In the aftermath of Enron's collapse, the SEC, the US Congress and other entities have clamoured for changes in the US regulatory system. These changes include revamping the way accounting profession is monitored, limiting the non-audit services that auditors can provide to their clients, adopting newer, timelier disclosure requirements and tightening regulation of analyst conflicts of interest. The fall-out from Enron has not unexpectedly spilled over to Europe. The European Commission recently issued a paper noting that the "Enron affair ... has brought to light a number of significant international policy issues" that "have major significance for the EU in the context of creating its efficient and competitive capital market by 2005". The paper highlighted five issues the Commission will continue to address in the future: financial reporting, auditing standards, corporate governance, transparency in the international financial system and financial analysts' research and the role of rating agencies.
At the same time, the EU is in the process of implementing the recommendations of the Committee of Wise Men on the Regulation of European Securities Markets to achieve an integrated European capital market. It has established a new regulatory body and released two proposed directives, the Prospectus Directive and the Market Abuse Directive, as well as a consultation paper designed to implement a harmonized EU securities regime. Many of the principles discussed in these documents are similar to the principles that guide US regulation.
What is missing in this process of implementing change is effective coordination between the SEC and the EU, and this lack of coordination has perhaps been aggravated since Enron. The common goal should be to streamline disclosure and accounting requirements and presentation formats, at least for companies already trading publicly in both markets.
Once the Prospectus Directive is adopted, the disclosure standards in both the US and the EU will be based on standards endorsed by International Organization of Securities Commissions (Iosco). In addition, the SEC is considering permitting international accounting standards that must be used by all EU companies by 2005 to be used in the US by non-US companies. Because auditing standards in both jurisdictions are converging, there needs to be an interagency group reviewing developments in both markets to explore how more uniformity can be achieved. And it is in the interests of the US to pursue coordination actively.
If the integrated market becomes a reality in the EU and there continue to be material differences between US and EU regulation, European issuers may only list in the US as a last resort or as a strategic matter, raising capital, when necessary, elsewhere. The likelihood of this occurring is only increased by the US litigation environment, plus proposed legislation requiring certification of financial reporting by officers and other post-Enron proposals.
An interagency group should, as far as possible, explore whether the two jurisdictions could achieve commonality in areas including:
auditing standards;
financial disclosure;
a mandate for and composition of audit committees;
timing and content of mandatory forward-looking information;
when it is necessary to update the market;
regulation of aftermarket activity following an offering; and
regulation of analyst conflicts of interest.
There are important differences between the two jurisdictions that make complete harmonization difficult. Liability standards are varied and uneven, and are not even addressed in the Prospectus Directive, while the prevalence of class action litigation affects the scope of possible rules in the US. Similarly, there are differences in governance standards. But things can be done better than they have been in the past.
There is another reason for better coordination. The US has previously deferred in certain instances to EU practices and not required compliance by European issuers with certain rules applicable to US companies. An example is that non-US companies are not subject to the quarterly or current reporting requirements applicable to US companies. The New York Stock Exchange has taken a similar approach. For example, it does not require non-US companies to comply with its governance rules concerning audit committees. In the fall-out from Enron, this deference is being reexamined, and some believe the US may seek to have all companies whose securities trade in the US play by the same rules in a post-Enron environment. Such unilateralism would be unfortunate, but all the more reason to increase the level of coordination to come up with a common approach to many of these issues as well as agreement as to when differences – and deference to those differences – will be appropriate. If this does not happen, the US market may well fall into a position of competitive disadvantage.