Answering The Effectiveness Question: Evidence From The SEC’s Networks
David Zaring*
Draft Paper for Georgia State Presentation, Sep. 18, 2009
Theoreticians have long claimed the importance and centrality of “networks” in the
regulation of international economic law. They are indeed critical. But still missing in the
analysis is why some networks fail while others succeed. Moreover, even the question of
what constitutes “success” is contested, given that baselines between agencies and issues
vary, and the metrics of success (power, control, or effectiveness) vary. One way to hold
some of these variable constant, albeit qualitatively, is to consider the experiences of one
agency. The United States Securities and Exchange Commission (SEC) has participated in
five networks in an effort to adjust its mission to reflect the increasingly global nature of
its regulatory remit. The paper analyzes the SEC’s experiences with its various networks;
one agency’s efforts in a variety of similar fora might reveal what networks are good for,
and where they can fail.
The methodological strategy is doctrinal and mildly quantitative. The doctrine of these
networks – their “legal” products – are compared, to show the various things that networks
are capable of, as well as the impact they can have on a network participant; here, the SEC.
But this sort of qualititative comparison of effectiveness has limits. The comparisons of
products is bolstered by the development of a simple index of the prominence of each of
the networks, based on their prominence in the Federal Register, the record of the
American bureaucracy, as well as in the popular press and legal scholarship. The index
gives another basis for comparison of the networks, and also affords a sense of the critical
events that led to the evolution of each network. Second, the products of the networks are
subjected to a content analysis. This analysis is instructive about the network form itself.
Does it lead to similar sorts of lawmaking? A content analysis can tell us whether the
products of financial networks look alike.
On the basis of this evidence, the paper suggests that one reason for variously effective
networks may turn on the nature of the network itself. On one hand, social networks create
soft institutional strictures by which compliance is facilitated through familiarity and
positive incentives. This is a cooperative model that uses peer review as encouragement
for compliance. On the other hand, other networks create hard rules and incentivize
compliance through lock-ins. These networks penalize non-compliance through a range of
negative externalities – they look more like the sorts of monopolies that have driven
economic network analysis. This is a different sort of peer review; it is like peer review as
accreditation as a condition for membership.
I.
INTRODUCTION
The first commissioners of the SEC gave their speeches in the United States, concentrated
on American stock exchanges, and evaluated the disclosures of American companies. As
Commissioner James Landis said of the securities laws in 1933, “the public interest and the
*
Assistant Professor, Wharton School of Business. Thanks to Bobby Bartlett, Harlan Cohen, Greg Shaffer, [], and in particular
to Chris Brummer, who is the source of many of the insights in the draft so far.
1
protection of investors must be the guiding consideration” for an agency that was needed
because “some groups of persons associated with security flotations are not induced to
refrain from material nondisclosure by fear either of the very real liability for
compensatory damages at common law or fear of prosecution under the criminal law.”1
Today, the SEC’s mission is the same, but both the investors and the security flotations are
as likely to be found overseas as they are in the United States. American gross trading
activity in foreign securities is $7.5 trillion, up from $53 billion three decades ago.2
Approximately two-thirds of American investors own securities of non-U.S. companies – a
30% increase from just five years ago.3 And foreign trading activity in U.S. securities now
amounts to over $33 trillion.4 Recently, globalization has been blamed for the exposure of
a number of European financial institutions to securitized American subprime mortgages,
and to an American bank that failed because of them.
The impact of this globalization on the regulators who oversee American markets has been
enormous. Instead of exclusively spending their time in the United States, in 2007, the
SEC commissioners gave speeches in Sydney (twice), Madrid (twice), Mumbai, London
(thrice), Dublin, Berlin, Frankfurt, Paris (twice), Munich, Luxemburg, Cape Town,
Vancouver, Brisbane, and Tokyo (thrice).5 Former SEC Chair Christopher Cox reports
that international work now “comprises over half of my time and responsibilities.”6 In his
view, “it is no longer possible for the SEC to do its work in the United States without a
truly global strategy… what goes on in other markets and jurisdictions is now intimately
bound up with what happens here.”7
All of this international activity has come in the wake of a recognition by the SEC that the
global markets have created unprecedented international challenges. Capital can leave a
regulatory jurisdiction, but the regulators trying to attract it or insure that it complies with
local laws are less mobile. Moreover, the SEC, long the regulator of the largest capital
markets by far, is facing a future with many more competitors, both in formal and informal
financial sectors. These competitors do not only offer an alternative to the American
regulatory frameworks, they interfere with it, with regulations of increasingly
extraterritorial import.8
1
James M. Landis, The Securities Act of 1933, Address before New York State Society of Certified Public Accountants
(October 30 1933)
2 Christopher Cox, International Business — An SEC Perspective, Address to the American Institute of Certified Public
Accountants' International Issues Conference ( January 10 2008 )
3 Id.
4 Id.
5 The analysis was concluded by visiting the agency’s website, which admirably keeps track of every speech by SEC
Commissioners. See http://www.sec.gov/news/speech/speechartchive/2007speech.shtml#chair
6 Christopher Cox, International Business — An SEC Perspective, Address to the American Institute of Certified Public
Accountants' International Issues Conference ( January 10 2008 ).
7 Christopher Cox, The SEC Speaks 2008, available at
http://www.knowledgemosaic.com/Gateway/Rules/SP.spch020808cc.020808.htm.
8 For example, the European Union has imposed substantial fines on Microsoft, an American company, for conduct that
American antitrust regulators found consistent with its own antitrust laws and regulations. Various of the opinions and other
resources in the lengthy EU litigation may be found at
http://ec.europa.eu/comm/competition/antitrust/cases/index/by_nr_75.html#i37_792.
2
But amidst all these problems, there may be an international solution. American federal
regulators have addressed these global developments by interacting with their counterparts
abroad, and trying to develop a multilateral regulatory regime of global scope.
They have done so through networks. As Anne-Marie Slaughter has put it, networks of
regulators exhibit “pattern[s] of regular and purposive relations among like government
units working across the borders that divide countries from one another and that demarcate
the ‘domestic’ from the ‘international’ sphere.”9 As the network form has developed and
spread, the regulatory network has become an important tool in the arsenal of international
regulation – perhaps even the primary such tool, and at any rate, a worthy alternative to
either unilateralism or more institutionalized, and, occasionally, judicialized forms of
international administration.10 I think of networks as the principle rulemakers in global
administrative law, a complement to the tribunals who perform important adjudicative
roles in various international administrative schemes.
For these and other reasons, the SEC has been remarkably network friendly – it “has
pursued [its] goals through a variety of international multilateral and bilateral fora,
including the International Organization of Securities Commissions (IOSCO), a bilateral
dialogue with the Committee of European Securities Regulators, and with fellow securities
regulators” on a number of issues, including the “holy grail” issue of standardization of
accounting practices.11
The SEC has also joined the Financial Action Task Force, designed to do something about
money laundering. It participates in the Joint Forum, designed to coordinate international
supervision of financial conglomerates. It is a member of the new Financial Stability
Board, the successor to the Financial Stability Forum, a network of networks designed to
coordinate financial oversight across jurisdictions. It has through its other networks
encouraged the addition of a new one; the Public Interest Oversight Board, designed to
ensure that accountants develop international standards that meet the goals of their
regulations. And, perhaps most interestingly, to that end, after the agency failed to develop
accounting standards through its international regulatory network, a different network, the
International Accounting Standards Board, developed those standards – which the SEC has
since appeared to grudgingly adopt.12
All of these institutions are networks. They are not formal international organizations,
created by treaty and governed by traditional principles of international law. Instead, they
are informal, rather than hierarchical, open, or entrusted with carefully limited
responsibilities. They work through collaboration and, in theory, mutual agreement.
But which of them are doing the SEC some good? Answering this question is difficult
because theorists have not been able to explain why some networks fail and others
succeed. I try to do so in this paper by looking at the SEC’s international efforts, which is
9
ANNE-MARIE SLAUGHTER, A NEW WORLD ORDER 14 (2004)
David Zaring, Choice of Policymaking Form in International Law, 45 COLUM. J. TRANS. L. ___ (forthcoming 2009).
11 James Hewitt & Michael White Testimony before Congress, October 24 2007, available at
http://www.sec.gov/news/testimony/2007/ts102407cwh-jww.htm.
12 See infra notes __ and accompanying text.
10
3
largely encompassed by each of these networks. What is the record of success for each of
these networks? And what is it about them that makes them successful?
It is difficult to draw final conclusions about institutions that are all works in progress.
Nonetheless, some broader themes may be identified. I argue that some networks develop
legal standards via soft institutional strictures by which compliance is facilitated through
familiarity and positive incentives. They offer club goods as benefits, are informal, and
offer easy ways in and out. Social scientists call these sorts of networks “social networks.”
The SEC has created one such network in IOSCO.13
Other networks are more likely to create hard rules through connections that incentivize
compliance through lock-ins and penalize non-compliance with a range of negative
externalities. They offer similar goods as benefits – the club goods of access to the
network, but also real costs for exit. These networks look like telephone or utilities
monopolies, and like these monopolies, they are difficult to build, but, once built, hard to
leave. I think that networks that offer both the benefits of network membership, and the
costs of exit from – or noncompliance with – the network approach to regulation are the
most likely to be successful ones. These sorts of networks have been described as
economic networks. It appears that a network the SEC has eschewed – on accounting
standards – has managed this process. The IASB has made the turn from advisory to
necessary.
In what follows, I consider these networks and the others to which the SEC belongs.
These include the Financial Action Task Force, a money laundering network, two
“networks of networks,” the Joint Forum and the Financial Stability Board, with which the
SEC is involved because of its affiliation with IOSCO, and the new Public Interest
Oversight Board, another accounting rules network to which the SEC has sent a former
commissioner to serve as a member.
I help to give context to how these networks are doing with some empirical research on the
visibility of networks, as measured through their appearances in major American
newspaper and the legal scholarly literature. I blend that measure with a similar index,
over time, concluded for each of the networks, that reflects their appearance in the basic
record of American administrative law: the Federal Register.
I also collect the primary documents produced by these networks to which the SEC
belongs, and perform a computer aided content analysis of them. What terms matter to
networks? How often and to what degree do they borrow from one another? A content
analysis can illuminate these terms – and underscore the relatively consistent way that the
networks studied here have evolved over time – although to be sure, the networks are each
at different stages in the evolutionary process.
II.
13
GLOBALIZATION AND NETWORK THEORY
I attribute this insight to Chris Brummer.
4
Networks allow domestic officials to interact with their foreign counterparts directly,
without much supervision by foreign offices or senior executive branch officials, and
feature “loosely-structured, peer-to-peer ties developed through frequent interaction rather
than formal negotiation.”14
The evolution of regulatory networks may be charted by tracking the way the scholarship
on those networks has changed. In the early years of network analysis, scholars – myself
included – were impressed at how widespread and vibrant this tool of international
governance appeared to be.15 But when do they work, and work best? Some network
based standards have enjoyed wider compliance than have others. In financial regulation,
the Basel Committee has been able to claim a remarkable record of international
compliance with its capital adequacy requirements, as I and others have documented,16
while IOSCO has not yet been able to develop a comparable set of international
standards.17
Some have cautiously suggested that networks as less likely to be as effective as formal
international cooperation,18 or that, more generally, international efforts closely controlled
by states are more likely to work better than those where powers are delegated to other
international institutions, which networks, composed of agencies, not states, exemplify.19 I
suspect determining where a network is effective is likely to turn on the strength of the
network itself.
In this section of the paper, I discuss two different ways that networks might thought to be
constituted. The first is based on prior work I have done, and the second, associated with
Chris Brummer, is a more theoretical approach based on fundamental distinctions made
between networks in other academic disciplines. It informs the first approach, which is
based on the practice of networks, and posits that, without making too teleological a point,
that networks tend to evolve along similar paths. In addition to identifying some of the
matters that concern networks, the content analysis contained in the final part of the paper
supports this timeline of the network.
Formality -- One thing that created a network that lasts is the achievement of something
difficult in its regulatory arena. This could be characterized as the move from principles to
rule, and somewhat surprisingly, it implies that the networks that work best when they
push for accomplishment, rather than by letting evolving ties of consanguinity grow into
something important. Less counterintuitively, it suggests that an effective network is
difficult to create. Accordingly, the lesson here is that some formalization, and particularly
harmonization, can help. Currently most networks enforce compliance with standards
14
Kal Raustiala, The Architecture Of International Cooperation: Transgovernmental Networks And The Future Of International
Law 43 VA. J. INT'L L. 1, (2002).; see also Risse-Kappen 1995).
15 See David Zaring, International Law by Other Means: The Twilight Existence of International Financial Regulatory
Organizations,33 TEX. INT'L L.J. 281 (1998).
16 David Zaring, Informal Procedure, Hard and Soft, in International Administration, 5 CHI. INT'L L.J. 547 (2005); Walter Mattli
& Tim Büthe, Global Private Governance: Lessons from a National Model of Setting Standards in Accounting, 68 LAW &
CONTEMP. PROBS. 225, 227-28, 250-59 (Summer/Autumn 2005).
17 David Zaring, Informal Procedure, Hard and Soft, in International Administration, 5 CHI. INT'L L.J. 547 (2005).
18 Eric A. Posner, International Law and the Disaggregated State, 32 FLA. ST. U. L. REV. 797 (2005) (describing the difference
between a traditional unitary state model and a theory that disaggregates the state, concluding that formal international
cooperation is likely to do as well as networks).
19 Eric A. Posner & John C. Yoo, Judicial Independence in International Tribunals, 93 CAL. L. REV. 1 (2005).
5
through self-reporting and some evaluation by outside working groups – at least, that is
how it works with IOSCO. This sort of policing is no guarantee of harmonization.
Networks may instead benefit from deep degrees of regulation. Technical specification
can make interoperability more important, smoother – and more difficult to depart from.
Accordingly, the move from principles to rules may be critical to ensure network
effectiveness.
Exclusivity -- Exclusivity may also be crucial – and that is not particularly consistent with
the economic network model, but consistent with the insights of scholars like Lake and
Jung. Small n networks have a better chance of achieving the crucial move to binding
rules than do large n ones, it appears. IOSCO is a network open to all; accounting
standards were devised by a more obscure and elite outfit. It may not accord with our
intuitions about democracy, but it is possible that narrowly focused – and membered –
networks do better at devising technical, difficult rules than do large ones.
Voice? -- Because the goal of many of these networks is to make exit costly, offering
members “voice,” the other side of Albert Hirschman’s dichotomy may help them stay
within the process.20 We will see that both IOSCO and the IASB have moved towards
more and longer comment periods and transparency. The IASB in particular has not
surprised any of its members with its agenda or with the particulars of accounting
standards, and in doing so, it reflects the work of other networks, which, such as the Basle
Committee have done pre-release comment sessions before undertaking major regulatory
efforts.
Others distinguish between social and economic networks. In some ways, all regulatory
networks are “social” or “virtual” in that they depend upon intangible ties between the
people who staff regulatory agencies and the somewhat evanescent links that a
memorandum of understanding, or an agreement on principles of regulation, can provide.
But while social network theorists have focused on the implication of these ties, other,
more economically minded scholars consider networks through the costs imposed on
network membership and departure.
A.
Social Networks
Social networks are tied together by intangible links – ties of consanguinity, say, or of
affinity. Social networks theorists trace the spread of the evanescent, such as ideas, or
friendships, in organizations ranging from school playgrounds to graduate school
disciplines. Although, today, social networks scholars often rely on complex computer
modeling and abstract algebra to model and depict complex and large-n networks, the
concept has been with us for some time. No less an authority than Emile Durkheim
concluded that in society, “the essential is not the number of persons subject to the same
authority but the number bound by some form of relationship.”21
Some international legal scholars have rather explicitly adopted a social networks approach
to the new international governance. As Kal Raustiala has said, “networks appear to
20
21
ALBERT O. HIRSCHMAN, EXIT, VOICE, AND LOYALTY: RESPONSES TO DECLINE IN FIRMS, ORGANIZATIONS, AND STATES (1970).
EMILE DURKHEIM,, DURKHEIM, MONTESQUIEU AND ROSSEAU: FORERUNNERS OF SOCIOLOGY, (tr. A Cuvillier 1965) (1892).
6
promote convergence” across jurisdictions not subject to each other's laws “through a
decentralized, incremental process of interaction and emulation.”22
One of the ways that networks do this is through knowledge exchange – a process that has
been characterized as the creation of an epistemic community. 23 Under that theory of
international relations, some of the stuff that bubbles beneath state action is explainable
partly by the fact that the people involved in the action come to think the same way about
issues that confront them – in ways that cross borders.24 The idea is that regulators who
talk to one another, and learn to think like one another may eventually come to see their
regulatory projects in the same way – and in this sense, the possibility that networks would
form a like-minded epistemic community – network theory has elements of socialization
although it is often thought to be an element of the liberal and law-friendly view of
international relations.25. In this way, standards can cross borders not because of the
content of the standard, but rather in a way that is developed through intellectual history –
that is, by the rise of a common language and thought process of regulation. In this way
international governance looks a lot like the dissemination of ideas, rather than rules. It is
a squishy concept, and one that owes some allegiance to constructivist theories of
international relations, which posit that the intangible alternatives paths for states can be
constrained by limitations on what they conceive is possible – but it surely plays a role in
helping the network to coalesce.26
This is not to say that a single standard will always occur when a network gathers and
exchanges information. As Raustiala has noted: “the more a network is virtual…, the more
likely there are to be multiple standards. But network effects do imply that convergence on
one or more standards is likely and this convergence is likely to be relatively sticky.”27
The implication of these virtual relations is that they can eventually enmesh the network
nodes in a variety of ties, standards, and obligations, that eventually, as David Mitrany
predicted decades ago, prove to be hard to break. “Internationally,...while a body of law
grew slowly and insecurely through rules and convention, many common activities were
developed effectively by means of functional organs,” he wrote.28 The idea here, as with
other networks is that once the actors in a network setting adopt a standard, switching to a
new standard requires extensive and costly, and hence rarely achieved, collective action.29
22
Kal Raustiala, The Architecture of International Cooperation: Transgovernmental Networks and the Future of International
Law, 43 VA. J. INT'L L. 1, 52 (2002).
23 See Peter M. Haas, Introduction: Epistemic Communities and International Policy Coordination , 46 INT'L ORG . 1, 3 (1992)
for the principal statement on this thesis. For more legally related work in the area, see Thomas, Ashley. "International Legal
Epistemic Communities" Paper presented at the annual meeting of the International Studies Association, Town & Country
Resort and Convention Center, San Diego, California, USA, Mar 22, 2006, available at
http://www.allacademic.com/meta/p99745_index.html.
24 See id. (describing how similarly situated experts – or, presumably, diplomats, could eventually arrive at a common set of
beliefs and policy suggestions).
25 See Hass, supra note __.
26 See, e.g., ALEXANDER WENDT, SOCIAL THEORY OF INTERNATIONAL POLITICS (1999); JOHN GERARD RUGGIE, CONSTRUCTING THE
WORLD POLITY (1998); Ted Hopf, The Promise of Constructivism in International Relations Theory, 23 INT’L SECURITY 171
(1998). On law faculties Ryan Goodman and Derek Jinks are associated with this form of constructivism.
27 Raustiala, supra note __, at 67.
28 DAVID M ITRANY , THE F UNCTIONAL THEORY OF P OLITICS 113 (1975).
29 Raustiala, supra note __, at 67.
7
Sociologists have found social networks to be very interesting, and one has bragged that
“network analysis is booming and the tendency of social scientists to ignore structure is
diminishing. Today, all kinds of social scientists, along with mathematicians and
physicists, have embraced the structural perspective.”30 Although describing the breadth
of research in these sorts of networks must be done cautiously – sociologists have begun to
develop their own sort of statistical processes to describe the way that networks develop,
political scientists such as Andrea Jung and David Lake, are doing agent-based modeling
to understand how social networks work, while others are researching the phenomenon in
less quantitative ways, the import of this research is promising.31
There is no question that the social variant of a network can be powerful. But it is worth
noting that it is fragile. For one thing, some believe that social networks, at least in the
international setting, atrophy as they grow. Regulatory networks of jawboners, mutual
understandings, and common approaches may not expand widely across the regulatory
firmament – or, at least, it is not obvious that they would do so. Some political scientists
think that traditional networks like these come with expiration dates.32
For now, it is perhaps enough to note the ties between the ties between regulatory networks
of friendship, epistemic community, and common perspective. These networks are limited
in the branches between their nodes, limited to suasion and common perspectives, and,
accordingly, may be limited in the compliance that they can expect in the anarchic world
order.
B.
Economic Networks
The significant difference between “social” and “economic” networks may lie in the
intellectual history of the economic variant. Economic network theorists considered
networks to be so potentially powerful (and, at times, inefficient), because the costs of
membership were worth it simply because the benefits of similarity with other members of
the network were so high. The close association between network theory and antitrust
economics may help to explain the connection.
Economists think that network effects can affect a market when the utility of a product to
one consumer increases the more other consumers use the product. More economically tied
networks exist when goods provide value to a consumer that “increases with the number of
additional users of identical and/or interoperable goods.” 33 To be sure, economic networks
“need not be linked to a common system as are the constituents of a communications
network.”34 As two law and economics scholars have put it, less is required: “a network
effect exists where purchasers find a good more valuable as additional purchasers buy the
30
LINTON C. F REEMAN , THE DEVELOPMENT OF S OCIAL N ETWORK ANALYSIS 167 (2004).
Andrea Jung & David Lake, Markets, Hierarchies, and Networks: An Agent-Based Organizational Ecology (working paper).
32 Id.
33 Mark A. Lemley & David McGowan, Legal Implications of Network Economic Effects, 86 CAL. L. REV. 479, 491 (1998);.
Telephones are examples of “actual network goods.” Id. at 488. The more people who purchase telephones connect to a network,
the more valuable the telephones already on that network become, as the calling options available to those already on the network
increase. Id. at 488-89.
34 Id.
31
8
same good.”35 For example, users of a particular word-processing program benefit when
other users use the same program, making it easy to exchange files. 36 This does not, of
course, mean that the word-processing system will be the best on the market, just that it is
the one that more people selected, which in turn makes it attractive to new entrants,
because it offers a feature – interoperability – that other, even other better designed, word
processing programs may not.
Economists have approached social networks a bit grudgingly. There is an “inherent
difficulty of drawing inference from the data that economists commonly bring to bear to
study social interactions,” as one economist has admitted. 37 Nonetheless, if social
networks offer the promises of club goods, economic networks, roughly, do the same and
impose costs on defectors from the network.
Economic networks, in short, are difficult to start, and difficult to exit. Although the
mechanisms of cooperation for international regulators look more social than economic –
that is, it looks more like friendship than it does like a water utility – the fact is that the
imposition of costs of exit marks the distinction between the international regulatory
efforts like those of the SEC’s which have largely failed, and those of other regulators,
which increasingly cannot contemplate a world where their efforts would transgress from
the international norm.
III.
NETWORKS IN ACTION
The SEC used to deal with international problems, if at all, through unilateral and
extraterritorial efforts to bring foreign investors and listers to heel. It insisted on the
adoption of American accounting standards for companies that sought to make use of
American markets. It has imposed American insider trading rules on financial institutions
doing business in foreign jurisdictions, and generally policed overseas fraud that it
concluded affected American securities markets.38 It passed the Foreign Corrupt Practices
Act on American companies doing business overseas. It required foreign listers to comply
with Sarbanes-Oxley.39
But this traditional model has resulted in what many think is a flight of capital from the
United States to other jurisdictions. It has made it difficult for the SEC to deal with
activities that no longer occur within the United States. Accordingly, the SEC has
developed outreach efforts, some bilateral, some multilateral, and perhaps most
interestingly, some through firmly established networks. It has used networks to try to
harmonize securities regulation with foreign counterparts, to pursue globally accepted
35
Mark A. Lemley & David McGowan, Legal Implications of Network Economic Effects, 86 CAL. L. REV. 479, 483 (1998); see
also Robert B. Ahdieh, Making Markets: Network Effects and the Role of Law in the Creation of Strong Securities Markets, 76 S.
CAL. L. REV. 277, 296 n.73 (2003) (“The relatively high network value and low inherent value of such goods implies that, once
consumers perceive that a de facto standard has been established, tipping will occur very quickly.”).
36 Lemley & McGowan, supra note __. at 491 (identifying computer software as the “paradigm example” of virtual networks).
37 Charles Manski, Economic Analysis of Social Interaction, 14 J. ECON. PERSPECTIVES 115, 117 (2000).
38 SEC v. Wang, 699 F.Supp. 44 (S.D.N.Y.1988); for a discussion, see Susan R. Essex, Comment, SEC v. Standard Chartered
Bank: Maintaining the Integrity of U.S. Capital Markets or Extraterritoriality Run Rampant?, 22 LAW & POL'Y INT'L BUS. 159
(1991); for a discussion of the SEC’s traditional practice with respect to overseas fraud, see Note, Predictability and Comity:
Toward Common Principles of Extraterritorial Jurisdiction, 98 HARV. L.REV. 1310, 1315-16 (1985).
39 For a discussion, see John C. Coffee, Leading Issues Under Sarbanes-Oxley, Part I, N.Y. L. J., Sept. 19, 2002, at 5.
9
accounting standards (for which it has participated, albeit in one case from afar, in two
networks),, to deal with money laundering and terrorism financing, to oversee financial
stability across the world, to keep an eye on financial conglomerates – or institutions that
played in the capital markets, offered credit, and sold insurance. In this part of the paper, I
survey these networks. For each of them I include an index of their appearances in major
newspapers, law reviews, and the Federal Register over time. The index is not
complicated, but it provides context on the impact of the various networks to which the
SEC belongs, by proxying prominence for significance, both to observers, and to the work
of the federal government’s administrative arm. The data shows that three of the SEC’s
networks – IASB, IOSCO, and FATF, have achieved a degree of notoriety and regulatory
attention, while three others, the JF, the FSB, and the PIOB, all of which are much
younger, have not.
1.
IOSCO
IOSCO is the regulatory network to which the SEC belongs with the broadest remit – it is
meant to serve as the conduit between legal harmonization and information exchange
among all of the world’s regulators. To that end, IOSCO’s members have agreed to
“cooperate together to promote high standards of regulation in order to maintain just,
efficient and sound markets; to exchange information on their respective experiences in
order to promote the development of domestic markets; to unite their efforts to establish
standards and an effective surveillance of international securities transactions; to provide
mutual assistance to promote the integrity of the markets by a rigorous application of the
standards and by effective enforcement against offenses.”40 The outfit is a regulatory
organization that developed out of the Interamerican Association of Securities
Commissions and Similar Agencies in 1984, when the members of that body passed
bylaws transforming it from a regional group founded a decade earlier into a global
collection of securities regulators.41
As a regulatory network, IOSCO is informally constituted, it has few rules, regulations, or
limitations on its regulatory agenda, and is comprised of most of the securities regulators in
the world. The organization has, over the quarter century of its existence, developed some
core principles of securities market supervision – largely as a means of advising
developing countries what the organization thinks is required of a good securities regulator
– created a process for international cooperation on enforcement issues, and, perhaps most
interestingly, but least successfully, tried rather unsuccessfully to agree on core regulatory
approaches to market supervision.
The problems for IOSCO have lain in the fact that it has not managed to create the kind of
costly ties that mark economic networks. Instead it remains a largely social network of
40
IOSCO, 2002 Annual Report 22 (2002), available online at < http:// dev.iosco.org/annual_report/PDF/IOSCO_2002.pdf>
(visited Nov 7, 2004).
41 See Paul Guy, Regulatory Harmonization to Achieve Effective International Competition, in FRANKLIN R. EDWARDS AND HUGH
T. PATRICK, EDS, REGULATING INTERNATIONAL FINANCIAL MARKETS: ISSUES AND POLICIES 291, 291 (1992). The bylaws of
IOSCO declare that “[t]he securities commissions or similar agencies of the countries of the American Continent, as well as the
Commission des valeurs mobilieres du Quebec and the Ontario Securities Commission, are charter members of the
Organization.” Bylaws of the International Organization of Securities Commissions pt 2, P 2.
10
regulators, one that the SEC has often abandoned when it has seen fit, and one which has
been unable to create an international securities regime that meets the promise of a global
market. Instead, the SEC’s globalization dilemma remains unsolved by this network,
which offers limited accomplishment.
A review of the organization’s efforts of late is illustrative. I focus first on its success: law
enforcement cooperation, and then turn to its semi-failure to play an important role in
devising a government response to the 2008 financial crisis. As for policy harmonization –
the holy grail of international regulatory efforts – IOSCO has little to say, and so we turn
to the story of the development of international accounting standards to help us understand
this process.
IOSCO’s principal achievement has been law enforcement cooperation memoranda –
slippery documents that require, in gauzy language, securities regulators to cooperate with
their foreign counterparts on law enforcement matters. Because these memoranda permit a
wide variety of regulators to maintain a wide variety of enforcement priorities, do not
punish defection or reward compliance (it is quite difficult to quantify cooperation), and
have been concluded with scores of participating entities, the initiative has failed to be the
sort of onerous and exclusive commitment that marks a successful regulatory enterprise.
Over the past three years, IOSCO has “endorsed the requirement that all securities
regulators applying for…membership…become signatories” to the Multilateral
Memorandum of Understanding Concerning Consultation and Cooperation, and the
Exchange of Information,42 “contribut[ed] actively to the work of” an accounting standards
board as it “remains convinced that the adoption of IFRS…should help to achieve
convergence towards high quality global accounting standards,”43 and taken steps to
establish “a more structured arrangement for…dialogue” with the financial industry and
“rationalise [its] decision making process.”44
IOSCO’s main concern during the this period has been the IOSCO MOU, described as “the
first global multilateral information-sharing arrangement among securities regulators,” that
“sets a new international benchmark for cooperation critical to combating violations of
securities and derivatives laws.”45 In 2005, IOSCO “resolved…to require all members to
become signatories to the IOSCO MOU, or to commit to doing so, by 1 January 2010,”46
and has continually worked towards this goal.47 IOSCO states that its mandatory
42
IOSCO, 2005 Annual Report at 3, available at <
http://www.iosco.org/annual_reports/annual_report_2005/pdf/Annual_Report_05.pdf.
43 Id. at 5.
44 IOSCO, 2006 Annual Report at 9, available at
<http://www.iosco.org/annual_reports/annual_report_2006/pdf/annual_report_2006.pdf.>
45 U.S. Securities and Exchange Commission, SEC Announces IOSCO Unveiling of Multilateral Agreement on Enforcement
Cooperation, available at<http://www.sec.gov/news/press/2003-145.htm.>
46 IOSCO, 2005 Annual Report, supra note 1, at 2.
47 “The organisation considered recent developments among the membership in taking up the MOU including the progress being
made as IOSCO seeks to meet the 2010 deadline by which members are required to become signatories.” IOSCO Update: Issue
6, May 2007 at 1, available at <http://www.iosco.org/library/newsletters/pdf/IOSCO_Update_May_2007.pdf.>
11
participation requirements “reflect[]…[the] belief that the IOSCO MOU is critically
important.”48
This sort of cooperation is worthy, but it has remained voluntary. And even though, from
the SEC’s perspective, the IOSCO MOU has fit well with what it has hoped to do, it is by
no means clear that it will be enough.
The SEC likes criminal and law enforcement cooperation because its international efforts
have, traditionally, focused on that area – an area with a whiff of extraterritoriality about it.
The goal for the agency, in law enforcement matters, at least, is to enforce its prohibitions
against market participants located abroad. It is thought that regulatory networks can help
agencies conduct their law enforcement responsibilities by providing for cooperation with
foreign law enforcement officials; the principal idea is that the networks help agencies like
the SEC by providing a path for the exchange of information; indeed, IOSCO template
MOU was designed to do exactly this.49
The number of specific initiatives mounted by the SEC to do more international
enforcement work are many – insider trading, for example, has long been a priority for the
SEC, and there is nothing about the practice that limits it to the confines of the United
States; the agency has been pursuing insider trading claims against foreign investors for
decades now.50 The SEC chair has said that the agency would be essentially unable to
continue its work in the area without international cooperation.51 The claim is a plausible
one, as the agency’s efforts against foreign corruption suggest, indicating a new global
enforcement priority that requires foreign cooperation to work.
In 2008, the SEC developed more cases than ever against corporate executives who bribe
foreign officials under the Foreign Corrupt Practices Act. The SEC filed 15 FCPA cases
during that fiscal year; since January 2006, the SEC has brought 38 FCPA enforcement
actions— which, it has said, amounts to more than were brought in all prior years
combined since FCPA became law in 1977.52
Through the IOSCO MOU, however, it is not clear that the SEC has been able to leverage
the network’s international cooperation to amount to much. On the one hand, to be sure, it
has cajoled the network into committing to information exchanges and law enforcement
assistance. But although the SEC will soon be able to point to a large number of
signatories to the IOSCO MOU, it is unclear, in the end, whether those signatures will
amount to a binding international regime that will have a real effect on global problems of
cross-exchange criminality. The MOU, after all, recourses to the gauzy promises of
enhanced cooperation – often “to the extent possible,” and without the sort of mandates
that make for an international standard.
48
IOSCO, 2005 Annual Report, supra note 1, at 3.
http://www.sec.gov/news/press/2003-145.htm has the so-called multilateral MOU available on its website.
50 E.g., Hong Kong case
51 Christopher Cox, The SEC Speaks 2008,available at
http://www.knowledgemosaic.com/Gateway/Rules/SP.spch020808cc.020808.htm
52 http://sec.gov/news/press/2008/2008-254.htm
49
12
The insight can be generalized. Like any network, much of the work IOSCO does not
appear to amount to much of anything. Highlighting anecdotal initiatives is not
dispositive, of course, but consider the 2008 financial crisis. During that crisis, the SEC
has implemented a short-lived ban on the shorting of financial stocks; it coordinated that
ban with the securities regimes of other countries, including Great Britain, Australia,
Taiwan, and Pakistan.53 But IOSCO was not the vehicle for the short ban, and, indeed, the
organization has had little to say about the financial crisis in any respect, other than a May,
2008, suggestion that its members peruse some recommendations about the subprime
mortgage crisis, the precursor to the market crashes.54 IOSCO thus is not a network that
oversees global market regulation – rather, it facilitates the abilities of members to enforce
their own standards.
FIGURE 1 HERE
IOSCO’s prominence in the press and scholarly literature grew sharply in the mid-1990s,
when it promulgated its core principles, and began serious work on its enforcement MOU;
in the past decade it has merited attention from outsiders at a rate of between 80 and 100
articles per year. During this time it has also enjoyed a steadily growing presence in the
Federal Register.
2.
IASB
IASB is the network that does in accounting what IOSCO has not been willing to do in
securities regulation. To be sure, if IOSCO has focused on enforcement cooperation,
taking on member participation in the IOSCO MOU as its main focus, it has not – at least
in its public pronouncements – claimed that it would ignore the more general, and to
international lawyers, more interesting, aspects of developing common global standards for
securities markets.
The SEC has not looked to IOSCO to perform a similar role – though it surely could – in
accounting harmonization. Instead, IOSCO has largely ceded that role, albeit with
consultation, in developing accounting standards – a critical part of any securities
enterprise (disclosure, after all, turns on the requirements of what publicly listed
companies are required to disclose to potential investors) to another network.
That networks is the IASB, which is charged with develop International Financial
Reporting Standards, or global rules for bookkeeping that would apply regardless of the
market or entity.
The attractiveness of common accounting standards in a world where investors and firms
have multijurisdictional presences is not hard to fathom. Common standards would allow
investors to evaluate companies based in the United States, Europe, or the developing
world on the basis of the same kinds of financial statements. By the same token, the ability
53
See, e.g., Canadian Regulators Implement Short-Selling Ban, REUTERS, Sep. 21, 2008, at
http://www.reuters.com/article/governmentFilingsNews/idUSN1925996220080919.
54 IOSCO Technical Committee Task Force on the Subprime Crisis, Final Report on the Subprime Crisis (May 29, 2008),
available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD273.pdf
13
of companies to use the returns that their local accountants prepared to list stocks in New
York, London, and anywhere else is clear. As one former SEC commissioner has stated,
“one cannot overlook the potential expansion of investment opportunities if all issuers
could use one set of accounting standards that would be accepted world-wide for securities
offerings.”55
Despite these incentives, the SEC essentially opted out of the informal effort to create
common standards that would work for any company and any exchange. It presumably
assumed that it had no need for foreign standards. It announced “concerns with respect to
the IASB governance structure,” among other things.56 These sorts of strategies capsized
IOSCO’s 1980s efforts to develop such a standard; the SEC has also failed to seriously
participate in the informal network that succeeded IOSCO in trying – the International
Accounting Standards Board, though it did participate in the arm’s-length IOSCO
committee that monitored IASB’s progress.57 But while during the 20th century, American
regulators could insist on unique American standards, in the 21st century, the preeminent
place of those standards has become much more tenuous, because of the global acceptance
of a European rooted principles-based system.58
Like IOSCO, IASB began as an informally constituted committee; it was formed in 1973
by the standard-setters--mostly private--of Australia, Canada, France, Germany, Ireland,
Japan, Mexico, the Netherlands, the United Kingdom, and, indeed, it included the United
States.59 Like IOSCO, IASB looks like a network – it is informal as well, only partially
public, and not subject to the ordinary requirements and limitations of international law.
These are differences the SEC has noted: “IOSCO is a committee of securities regulatory
agencies, the IASC is an independent, private sector organization,”60 but the organization
has moved increasingly to publicize its deliberations, in an effort, some commentators
believe, to win acceptance of IFRS by the United States.61
The organization tried to develop the sort of accounting standards that could stand in for
the diverse standards available around the world. It did so one painful standard at a time,
with regular meetings around the world, and the ready cycling in of representatives from
various jurisdictions in the standard development process.62 In this neither the SEC nor
American accountants played a particularly important role.
55
See Hunt, 51 Admin. L. Rev. at 1114
John W. White address at Annual Securities Regulation Institute in San Diego, California
(January 23, 2007) at <http://www.knowledgemosaic.com/Gateway/Rules/SP.spch012308jww.012308.htm>
57 James D. Cox, Regulatory Duopoly in U.S. Securities Markets, 99 COLUM. L. REV. 1200, 1208 (1999) (describing this event in
some detail, and noting that the stature of IASC during the mid-1990s presented the SEC with a difficult decision concerning
whether to recognize its accounting standards for SEC filings and how the SEC therefore engaged with IASC, directly and
through the International Organization of Securities Commissions (IOSCO), laying out basic criteria it would have to meet and
providing a “stream of comment letters” on IASC proposals).
58 Roberta S. Karmel, The EU Challenge To The SEC, 31 Fordham Int'l L.J. 1692 (2008).
59 George Mundstock, The Trouble With FASB 28 N.C. J. Int'l L. & Com. Reg. 813 (2005).
60 SEC, Report on Promoting Global Preeminence of American Securities Markets, available online at
<http://www.sec.gov/news/studies/acctgsp.htm>
61 The restructuring “include[s] changes in the IASC's objectives and strategy, due process, standards implementation and
enforcement, and funding mechanisms.” Maureen Peyton King, Note, The SEC's (Changing?) Stance on IAS, 27 BROOK. J INTL L
315, 332 (2001).
62 In this it benefited from the support of IFAC, the International Federation of Accountants, another network, though one entirely
private, and not one with its own designs on accounting standardization – it was happy to delegate that process to IASB.
56
14
During the late 1980s, the United States abandoned accounting standardization, and killed
IOSCO’s initial efforts along these lines. The result drove IOSCO’s headquarters from
North America to Europe and recentered the global effort on accounting in the competing
network represented by IASB. As former SEC commissioner Roberta Karmel has said,
“At this time, the SEC also determined not to adopt a process-oriented approach to IASB
standards …. Rather, it intended to assess each IASB standard after its completion, and
then recognize acceptable standards …[it only] decided instead to consider all IASB
standards after the IASB completed its core standards work program.”63
None of this stopped IFRS, however. The adoption of the standard throughout the
European Union in 2005, and similar decisions by Australia, Hong Kong, and South
Africa, tipped over a process that means that over 100 countries are now requiring or
permitting IFRS.64 As John White, the current director of the agency’s division of
corporate finance, has noted, the European accounting system that IASB adopted is the one
that seems to have caught on better with the world markets than has the arguably more
rigorous US GAAP.65
Accordingly, even without the support of the United States, international convergence on
accounting standards happened anyway. A December 2002 survey of fifty-nine countries'
accounting standard-setters revealed that 90% of the standard-setters intend to converge to
IFRS.66 “Most countries are moving towards IFRSs,” one observer has said, as these
countries found the standards to be congenial and reputable.67
The SEC in the end, was left with little choice on accounting standards – it decided that it
had to defer to the successful global network, though it has been slow to embrace it. In
2006, it established a “database on application of IFRS,” where “[IOSCO] members can
exchange information about problems and non-compliance with [the standard].” 68 IOSCO
“assesses the data[,] and where it reveals varying interpretations[,] refers them to the
[IASB],” the organization responsible for developing IFRS standards 69 IOSCO has a longstanding relationship with the IASB,70 and it claims continues to “contribut[e] actively to
the work of the IASB, through participation in various expert committees and responses to
consultation,”71 and “continue[s] to monitor the work of the IASB[].”72 But the SEC has
63
Roberta S. Karmel, The EU Challenge To The SEC, 31 Fordham Int'l L.J. 1692 (2008).
Christopher Cox, “International Business--An SEC Perspective” Address To The American Institute Of Certified Public
Accountants' International Issues Conference, Washington, D.C., January 10, 2008, 1669 PLI/Corp 205.
65 John W. White Director, Division of Corporation Finance U.S. Securities and Exchange Commission, 35th Annual Securities
Regulation Institute, San Diego, California, January 23, 2007, available at
<http://www.knowledgemosaic.com/Gateway/Rules/SP.spch012308jww.012308.htm>
66 Donna L. Street, GAAP Convergence 2002: A Survey of National Efforts to Promote and Achieve Convergence with
International Financial Reporting Standards 2, available at http://www.ifad.net/content/ie/ie_f_gaap_frameset.htm
67 40 Int'l Law. 363, 366 (.2006)
68 Id.
69 Id.
70 In 1996, “IOSCO join[ed the IASB] as observer,” and in 1999, IASB formed an “agreement with IOSCO to complete core
standards by 1999,” where “on successful completion IOSCO [would] consider endorsing IASs for cross-border offerings.”
“IOSCO review[ed the]…IASC core standards,” and in 2000, “IOSCO recommend[ed] that its members allow multinational
issuers to use 30 IASC standards in cross-border offerings and listings.” International Accounting Standards Board,<
http://www.iasb.org/About+Us/About+the+Foundation/History.htm > (last visited October 24, 2007).
71 IOSCO, 2005 Annual Report, supra note 1, at 6.
72 IOSCO, 2006 Annual Report, supra note 3, at 6.
64
15
been unwilling to join IFRS, at least until recently, and is only now making its presence
felt, after those standards were devised, and after the SEC has declared its intention to
adopt them.73
In the end, the SEC had to bow to the power of this network. As former SEC Chair Cox
would admit, “our recent decision to accept IFRS financial statements in SEC filings was
crafted in such a way as to support the efforts of the IASB, and many other nations, to
establish IFRS as a single, global set of standards, and not so many national flavors.”74
In my view, the story of this network is a story of a move from enforcement cooperation,
which permits countries to opt in and opt out as they wish, and to retain their regulatory
standards, to something in which the costs of exit – and, in the SEC’s case,
nonparticipation – are too high to bear, because the advantages of standardization – a
major advantage of network effects – were realized by IASB, but not by IOSCO. This was
because IASB created a standard that tipped, making it impossible to resist. It is a network
that moved from club goods to high exit costs.
FIGURE 2 HERE
The IASB is a creature of the new millennium, during which its IFRS process was
completed, while the United States agreed to take those standards seriously. After the
implosion of Enron and WorldCom, and during the increasingly widespread adoption of
IFRS, the IASB has received more attention from outsiders than has IOSCO, and
increasing appearances in the Federal Register as well. Its two spikes have coincided with
two occasions during which the SEC has considered adopting IFRS.
3.
FATF
The SEC plays a less central role in a rather vibrant network concerned with interdicting
the flow of money through criminal or terrorist enterprises. The Financial Action Task
Force on Money Laundering, created by the G-7 in Paris in 1989, is comprised largely of
developed world law enforcement agencies, again, the SEC is one of a number of agencies
in the American delegation (the American delegation is led by Treasury’s Financial Crimes
Enforcement Network and Office of Foreign Assets Control).75 As for the rest of the
world, the organization is comprised of delegations from, as of 2007, 34 member countries
“representing the major financial centers of the Americas, Europe, and Asia.” 76 It is
composed of “Members of the ministries of Finance, Justice, the Interior, and External
Affairs, financial regulatory authorities and law enforcement agencies.”77
73
72 Fed. Reg. 37962-01, 2007 WL 1985828
See supra notes [] [1669 PLI/Corp 205].
75 FINANCIAL ACTION TASK FORCE ON MONEY LAUNDERING, ANNUAL REPORT 2001–2002, at 3 (June 21, 2002), available at
http://www.fatf-gafi.org/dataoecd/13/1/34328160.pdf.
76 FATF, Annual Report 2001-02 at 2, available online at <http:// www1.oecd.org/fatf/pdf/AR2002_en.pdf> (visited Nov 1,
2004). The international organization members are the Gulf Coordination Council and the European Union. See FATF, Members
and Observers, available online at http://www.fatfgafi.org/document/52/0,3343,en_32250379_32237295_34027188_1_1_1_1,00.html.
77 Id.
74
16
The FATF is concerned with enforcement, but like most networks, it has begun with some
principles regulation. In purpose, it resembles IOSCO, and in paradigm too. It does
enforcement cooperation, rather than standardization, and the scene is one of a social
network. These recommendations were first developed in 1990, revised in 1996 and in
2003, and are designed to, as the FATF puts it “set out the basic framework for anti-money
laundering efforts and are intended to be of universal application.”78 It calls these its “40
Recommendations” to combat money laundering, and has, in the wake of 9/11, added nine
others designed to combat terrorism financing.79 Not every commentator has concluded
that the task force has effectively led to policy change.80 But the FATF has tried to ensure
that its 40 + 9 recommendations are observed through peer review, or “on-site visit
conducted by a small team of experts in the legal, financial and law enforcement fields
from other member governments,” who report on the progress of members.81 This
compliance mechanism is carefully delineated, but it is of a piece with the sorts of
jawboning familiar to networks.
The FATF has prospered partly by serving as a standard setter that other institutions could
endorse. The Task’s Forces 40 principles have been urged on borrowers by the IMF and
World Bank; for its part, the UN Security Council has called upon members to “to
implement the comprehensive international standards embodied in the FATF”
recommendations.82
The Task Force has also tried to ensure that its recommendations would be implemented
through a “name and shame” approach, that, at least in its hands, has achieved some
prominence. Since 2001, the FATF has created a list of some 23 jurisdictions it considers
to be Non-Cooperative Countries and Territories (NCCTs), countries without sufficient
anti-money laundering measures.83 These countries have rotated on and off the list – some
with alacrity, which the FATF might point to as evidence that its task force is achieving
some useful works. While no countries were considered an NCCT by the summer of 2009,,
the organization earlier that year pointed to Iran, Uzbekistan, Turkmenistan, Pakistan, and
São Tomé and Príncipe as regions where money laundering activities may be of some
concern.84
As for sanctions, the Task Force has few non-shame avenues available to it, but that may
be one reason why it values the participation of the SEC. NCCTs are subject to its
Recommendation 21, which suggests that “financial institutions should give special
attention to business relationships and transactions with persons, including companies and
financial institutions, from countries which do not or insufficiently apply the FATF
78
http://www.fatf-gafi.org/pages/0,3417,en_32250379_32236836_1_1_1_1_1,00.html
The recommendations are available online at <http:// www1.oecd.org/fatf/40Recs_en.htm> (visited Nov 1, 2004). See
generally Beth Simmons, International Efforts against Money Laundering, in Dinah Shelton, ed, Commitment and Compliance
244-63 (Oxford 2003).
80 Shaffer and Pollack, Beth Simmons, International Efforts Against Money Laundering, in COMMITMENT AND COMPLIANCE 24463 (Dinah Shelton ed., 2000).
81 http://www.fatf-gafi.org/document/60/0,3343,en_32250379_32236920_34039228_1_1_1_1,00.html
82 FATF, Annual Report 2007-2007 at 2, available online at <http://www.fatf-gafi.org/dataoecd/58/0/41141361.pdf>
83FATF, Annual Review of Non-Cooperative Countries and Territories 2006-2007: Eighth NCCT Review at 2, available online at
<http://www.fatf-gafi.org/dataoecd/14/11/39552632.pdf>
84 FATF, “Statement, February 5 th, 2009.” < http://www.fatf-gafi.org/dataoecd/18/28/42242615.pdf>
79
17
Recommendations.”85 Of course, it is the SEC that supervises many of the most important
potential providers of liquidity to these countries. Further countermeasures that can be
applied in the case of NCCTs include increased reporting and requirements for transactions
with suspect countries and potential reconsideration of establishing subsidies and branches
within these countries.86 All of these countries were de-listed as of October 2006, with
only Nigeria and Myanmar subject to further monitoring.87
In addition to policing the adoption of its by now quite venerable principles (two decades
is quite a long time in the parlance of the relatively new networks), the task force has
continued to develop them. As recently as 2008, the FATF revisited its mandate and
adjusted it as part of part of a mid-term review of its progress. The revised mandate
includes terms that focus the organization on global surveillance of criminal activity,
greater collaboration with the private sector to combat money laundering, and a
concentrated effort to raise standards in “low capacity countries.”88 Most recently, the
FATF has released reports suggesting best practices for freezing terrorist assets89 and
looking at money laundering in the football sector (“Why look at football? It is by far the
largest sport in the world – more than 250 million people play – and the FIFA World Cup
final in 2006, for example, attracted over 1 billion viewers”).90
As for the SEC’s role in this network, few observers appear to suggest that the FATF is a
very central part of its own policy agenda, or that it plays a central role in the Task Force.
It does not head the American delegation to the network, and while money laundering has
always been a problem with the securities markets, the laundering has generally come from
low-end bucket shops and pump-and-dump penny stock strategies. These sorts of threats
to ordinary investors occupy the time of the Enforcement Division of the agency, but not
much of the attention of the commissioners or the international affairs office.
Nonetheless, participation in the network give the SEC a role in the war in terror, and that
role is something that every agency must now have.91. Functionally, FATF memberships
no doubt helps its enforcement lawyers and investigators understand multinational stock
fraud schemes, which its directors of enforcement have occasionally discussed. And the
agency’s role as supervisor of the capital markets gives the network itself more heft, in
light of Recommendation 21.
Moreover, the FATF shows just how internationally oriented the agency has become. The
SEC has turned to networks not just to help it with rules for everybody, but with the tools
designed to catch bottom-feeders.
FIGURE 3 HERE
85http://www.fatf-gafi.org/document/39/0,3343,en_32250379_32236992_33916519_1_1_1_1,00.html
86http://www.fatf-gafi.org/document/47/0,3343,en_32250379_32236992_33916527_1_1_1_1,00.html
87FATF,
Annual Review of Non-Cooperative Countries and Territories 2006-2007: Eighth NCCT Review at 14, available online
at <http://www.fatf-gafi.org/dataoecd/14/11/39552632.pdf>
88 “FATF Revised Mandate 2008-2012” <http://www.fatfgafi.org/document/10/0,3343,en_32250379_32235720_40433674_1_1_1_1,00.html>
89
FATF, “International Best Practices: Freezing of Terrorist Assets,” 23 June 2009. <http://www.fatfgafi.org/dataoecd/30/43/34242709.pdf>
90FATF “Money Laundering through the Football Sector,” < http://www.fatfgafi.org/document/20/0,3343,en_32250379_32237202_43216660_1_1_1_1,00.html>
91 Elena Baylis & David Zaring, Sending the Bureaucracy to War, 92 IOWA L. REV. 1359 (2007).
18
The FATF grew in prominence after 9/11, consistent with the anti-terrorism
responsibilities that that network took on, and the attention of both scholars and journalists
into all things related to the American war on terror. After 9/11 it rivaled IOSCO in
prominence both in the pages of the Federal Register and among outside observers. As
interest in terrorism financing has cooled, however, so has the prominence of the network.
4.
The Financial Stability Board and the Joint Forum
The SEC is also member of two networks of networks, the Joint Forum and the Financial
Stability Board. These two networks are run out of the Basel Committee for Banking
Supervision’s home base, the Basel-based Bank for International Settlements, and the
Basel Committee played an important role in founding both. Both are designed to address
problems of systemic risk from financial institutions more generally, but while the FSB is
aimed at coordinating very grand questions of systemic risk, the Joint Forum, which used
to be known as the Joint Forum on Financial Conglomerates, has the somewhat more
mundane job of coordinating supervision of large multinational entities across supervisors
who might ordinarily only look at parts of those conglomerates – insurance, say, or
securities issues. How do these two networks compare to the others in which the SEC is a
part?
It is hard to know what, exactly to make of the FSB, other than that it has bright potential,
because it coordinates everything that the SEC has hoped for from IOSCO with the
international work of other financial regulators. The FSB brings together senior
representatives of national financial authorities (e.g. central banks, supervisory authorities
and treasury departments), international financial institutions, international regulatory and
supervisory groupings, committees of central bank experts and the European Central
Bank.92 The Forum was originally designed “to ensure that national and international
authorities and relevant international supervisory bodies and expert groupings can more
effectively foster and coordinate their respective responsibilities to promote international
financial stability, improve the functioning of the markets and reduce systemic risk.” 93 It
has met biannually and currently consists of 26 national regulatory agencies, including the
principal members of the networks of banking supervisors and securities regulators.94 The
FSB has in the past been run by the General Manager of the Bank for International
Settlements, who “was appointed Chairman of the FSB in a personal capacity,” and for
that reason, it has seemed like a rather quiet effort by Basel to broaden its supervisory
ambit to include systemically significant multinational institutions that engage in banking
but that also provide other financial services.95 The FSB is a work in progress, with a
mandate from the G20 to take a coordinative role in global financial oversight. The G20
has recently enlarged the FSF, and renamed it (it will be the Financial Stability Board) and
called for it to be remade as a stronger, and better consolidated entity; time will tell if a
network – even a network of networks – is even capable of playing that role effectively.
92
http://www.fsforum.org/about/overview.htm
See G20 (GROUP OF TWENTY), DECLARATION ON DELIVERING RESOURCES THROUGH THE INTERNATIONAL FINANCIAL
INSTITUTIONS – LONDON, (APRIL 2 2009), http://www.g20.org/Documents/final-communique.pdf.
94 FINANCIAL STABILITY FORUM , supra note __.
95 G20 (GROUP OF TWENTY), DECLARATION ON DELIVERING RESOURCES THROUGH THE INTERNATIONAL FINANCIAL INSTITUTIONS –
LONDON, (APRIL 2 2009), http://www.g20.org/Documents/final-communique.pdf. The so-called “Joint Forum on Financial
Conglomerates” has also served this purpose.
93
19
But the events surrounding the expansion are significant. At the G20’s behest, the Basel
Committee has expanded its membership to include the G20 members. This expansion has
long been sought by countries of the developing world, and Basel has always resisted. So
perhaps it is indicative of the network’s crisis response to note that the chief
accomplishment of Basel during the crisis has been to look more like the G20 – at the
instigation of the G20.
In sum, the FSB has begun with principles; time will tell if it can move from consanguinity
to the sorts of high costs of exit that organizations like IASB have managed to achieve.
For the SEC, this network at networks gives it a place at the table for international
financial oversight and crisis response – but the seat that it has had at the table during the
last crisis – both domestically and internationally, has hardly won the agency any large
degree of plaudits or acclaim.96
The SEC, through IOSCO, has also joined the Joint Forum, designed to deal with the
regulatory issues raised by multinationals that offer banking, investment banking,
securities brokering, and insurance services to clients. That forum was established in 1996
to deal with issues common to the banking, securities and insurance sectors, including the
regulation of financial conglomerates. It is comprised of an equal number of senior bank,
insurance and securities supervisors representing each supervisory constituency. 97 The
Forum has taken as its charge the need for coordination in oversight – an enforcement goal
– and common standards for risk management, auditing, testing, and so on, with an eye to
developing commons standards for these kinds of large financial institutions.98 The Forum
has a particular interest in developing adequate disclosure standards for these sorts of
institutions, and has threatened to “study financial conglomerate structures that may impair
effective supervision or otherwise be problematic, and to periodically assess the
supervision by the various regulators to which these institutions report, and “if appropriate,
develop guidance and principles and/or identify best practices.”99
In keeping with the network paradigm, the Joint Forum began with principles-based
regulation. In November 2001, that forum issued its own set of Core Principles.100 The
principles of the Joint Forum, although broad, do matter for developing markets. As the
Forum acknowledged, the IMF and the World Bank suggested that principles be
developed, in part to “help assessors improve their understanding of the principles and
thereby make the implementation and assessment process more effective.”101
Neither of these networks of networks have delivered much in the way of accomplishments
yet, but the advantages for the SEC in both are to leverage the coordination they already do
with other domestic regulators and with the foreign participants in its other networks to
Steven Davidoff & David Zaring, Big Deal: The Government’s Response to the Financial Crisis, 61 ADMIN. L. REV. ___
(forthcoming 2010).
97 http://www.bis.org/bcbs/jointforum.htm
98 http://www.bis.org/bcbs/jfmandate.htm
99 http://www.bis.org/bcbs/jfmandate.htm
100 See generally BIS, Capital Adequacy Principles (Feb 1999), available online at <http://www.bis.org/publ/joint02.pdf> (visited
____).
101 Basel Committee, Joint Forum, Core Principles: Cross-Sectoral Comparison P 12, available online at
<http://www.bis.org/publ/joint03.pdf> (visited ___).
96
20
oversee out-of-bailiwick institutions that it believes could affect its within-bailiwick
obligations. To some this might seem like wise forecasting, to others it may appear a bit
more like turf-enlargement. But – though the FSB may develop into something interesting
– the network of networks have proven to be too weak and disaggregated to amount to
much. They are, in many ways, late-arriving additional international assignments to add to
all of the other international assignments the SEC has given itself, and for this reason, and
possibly also because of the limited role the agency can play in such large networks, they
have receded to the bottom of the list.
FIGURE 4 HERE
FIGURE 5 HERE
The networks of networks have seen growing prominence during the most recent financial
crisis – the FSB in particular has captured attention in a way that tripled interest in the
institution after its founding. The JF is a much less commonly discussed and explored
network, but it too drew growing attention during the final years of the asset bubble and its
subsequent implosion.
5.
The Public Interest Oversight Board
Finally, and most recently, there is the Public Interest Oversight Board, which is a network
designed to join the IASB in the supervision of accountancy. But while the IASB will
develop the rules for accounting, the PIOB will focus on the auditors themselves. The
SEC has placed one of its former commissioners on the board, and has endorsed its
activities. Indeed, it had told a private organization of accountants that the PIOB is an
essential precondition to accounting standards harmonization.102
Like the FSB and the Joint Forum, the PIOB looks a bit like a network of networks at first
glance. It is a product of a number of other networks, for one thing – it was devised by the
Monitoring Group, a collection of representatives from IOSCO, the BCBS, the IAIS, the
World Bank, the European Commission, and the Financial Stability Board (with the
addition of the Forum of Independent Audit Regulators as an observer).103 The board will
oversee international standard setting activities in the areas of audit performance standards,
independence and other ethical standards for auditors, audit quality control and assurance
standards, and education standards.
As the organization was “conceived as a response to the crisis of confidence created by
numerous corporate and audit failures in the early years of this decade,” 104 its goal is to
ensure that the auditing standards set by accountants (who themselves meet in a private
international network of accountants known as IFAC. The idea is that the controversial
supervision of companies like Enron, with all of its off-balance sheet shenanigans, by
accountants like Arthur Anderson (which blessed those shenanigans or failed to recognize
In a letter in 2000, the SEC said that “we believe that a credible standard-setting process would require the creation of an
independent oversight organization that ensures IFAC's standard setting process is conducted in the public interest, in the
"sunshine."” http://www.sec.gov/info/accountants/staffletters/ifac101600.htm
103PIOB, “Press Release: Monitoring Group Charter Confirms the Independence and Accountability of the Public Interest
Oversight Board” 21 May 2009, <http://www.ipiob.org/downloads/PIOB_Press_Release_21_May_2009.pdf>
104PIOB, “Overview” The Fourth Public Report of the PIOB at 4, http://www.ipiob.org/downloads/INFORME_PIOB_2009.pdf
102
21
them) must be mitigated by, in part, industry self-policing. PIOB polices that policing,
which may grow particularly important if the accountancy profession comes up with new
conduct rules to parallel the rules being put into place by the IASB.
Michel Prada, Chairman of the French Financial Markets Authority and Deputy Chairman
of the IOSCO Technical Committee, who led the coordination of work amongst financial
regulators and related international organizations, has said: “The creation of the PIOB is
the fruit of a convergence of views between the official community and IFAC and
expresses a sense of responsibility among audit practitioners and the international
institutions and regulatory organisations involved in promoting financial stability in a
globalised economy.”105 The PIOB is also a work in progress, of course; indeed it was
founded in February of 2005. In some ways, from the SEC’s perspective, it represents a
commitment to the network form. A nascent network, though, we may expect that it will
also begin with principles, and proceed from there.
The official charge of the PIOB is to oversee IFAC's Public Interest Activity Committees
(PIACs) by a variety of measures, including the review and approval of ‘Terms of
Reference’ for the PIACs and the evaluation of due process procedures for the boards of
the PIACs. 106 It claims to utilize a new model of oversight:
“First, it is a collaborative model which reflects an agreement between a group of
international regulators and other public sector stakeholders, and [the IFAC] to co-sponsor
an independent oversight body for the private sector appointed by the regulators. Second,
this model effectively combines the high competence of experts operating within a private
standard setting body with oversight by a separate body that represents and pursues public
interest objectives. In the current crisis, it is clear that the need for high quality and broadly
applicable standards developed in an inclusive, responsive and credible manner has taken
on a greater relevance and urgency than ever before.”107
Part of this oversight model is based on the use of Consultative Advisory Groups (CAGs)
that are made up of representatives of public interest organizations and other related
groups.
While the PIOB has certainly been placed in a position to make an impact on the
functioning of the IFAC, it is subject to restrictions. The Board and its activities can be
reviewed by both the Monitoring Group and IFAC’s Leadership Group. In its review of a
PIAC’s terms of reference, the PIOB cannot demand specific changes to the proposed
document but can only wait for a revised version to be put before them. It also cannot
prevent a PIAC from issuing a standard or document. Another point of concern is that the
Forum of Firms (FoF), the part of the IFAC that actually performs audits, does not fall
within the PIOB’s scope, creating an odd tension. “IFAC’s is a standard setter, not a
provider of audits. Accordingly, the PIOB will not be reviewing whether the key providers
105
All from initial press release http://www.ipiob.org/
“Responsibilities” <http://www.ipiob.org/>
107PIOB, “The Fourth Public Report of the PIOB, May 2009” at 4, available online at <
http://www.ipiob.org/downloads/INFORME_PIOB_2009.pdf>
106PIOB,
22
of global audits (the members of FoF) are complying with the globally acceptable auditing
standards.”108
The PIOB has maintained a close relationship with IOSCO, as it has joined the latter in
Madrid, a move partly due to the Spanish government’s willingness to recognize the
PIOB’s legal structure as a tax-exempt international organization. Now legally labeled a
non-profit foundation in Spain (where it is officially the “Fundación Coansejo
Internacional de Supervisión Pública en Estándares de Auditoria, Ética Profesional y
Materias Relacionadas”), the PIOB is free to conduct its own fundraising and other
financial operations as it seeks to expand its current funds.109 Once such financial activity
could be potential funds from an EU promise to offer limited term financial support to
“bodies execute EU or international public interest missions aimed at enhancing the quality
of financial reporting and/or auditing.”110
FIGURE 6 HERE
The PIOB, the newest network to enjoy SEC participation has yet to appear in the Federal
Register at all, and has not captured the attention elsewhere of its accounting cognate, the
IASB. Its prominence is dwarfed by the other networks – but the PIOB may be something
of a growth stock, in light of the growing attention paid to international accounting
standards, the administration of which may make for an important role for the new board.
It is too soon to tell how this network will fare, but it has grown its prominence since its
founding.
IV.
CONTENT ANALYSIS
I conducted a content analysis of various promulgations of the networks; the goal was to
see whether computer analysis of the texts of the SEC’s networks would reveal whether
there was a distinctively network-like form of communication, or issues that regularly
repeated themselves.
Some network theorists have concluded that networks are drawing ever closer to one
another, and even, at the extreme, entangling states an ever-growing and constantly
harmonizing links.111 The assumption underpinning this sort of theory is that there is a
Humphrey, Christopher, and Kim Jeppesen, Anne Loft, Stuart Turley, “The International Federation of Accountants: Private
Governance in the Public Interest?” at 21. available at
http://www.lse.ac.uk/collections/CARR/pdf/GlobalGov/HumphreyFullPaper.pdf
109 PIOB, “The First Public Report of the PIOB, May 2006” at 5, available online at
<http://www.ipiob.org/downloads/annualreports/piob_ar_final_web.pdf>
110 PIOB, “The Fourth Public Report of the PIOB, May 2009” at 6 (FN 1), available online at
<http://www.ipiob.org/downloads/INFORME_PIOB_2009.pdf>
111 David Mitrany is often thought to be the epitome of this view. Mitrany's classic exposition of functionalism, A WORKING
PEACE SYSTEM, first appeared in 1943, and was heavily influence by the New Deal, which he interpreted to represent a
fundamental shift in political power from the states to the federal government that had occurred quietly because of the way the
New Deal created specific new powers in task-defined federal agencies such as the SEC. See DAVID MITRANY, A WORKING
PEACE SYSTEM 21-22 (1943) (“No attempt was made to relate [New Deal reforms] to a general theory or system of government. .
. . Yet the new functions and the new organs, taken together, have revolutionized the American political system. The federal
government has become a national government.”). Ernst Haas redefined the theory (into “neofunctionalism”) and applied it to
Europe: he believed that technical experts, if linked to effective interest groups, could further continental immigration. ERNST
HAAS, THE UNITING OF EUROPE: POLITICAL, SOCIAL, AND ECONOMIC FORCES, 1950-1957 19 (1958). His study of Europe stood for
“the pluralistic thesis that a larger political community can be developed if the crucial expectations, ideologies, and behaviour
patterns of certain key groups can be successfully refocused [sic] on a new set of central symbols and institutions,” provided the
108
23
likeness to network regulation; this paper assumes that such a likeness exists, and looks to
the content of network promulgations to see what, precisely, is distinctive about network
regulation. Moreover, as I have noted (and use in this paper to make the content analysis
more of an apples to apples comparison), networks often do the same sorts of things,
frequently beginning with the promulgation of a set of broad principles for effective
regulatory supervision meant to apply to all of the members of the network. If they do the
same sorts of things, do they do it in the same way, using similar language?
Content analysis is one way to answer these sorts of questions. It can tell us something
about the terms used by the network in its own production of principles, reports, or other
internal governance mechanisms.112 If such similarities should exist anywhere, they
should exist in financial regulation, where the networks are concerned with related matters,
and, as the SEC exemplifies, are composed of a number of repeat participants.
Moreover, it is a good time to study the content of the products of financial regulatory
networks, as those products are more available now than they have been in the best.
Networks have become more open and transparent – but only recently.113 The new
transparency drive has led five of the networks studied here to produce publicly available
annual reports, while each of the six networks to which the SEC belongs other governance
documents that are also suitable for comparison and shared across borders. Finally some
networks have produced something to explicitly call a mandate, while other networks have
created analogous documents either in their annual reports or elsewhere that enable a rough
sort of comparison as to what they see themselves doing, and how they see their mission.
It is the principles that are perhaps the most interesting products of the networks for
content analysis, but, drawing broad conclusions on the basis of four documents for the six
networks is difficult, not least because IOSCO’s principles are long compared those of the
others, and so may weigh heavily in sorting through the most common words between the
documents.114 Although four of the networks have produced principles, the PIOB, the
newest of the networks, has not completed its core principles, yet, though it has identified
that as a priority. Moreover, the Financial Stability Board has relied for its own set of core
principles – it calls them its “key standards” – based on the principles of other networks,
which it lists as its own core principles, meaning that, at least for the FSB’s participation in
community was developed from democratic states with sophisticated economies enmeshed in international trade and finance. See
id at xiv-xvi.
112 For the basics on content analysis, see David Altheide, Qualitative Media Analysis (1996); Klaus David Tabak, Making
Assessments About Materiality Less Subjective Through The Use Of Content Analysis,1620 PLI/CORP 691, 696 (2007). For some
of the basics of content analysis from a social science perspective, see KLAUS KRIPPENDORFF, CONTENT ANALYSIS: AN
INTRODUCTION TO ITS METHODOLOGY 18 (2d ed., 2004) (defining content analysis as “a research technique for making replicable
and valid inferences from texts (or other meaningful matter) to the contexts of their use”) . For a recent analysis of the quality of
technical languages, see Luis Garicano, et al., Language and the Theory of the Firm, Q.J. Eecon. available at
http://www.garicano.com/index_files/codes.pdf. For the seminal article on its application in legal contexts, see Mark A. Hall &
Ronald F. Wright, Systematic Content Analysis Of Judicial Opinions, 96 CAL. L. REV. 63 (2008). There are not too many
computer-aided contents analyses in the law review literature yet, but for some examples, see, Laura E. Little, Hiding With
Words: Obfuscation, Avoidance, and Federal Jurisdiction Opinion, 46 UCLA L. REV. 75 (1998); Laura J. Hendrickson,
Coverage of the Endangered Species Act in Four Major Newspapers, 45 NAT. RESOURCES J. 135 (2005).
113 David Zaring, Informal Procedure, Hard and Soft, in International Administration, 5 CHI. INT'L L.J. 547 (2005).
114 As we have already noted, the FSB relies for its principles on the principles of other networks, including the FATF and
the IOSCO, and PIOB has not yet promulgated principles, although it announced in its most recent annual report that it intends
to do so soon.
24
securities regulation, it has already adopted in toto the principles of IOSCO and the FATF,
as well as those of the IASB.115
Accordingly, I obtained other foundational network documents that were also roughly
comparable; most of the networks, but not the Joint Forum, put out an annual report.
Many of these reports were long and glossy, though the FSB’s cognate report consists of a
memo put out by the board in advance of an FSF meeting – there are now often two of
these per year.
As I have noted, the organizations have also promulgated brief “mandates,” which are
informal guides to the organizations and their missions. Mandates are not formal things
that all networks do (four of the networks have produced explicit mandates, while IOSCO
and IASB have produced “about us” documents, which they included in their annual
reports).116 I analyzed these documents in the same way that I analyzed the principles.
The goal was to see if the language used in its “legal” promulgations was matched by
similar language in its other, less formal products, and so to see if the various networks
talked in the same way, and used the same terms over and over again.
Nonetheless, with these caveats aside, the fact remains that most of the SEC’s networks
issued an annual report in 2008, most of them have promulgated core principles, and all of
them had mandates, or mandate-like texts, the content of what these institutions do could
usefully be compared. Moreover, these promulgations – principles, mandates, and annual
reports, are among the most critical that the networks produce.
I used two computer programs to assist in the content analysis. I used the Concordance
software package to obtain a table of the frequency that every word appeared in each of the
three compared sets of documents. Concordance is used to automate the making of
concordances, or records of every word used in a text along with its context.
Concordancing is a practice which has been live in the humanities, since, literally, the
Middle Ages.117 I used the Wcopyfind plagiarism software package to analyze the overall
comparability of promulgations of the regulatory networks to which the SEC belongs.118
Wcopyfind has been used in recent law and courts research, though not often in legal
scholarship.119
Concordance permits the creation of frequency tables identifying the most commonly used
terms in the documents compared, which may serve as evidence of similar conceptual
115
http://www.financialstabilityboard.org/cos/key_standards.htm
The various documents here may be found in the following locations:
FATF, “Revised Mandate 2008-2012” http://www.fatf-gafi.org/dataoecd/3/32/40433653.pdf, FSB, Mandate,
http://www.financialstabilityboard.org/about/mandate.htm,
PUIOB,
Mandate,
http://www.ipiob.org/downloads/annualreports/piob_ar_final_web.pdf; IOSCO, “General information on IOSCO”,
http://www.iosco.org/annual_reports/annual_report_2007/pdf/generalInformation.pdf; IASB, “Who we are and what we do”
http://www.iasb.org/NR/rdonlyres/95C54002-7796-4E23-A327-28D23D2F55EA/0/April09Whoweareandwhatwedo.pdf.
116
117 Monks made a concordance of the bible then, a massively difficult multiyear task that can be done in seconds with
modern computer software.
118 WCopyFind is available for free at http://www.plagiarism.phys.virginia.edu/Wsoftware.html.
119 See Pamela C. Corley, The Supreme Court and Opinion Content: The Influence of the Parties’ Briefs, __ Pol. Res. Q. __
(forthcoming 2009),
25
approaches by the networks, while WCopyfind permits an analysis of similarities among
the documents, by looking for similar or identical phrases across them.
TABLE 1 HERE
After extracting the conjunctions and other terms from the data, the most frequently used
words in the principles concerned the mission of the networks, language reflecting their
jobs as regulators, and, less interestingly, identifiers of the networks. The prominence of
words like “financial,” “risk,” “market,” “securities.” and “capital” go to the regulatory
mission of the network, which is to deal with these matters. The common references to
“management,” and “boards” in most cases refers to requirements on the regulated markets
themselves.
This sort of language goes to the mission of the network, and it makes sense that the core
principles that networks endorse would be places where this mission is considered
carefully. But there are some curiosities; “principles” and “standards” appear in roughly
the same number, and are not at the top of what these organizations talk about most when
there are referring to their work product – even though the work product in question were
principles. “Qualitative” is among the most popular words in the principles, but
“quantitative” is used much less frequently. And “legal” or “law” are words that appear,
but less often than do “regulation” and its cognates. The always ambiguous legal status of
network promulgations, in sum, is reflected by the words most often used to describe the
basic goals of the enterprise.
The second sort of language adopted in the principles of these groups concern what they
do. Regulators obtain “information,” and require “reporting” (and “reports”); they are
“public” entities (supervising “publicly” traded firms, for the most part) that issue
“regulations.” These words were the second most common sorts of words in the
principles, and they were followed by references to “documents,” and “supervisors.” Such
words describe the work that regulators do; it is perhaps worth noting, however, that the
actual term “network,” was much further down the list of common words – as was
“principles,” which, after all, was what these documents were titled to be. All of this is
more evidence, when considered with the mission, that the core principles tend to be
directed at the members of the network themselves; that is, they are often for regulators,
rather than a guide as to how to regulate industry, or core principles for a regulatory
scheme. Instead, network principles are as much the basis for setting up the agency, more
than anything else.
Finally, a third category of words used in the principles identify the regulators themselves,
as is the case with “IOSCO,” and “committee.” This category is not worth lots of
attention, but it is worth noting that in the principles – which are the basic directives of
what the network is supposed to be doing – this category of words proved to be less
common than it did in the annual reports and mandates, which are both replete with
reference to the regulatory acronyms, “committees,” “boards,” and so on.
Comparison of the principles to the other groups had their own set of interesting
implications. The less formal documents did use different words from those that appeared
in the principles, but not too different. Although “financial” was shared by each set of
26
comparisons as the most common ones. But the reports and the mandates were much more
liked to refer to the networks themselves than were the principles. In this way “members.”
Both the sets of comparables also noted the “work” that the networks were to do often,
while the principles were less replete with references to work. The principles eschew high
degrees of reference to “international” matters, though that word is among the top two that
appears most often in the annual reports and mandates of the organizations. The mandates
of the organization, which often take on a “who we are and what we do” tone, refer to
members (it is also a top word in the annual report. But member references are not an
important part of the principles, at least, not when taken together.
TABLE 2 HERE
Still, comparisons are not impossible to draw. Of the twenty-five most common unique
words in the principles, 13 appeared in the top sixty of both, and 4 more appeared in the
top fifty of the annual reports. Of the words that did not appear in the other documents
many were, for what it is worth, regulator action words, like “resolution,” “framework,”
“reporting,” “resolution,” and “document.”
TABLE 3 HERE
My goals with the other software package were modest; WCopyfind could serve as
something of a check that the words in the frequency tables were likely distributed across
the various promulgations by the networks, and could show how often the networks
borrowed similar phrases from one another. I used Wcopyfind to calculate a percentage
overlap between each paired annual report, principles document, or mandate. It reported
the number of identical phrases that appear in each compared document (the “total match”
score), as well as the percentage of the words in one document that appeared in the other
document above a threshold, which I defined relaxedly, in an effort to look for similar
word choices, as we are looking for common language rather than plagiarism. I defined
the threshold to include phrases of at least three words, with a 10 word minimum match to
report, and the shortest matchable phrase being at least 50 characters.
Although the assumption is not the most robust one, I relied on the roughly similar
word lengths of the principles, mandates, and annual reports to serve as a way to make the
comparisons useful.120 The comparisons show that the products do share content,
particularly the longer products. The principles share slightly less than 5% of their
phrases, with the FATF’s 40 principles borrowing less than that norm. A slightly higher
level of borrowing may be seen among the mandates, and the annual reports, when
matched against one another, share slightly less than 10% of their content.
FIGURES HERE
These results do not suggest plagiarism or the sort of borrowing that would be akin
to a copyright violation (nor could they, as these are public promulgations in which the
120
The total match score is highly correlated with the length of each of the two agreements in the pair; the more words, the
more likely those words appear in paired documents. Conversely, when a pair had one short agreement, it tended to have a low
total match score. To adjust to this factor a similarity score had to be devised that was unconfounded with length. I have been
working with people to devise it, but it has not, alas, yet been completed by the time of the circulation of this paper.
27
networks presumably do not take copyright), but the comparison is nonetheless an
instructive form of context. Courts have found violations of copyright for plagiarism
encompassing as little as 1% and 11% of the printed work, ranging to a higher 30% for
software code.121 Gideon Parchomovsky and Eric Goldman have suggested a liability rule
of 15% overlap for copyrighted work, a level that most of these materials do not meet.122
Nonetheless, the borrowing we do see is not infinitely far from the line, and it is
clear that in addition to using similar words, a broader, document by document comparison
of content also reveals a degree of sharing across networks that it is difficult to ignore.
To be sure, there was no actual copying of particular turns of phrase, as could be
demonstrated by putting all of these documents through WCopyfind, on its more standard
plagiarism detection setting. Twice phrases of six words or more appeared in the annual
reports of the agencies; an examination of the phrases leads one to think that both were up
to chance.
V.
CONCLUSION
The SEC is not obligated to cooperate, through a network or any other international
institution other than a treaty ratified by the Senate, of course. But if it were to embrace
the network form, what is the best way to go about doing it? In this paper, I have argued
that one critical way that networks differ is through the exit costs that they use to ensure
compliance. I have also suggested that networks start slowly and socially, with principles,
and may proceed, but do not always do so, with the difficult standardization that creates
costs of exit. In this brief conclusion, I suggest some other factors that may matter to
explaining why some networks succeed more than do others.
There is more to be done for research in this area. The metric of success here is imprecise.
The harmonization through shared words is susceptible to much more quantitative
analysis. And there are other questions about trying to discern what effectiveness is that
are almost philosophical in nature: is effective doing a good job, forestalling some other
job, meeting the interests of the designers (or the United States), or based on some
objective criteria? And so on. All this says that empirically evaluating networks remains
challenging – but, of course, that is no reason not to do it.
121
Perhaps unfortunately, the Supreme Court has been unwilling to impose a percentage similarity requirement on
copyright. Harper & Row, Publishers, Inc. v. Nation Enter., 471 U.S. 539, 564-65 (1985) (holding that copying of an
insubstantial portion of a book still qualified as copyright infringement when the defendant essentially copied the “heart of the
book”). For views from the federal courts in New York, perhaps the jurisdiction most attuned to text copyright questions, see,
e.g., Computer Assocs. Int'l. Inc. v. Altai, Inc., 982 F.2d 693, 700 (2d Cir. 1992) (finding infringement where 30% of software
code was copied) Video-Cinema Films, Inc. v. the Lloyd E. Rigler-Lawrence E. Deutsch Found., No. 04 Civ. 5332 (NRB), 2005
WL 2875327 (S.D.N.Y. Nov. 2, 2005) (holding a television programmer liable for copying less than 1 percent of a motion
picture) Meredith Corp. v. Harper & Row, Publishers, Inc., 413 F.Supp. 385, 387 (S.D.N.Y. 1975) (finding plagiarism
amounting to 11% of the copied work to be a copyright violation).
122 Gideon Parchomovsky & Eric Goldman, Fair Use Harbors, 93 VA. L. REV. 1483, 1511 (2007) (proposing that “the
lesser of fifteen percent or three hundred words may be copied without the permission of the copyright holder. The words need
not appear consecutively (either in the original or in the copy), so long as the total number of duplicated words does not exceed
the threshold.”).
28
Figure 1
IOSCO Media, Journal, and Federal Register Appearances
140
120
100
80
All
60
40
20
0
Figure 2
IASB Media, Journal, and Federal Register Appearances
250
200
150
All
Federal Register
100
50
0
29
Figure 3
FATF Media, Journal, and Federal Register Appearances
120
100
80
All
60
Fderal Register
40
20
0
Figure 4
FSB Media, Journals and Federal Register Appearances
90
80
70
60
50
All
40
Federal
Register
30
20
10
0
30
Figure 5
Joint Forum Media, Journal, and Federal Register Appearances
20
18
16
14
12
10
8
6
4
2
0
All
Federal Register
Figure 6
PIOB Media, Journal, and Federal Register Appearances
7
6
5
4
All
3
Federal Register
2
1
0
31
Table 1: Frequently Used Terms in Network Principles
Frequency
Shared?123
Word
FINANCIAL
INFORMATION
IOSCO
REPORTING
COMMITTEE
RISK
MARKET
SECURITIES
ENTITY
MANAGEMENT
REPORT
TECHNICAL
PUBLIC
CAPITAL
BOARDS
REGULATION
DOCUMENT
MARKETS
STANDARDS
SUPERVISORS
PRINCIPLES
FRAMEWORK
RESOLUTION
QUALITATIVE
REGULATOR
726
616
x
x
359
x
315
282
x
265
x
241
x
233
x
211
211
y
207
y
201
184
174
165
164
154
y
148
x
148
146
143
142
141
121
121
x
x
x
x
y
x
123
X = term appears among the top 60 in the compared 2008 annual reports and network mandates, y = term appears among the top 60 only
in the compared 2008 annual reports.
32
Table 2: Frequently Used Terms
in Network Mandates
Word
Frequency
FATF
INTERNATIONAL
FINANCIAL
PIOB
MEMBERS
STANDARDS
IOSCO
IFAC
PUBLIC
COMMITTEE
WORK
CHAIRMAN
GROUP
BOARD
PROCESS
ACTIVITIES
DIRECTOR
IASB
MEMBER
COUNTRIES
INTEREST
ISSUES
MEMBERSHIP
ACCOUNTING
FORUM
33
76
62
56
51
40
39
34
32
32
30
29
25
25
22
22
21
19
18
18
17
17
17
17
16
16
Table 3: Frequently Used Terms in 2008 Annual
Reports
Word
Frequency
FINANCIAL
INTERNATIONAL
STANDARDS
FATF
IOSCO
COMMITTEE
WORK
PUBLIC
INFORMATION
MEMBERS
MARKETS
REPORT
MARKET
ACCOUNTING
GROUP
IMF
ISSUES
BOARD
TECHNICAL
PROCESS
IASB
BANK
WORLD
CONTACT
GLOBAL
655
426
422
411
408
378
346
313
300
297
280
265
254
217
217
202
199
196
195
187
182
175
169
167
167
34
Table 4: Overlap Between 2008 Annual Reports
Annual
Report
Compared
Match
1
With
6%,15%
FSB
FATF
5%,10%
IASB
FATF
9%,7%
IASB
FSB
8%,8%
IOSCO
FATF
24%,10%
IOSCO
FSB
15%,8%
IOSCO
IASB
6%,7%
PIOB
FATF
10%,5%
PIOB
FSB
10%, 6%
PIOB
IASB
8%, 9%
PIOB
IOSCO
Table 5: Overlap Between Network Mandates
Match
5%,0%
3%,1%
2%,0%
3%,4%
1%,10%
2%,5%
0%,2%
1%,6%
Mandate
FSB
IOSCO
JF
PIOB
PIOB
PIOB
PIOB
PIOB
Compared
With
FATF
FATF
FATF
FATF
FSB
IASB
IOSCO
JF
Table 6: Overlap Between Network Principles
Match
2%,5%
4%,12%
4%,6%
5%,5%
6%,2%
11%,4%
Principles
IASB
IOSCO
IOSCO
JF
JF
JF
35
Compared
With
FATF
FATF
IASB
FATF
IASB
IOSCO