First, there are different classes of investors, such as institutional investors, insiders, activists, and the general public individual investor as all forms of investors who have different interests. Perhaps some investors will want the securities exchanges to adopt stringent corporate governance measures, and other will be at best indifferent. Thus, some corporations may choose exchanges with limited governance regimes while others more stringent ones. Thus, my general belief in the free market - the choices that the market offers to investors allows investors to choose not only the companies with which to invest, but to ignore those companies that invest in “poorer” exchanges (from a regulatory standpoint) and the members that list there.
I do not conclude here that the recent (post war) growth of the exchanges as quasi-public regulatory agencies has resulted in SEC obsolescence. That outcome is far too unrealistic as actually to occur. If, however, exchanges fill gaps between state and federal law, and are increasingly being used to effect federal law, then perhaps the exchanges have become sophisticated enough to no longer require the regulatory function of the SEC (allowing for the continuance of the enforcement arm, however). By using governance listing requirements as a means to compete for listings and for the trades that follow those listings, these exchanges can compete with the government agencies at the state or federal level. If the exchanges then can function more effectively (as private agencies usually do), then there is no need for the governmental duplication. Eventually, through mergers and globalization efforts, the American exchanges can then implement their rulemaking functions to create transnational exchanges that cross national boundaries and integrate the capital markets of the global economy more fully than any government agency could.
Of course, the threat remains that instead of achieving these lofty aims, the abolishment of the government’s role in security and corporate governance rulemaking could result in the race to the bottom problem. Thus, a result could be the loss of value in bidding down shares in lax legal regimes. This would confirm the power of the market to make the “correct” choice and reinforce “good” choices as compared to poor corporate governance regimes.
The federal government’s biggest fear over allowing the exchanges to compete freely over governance is their loss of power to harmonize the exchanges. Exchanges will not necessarily begin a race to the bottom, but would freeze in the status quo and not adopt new rules for fear of giving the other exchanges a competitive advantage. Would companies actually move based on new requirements in the exchanges? How would the board and insiders be able to convince shareholders to vote to approve a switch in listing (if that vote is necessary) if the exchanges provide information describing how that change is beneficial to the shareholder? Additionally, allowing exchanges to implement rules on their own and compete for listings through governance rules facilitates the experimental nature of competitive Federalism, as not only states, but companies and exchanges can see which rules work and which do not. Laying a heavy blanket of federal rules on top of this removes the incentive to experiment and develop new, innovative corporate governance regimes.
Regardless of whether the exchanges were ever able to operate without intrusive federal oversight and rulemaking, the present pattern of agency rulemaking seems to be the best that the exchanges could hope. For example, if Congress were to adopt a federal corporate law or provide the SEC with increased power, the exchanges could suffer further regulatory burdens. However, the current limits on SEC power prevent this. The limited (relatively) existing federal statutes and the Business Roundtable decisions limit the agency from overreaching. Of course, the lack of any federal power could always subject the exchanges to fractured state laws, but this is less of a threat as companies are only governed by the laws of their state of incorporation.
Until the time comes that Congress either increases SEC power directly or federalizes corporate law, the use of the exchanges by the SEC will continue. At least the indirect use allows the exchanges to implement the rule in the manner that they see fit, which would (hopefully) limit the impact of additional regulation. Furthermore, the exchanges would be able to implement the rules and regulations through their own expertise and avoid politically based requirements that are overly costly and of limited value, such as the SarbOx implementation.
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