure of shareholder protection, Germany scores only one out of five possible points on an aggregated index scale.This chapter argues that this assessment is no longer correct, because Germany has reformed its capital market regulation in ways that now afford much greater shareholder protection. In four sections, the chapter examines these developments and their effect on changes in corporate governance and investor protection to date.Less

Corporate Governance in Germany: An Economic Perspective

Reinhard H. Schmidt

in The German Financial System

Analyses German corporate governance under the aspect of whether it was, and possibly still is, a consistent and economically efficient system composed of complementary elements. The author shows ... More

Analyses German corporate governance under the aspect of whether it was, and possibly still is, a consistent and economically efficient system composed of complementary elements. The author shows that it was, and still is, an insider-control system in which several influential stakeholder groups govern corporations according to the concept of stakeholder orientation. In recent years, several steps that aim at modernising the system have been taken. The system has indeed become more modern and shareholder-friendly, but also less consistent than it used to be. Moreover, so far the recent developments have not had the effect of transforming German corporate governance in a fundamental way and converting it into a capital market-oriented and outsider-control system.Less

Internalisation under the MiFID: Regulatory Overreaching or Landmark in Investor Protection?

Johannes Köndgen and Erik Theissen

in Investor Protection in Europe: Corporate Law Making, The MiFID and Beyond

This chapter sums up the economic fundamentals of internalised stock trading and attempts to make a case for regulation. It then sketches the current practice of internalisation in Germany, with ... More

This chapter sums up the economic fundamentals of internalised stock trading and attempts to make a case for regulation. It then sketches the current practice of internalisation in Germany, with special emphasis on the ‘Xetra Best’ facility, a trading venue which tries to integrate internalised trading with an organized market. Subsequently, the chapter turns to a critique of the relevant parts of the EC Markets in Financial Instruments Directive (MiFID), measuring the latter against the fundamental principles of market efficiency and investor protection. Finally, it discusses whether Xetra Best, after some refurbishment, could serve as a blueprint for other European stock exchanges.Less

 Corporate Financial Reporting and Regulation in the United States

George J. Benston, Michael Bromwich, Robert E. Litan, and Alfred Wagenhofer

in Worldwide Financial Reporting: The Development and Future of Accounting Standards

This chapter reviews the rules governing financial disclosure by corporations in the United States. It begins with an overview of state regulation (which is still in force) and then turns to federal ... More

This chapter reviews the rules governing financial disclosure by corporations in the United States. It begins with an overview of state regulation (which is still in force) and then turns to federal regulation, which began in 1933. The public securities markets are described and the Securities and Exchange Commission’s (SEC) rules governing financial disclosure of public corporations are outlined. Standard setting by the American Institute of Certified Public Accountants (AICPA), the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB), and investor protection and corporate governance are considered next. Current issues such as the scope of auditing practices, auditor independence, audit failures, principles- versus rules-based accounting standards, and convergence of U.S. and international standards are discussed.Less

From Individual to Community Interest in International Investment Law

Christoph Schreuer and Ursula Kriebaum

in From Bilateralism to Community Interest: Essays in Honour of Bruno Simma

The protections granted to investors by international investment law would seem to epitomize individual interests. In fact, some of the criticism directed at investment law and especially investment ... More

The protections granted to investors by international investment law would seem to epitomize individual interests. In fact, some of the criticism directed at investment law and especially investment arbitration is based on the charge that they serve the egoistical interests of big corporations often at the cost of a wider community. This chapter demonstrates that investment law is by no means exclusively governed by individual interests but is also receptive to community interest.Less

The Turnaround of 1997: Changes in Japanese Corporate Law and Governance

Zenichi Shishido

in Corporate Governance in Japan: Institutional Change and Organizational Diversity

This chapter examines the impact on the scope of behaviour of top management of legal reforms in Japan since 1997. Demand-pull measures were promoted by business associations to facilitate the ... More

This chapter examines the impact on the scope of behaviour of top management of legal reforms in Japan since 1997. Demand-pull measures were promoted by business associations to facilitate the introduction of new market-oriented business practices, including removing prohibitions of share buybacks, introducing stock options, and share swaps and spin-offs to support corporate reorganization through M&A. Policy-push reforms were also initiated by the government in order to push change in existing corporate governance practices, such as changes to accounting rules. The epoch making 2002 amendment to the Company Law introduced an American-style board of directors, termed ‘board with committees’ as a second option alongside the traditional Japanese-style board with statutory auditors. By facilitating these new practices, Japanese corporate law has undergone a formal convergence with the US model. However, the diversity of actual choices among firms is argued to reflect continued functional divergence due to differences in the incentive patterns among corporate stakeholders. Thus, legal reform holds an ambiguous potential.Less

Progress in and Prospects for the Financial Sector Reform

Yung Chul Park

in Economic Liberalization and Integration in East Asia: A Post-Crisis Paradigm

Although financial reform agendas differ among countries in East Asia, these are loosely categorized between more advanced and less developed economies. The overall agenda for such reforms includes ... More

Although financial reform agendas differ among countries in East Asia, these are loosely categorized between more advanced and less developed economies. The overall agenda for such reforms includes the strict separation of banking and commerce, privatization of state-owned institutions, opening of the domestic financial services industry, legal reform, and strong accounting and auditing rules.Less

Financial Development and the Credit Cycle in Greece¹

Michael Haliassos, Gikas Hardouvelis, Margarita Tsoutsoura, and Dimitri Vayanos

in Beyond Austerity: Reforming the Greek Economy

This chapter reviews the developments in Greece's financial system since the beginning of the crisis. The chapter places them in a broader context by (i) evaluating the long-term performance of ... More

This chapter reviews the developments in Greece's financial system since the beginning of the crisis. The chapter places them in a broader context by (i) evaluating the long-term performance of Greece's financial system in comparison to other countries, and (ii) reviewing the credit boom-and-bust cycle that Greece has experienced since Euro entry. Risks in the Greek economy remain overly concentrated to those originating them and are not well diversified. By raising the cost of equity capital for firms, this impedes investment. It also drives up corporate leverage, thus making the economy more vulnerable to shocks. These vulnerabilities manifested themselves even before the sovereign crisis hit. Strengthening investor protection, through improvements in the justice system and financial regulation, is an important part of the solution. In the shorter run, the debt overhang problem in the private sector should be addressed. The chapter discusses policy options to achieve these goals.Less

Privatization and Corporate Governance

Simon Johnson and Andrei Shleifer

in Governance, Regulation, and Privatization in the Asia-Pacific Region

This chapter discusses the corporate governance of privatized firms. Ronald Coase (1960) explained the conditions under which individuals and private firms should be able to make contracts as they ... More

This chapter discusses the corporate governance of privatized firms. Ronald Coase (1960) explained the conditions under which individuals and private firms should be able to make contracts as they please. As long as the enforcement costs of these contracts are nil, individuals do not need statutory law or can find ways to contract around the law. Coasian arguments have had great influence on discussions about corporate finance, and the chapter focuses on this literature. A great deal of research suggests that privatization can be helpful for economic development. But the effectiveness of privatization is greater when corporate governance works well. It is argued that effective laws are an important requirement for corporate governance. Without enforceable investor protection, privatization is less likely to succeed. Two commentaries are also included at the end of the chapter.Less

Issuer Disclosure Regulation

John Armour, Dan Awrey, Paul Davies, Luca Enriques, Jeffrey N. Gordon, Colin Mayer, and Jennifer Payne

in Principles of Financial Regulation

This chapter considers the rationale for, and scope and content of, mandatory disclosure obligations placed on firms issuing securities in capital markets. The explicit regulatory objective of issuer ... More

This chapter considers the rationale for, and scope and content of, mandatory disclosure obligations placed on firms issuing securities in capital markets. The explicit regulatory objective of issuer mandatory disclosure for primary as well as secondary markets is investor protection. This chapter aims to reconcile policymakers’ investor protection goal with how market players, including investors, behave in the real world, based on an understanding of the reasons why market forces alone may be insufficient to attain informational efficiency and how they still may put mandated disclosure to good use. Thus, the chapter first asks what the regulatory objectives are for mandating disclosures and how they can be reconciled with economic theory. Next, it answers the question of why mandatory disclosure is needed at all. Then, it provides an overview of disclosure regimes, taking those of the US and the EU as examples. The chapter concludes with a brief discussion of the role of enforcement in ensuring adequate disclosure.Less

Mutual Fund Disclosure and Related Fund Investor Protection Features

Joseph A. Franco

in Mutual Funds and Exchange-Traded Funds: Building Blocks to Wealth

This chapter discusses the principal features of mutual fund disclosure regulation in the United States and the challenges faced by the SEC in designing a disclosure regime that meets the needs of ... More

This chapter discusses the principal features of mutual fund disclosure regulation in the United States and the challenges faced by the SEC in designing a disclosure regime that meets the needs of retail investors and promotes investor protection. The chapter notes that, unlike conventional public companies, mutual funds are engaged in continuous offerings of securities to the public. As a result, fund disclosure, including fund advertising, is subject to ongoing regulatory requirements in terms of format and content, especially as it relates to disclosure of fund performance. The chapter then explains why regulators have been successful in making disclosure easier to understand, but face far greater challenges in designing disclosure requirements that promote rational investment decision-making given well-established behavioral biases of retail investors.Less

The Enron Scandal: Legal Reform and Investor Protection in the United States

in Law and Capitalism: What Corporate Crises Reveal about Legal Systems and Economic Development around the World

This chapter discusses the collapse of Enron and its aftermath. Enron's breathtakingly rapid unravelling in 2001 threw a good deal of cold water on the perception that the United States had reached ... More

This chapter discusses the collapse of Enron and its aftermath. Enron's breathtakingly rapid unravelling in 2001 threw a good deal of cold water on the perception that the United States had reached the zenith of legal and corporate governance. This perception had been building throughout the 1990s, propelled in part by the law and finance literature. The chapter opts for a simple rendition of the crisis, because the precise mechanics of Enron's accounting fraud are less important for its purposes than situating the event in the contemporary U.S. market and legal structures. The Enron saga vividly underscores that all market-oriented economies, however highly developed, require constant regulatory recalibration; the legal infrastructure for a capitalist economy is always under construction. The chapter also shows how a decentralized and highly protective legal system helps give rise to and responds to a corporate crisis. The legal response to the Enron debacle and other corporate scandals in the United States in the name of investor protection has proved to be almost as controversial as the underlying events.Less

Negotiating New Generation International Investment Agreements: New Sustainable Development Oriented Initiatives

Peter Muchlinski

in Shifting Paradigms in International Investment Law: More Balanced, Less Isolated, Increasingly Diversified

International Investment Agreements (IIAs) are in need of substantial reconsideration. This position has now entered the mainstream with bodies such as UNCTAD and the Commonwealth Secretariat ... More

International Investment Agreements (IIAs) are in need of substantial reconsideration. This position has now entered the mainstream with bodies such as UNCTAD and the Commonwealth Secretariat offering detailed models for the recalibration of IIAs. At the core of this development lies the fear that an unaccountable, privatized, system of Investor–State Dispute Settlement (ISDS), is acquiring too great a role in international life. Against this background both organizations seek to place sustainable development at the heart of the IIA reform project. This chapter looks at the changing investment environment and why this requires change to IIAs based on sustainable development. It then examines how changing circumstances may affect the design and content of new IIAs focusing on resolving controversial interpretations of existing provisions, as well as on the introduction of new provisions that may be required to further sustainable development goals. Finally, proposed reforms of ISDS procedures are briefly reviewed.Less

Understanding and Combating Investment Fraud

Christine N. Kieffer and Gary R. Mottola

in Financial Decision Making and Retirement Security in an Aging World

Investment fraud is a significant problem in America. Many Baby Boomers are entering retirement with significant assets, and enforcement actions by financial regulators indicate that investors can be ... More

Investment fraud is a significant problem in America. Many Baby Boomers are entering retirement with significant assets, and enforcement actions by financial regulators indicate that investors can be vulnerable to fraud at key ‘wealth events’ in their lives, such as when they face a decision about what to do with money arising from the sale of a house, an inheritance, or an IRA rollover. Protecting these assets—for Baby Boomers and younger generations who face key wealth events—will be important to ensure the financial well-being and retirement security of millions of Americans. This chapter reviews the prevalence and impact of financial and investment fraud, explores the value of using demographic characteristics, psychographic characteristics, and the number of times an individual is targeted for fraud to predict investment fraud victimization, explains how fraudsters use social influence tactics to defraud their victims, and describes current investor protection efforts.Less

Corporate Governance and the Development of Manufacturing Enterprisesin Nineteenth-Century Massachusetts

Eric Hilt

in Enterprising America: Businesses, Banks, and Credit Markets in Historical Perspective

This chapter analyzes the use of the corporate form among nineteenth century manufacturing firms in Massachusetts, from newly collected data from 1875. An analysis of incorporation rates across ... More

This chapter analyzes the use of the corporate form among nineteenth century manufacturing firms in Massachusetts, from newly collected data from 1875. An analysis of incorporation rates across industries reveals that corporations were formed at higher rates among industries in which firm size was larger. But conditional on firm size, the industries in which production was conducted in factories, rather than artisanal shops, saw more frequent use of the corporate form. On average, the ownership of the corporations was quite concentrated, with the directors holding 45 percent of the shares. However, the corporations whose shares were quoted on the Boston Stock Exchange were ‘widely held’ at rates comparable to modern American public companies. The production methods utilized in in different industries also influenced firms’ ownership structures. In many early factories, steam power was combined with unskilled labor, and managers likely performed a complex supervisory role that was critical to the success of the firm. Consistent with the notion that monitoring management was especially important among such firms, corporations in industries that made greater use of steam power and unskilled labor had more concentrated ownership, higher levels of managerial ownership, and smaller boards of directors.Less

The Greek Justice System: Collapse and Reform¹

Elias Papaioannou and Stavroula Karatza

in Beyond Austerity: Reforming the Greek Economy

This chapter discusses the key structural deficiencies of the Greek justice system and proposes concrete policy reforms. The first part provides an account of the Greek legal system using ... More

This chapter discusses the key structural deficiencies of the Greek justice system and proposes concrete policy reforms. The first part provides an account of the Greek legal system using cross-country indicators reflecting the formalism, quality, and speed of resolution mechanisms. The analysis shows that the Greek justice civil system has failed to perform its basic tasks. Trials in all types of courts take years to complete, in some instances seven or even ten years. At the same the quality of laws protecting investors, contracts and property, is low. Using comparative data from other EU jurisdictions, the chapter shows that the key reasons behind these failures are the absence of information technology, the lack of support staff, the absence of specialized courts and tribunals, and a hugely dysfunctional administration. At the same time there is minimal assessment of the judges' performance and limited possibilities for continuing professional development. The second part details a set of policy proposals. The proposals consist of immediate measures for clearing the large backlog and a set of ambitious medium-term reforms, many of which require a constitutional amendment. They aim to make the Greek justice system professionally administered, less formalistic, suitably flexible, and more accountable. Given the strong link between legal institutions and development, justice reform should be an absolute priority of the policy agenda, though sadly it is not.Less

Foreign Direct Investment: A Historical Perspective

Leon E. Trakman and Nicola W. Ranieri

in Regionalism in International Investment Law

The development of foreign direct investment (FDI) protocols reflects an evolutionary progression of thinking on the subject. They are steeped in established international law obligations and ... More

The development of foreign direct investment (FDI) protocols reflects an evolutionary progression of thinking on the subject. They are steeped in established international law obligations and evolving treaty commitments. Most FDI progress has been made regionally and bilaterally, with investor protection now commonly addressed in comprehensive regional and bilateral trade agreements, or in stand-alone bilateral investment treaties. Regardless of the type of agreement that embodies them, investment provisions are generally aimed at facilitating the flow of investments between countries and creating standard investor protection protocols. In essence, they seek to imbue certainty and predictability in the FDI decision-making process and limit political interference, albeit selectively. This chapter discusses the history of FDI protocols in four distinct phases: regulation in historical societies, the period of regulation prior to the end of World War II, the period subsequent to that war, and the present global era.Less

Enforcement

Carsten Gerner-Beuerle and Michael Schillig

in Comparative Company Law

This chapter explores whether the lower level of investor protection that some commentators associate with the civil law can be explained with deficiencies in the enforcement mechanisms that ... More

This chapter explores whether the lower level of investor protection that some commentators associate with the civil law can be explained with deficiencies in the enforcement mechanisms that investors, and in particular minority shareholders, have at their disposal. It starts with a discussion of the so-called ‘contracwetualisation of responsibility’. It then analyses how the claims that a company has against its own directors can be enforced, in particular, by minority shareholders. The last part of the chapter gives an overview of substitute enforcement mechanisms for the minority shareholder lawsuit that are of great practical importance in some jurisdictions. In contrast to litigation by the company (acting through its authorized organ or minority shareholders), these substitute mechanisms are predominantly of a public law nature. Thus, this final section will illustrate how some legal systems have a preference for public enforcement, while others rely extensively on private enforcement.Less