Monday, December 04, 2006

My 10 pence on the Paulson Committee Report

A guest post, by Werner Kranenburg, a former Schiffrin & Barroway, LLP summer associate, and current law student in the United Kingdom.

My 10 pence on the Paulson Committee Report

It’s only been a few days since the release of the highly-anticipated Interim Report by the Committee on Capital Markets Regulation (aka the 'Paulson Committee') and as expected it’s been the topic of the day.

For the first round of analysis, please take a look at (in no particular order) Lyle Roberts at The 10b-5 Daily, Walter Olson at here and here, Broc Romanek at Blog and Peter Lattman at The WSJ Law Blog here and here.

Looking at the Report from a UK point of view however, it is interesting to incorporate two pieces of UK legislation that do not seem to be the subject of US discussion yet. They are the Investment Exchanges and Clearing Houses Bill and the Fraud (Trials without a Jury) Bill. Regarding the first Bill, on page 69 (85 of 152) the Report states the following under the heading of 'Need For More International Regulatory Cooperation':
Regulators in the United Kingdom and Europe have voiced concerns about the extra-territorial reach of U.S. laws and rules, should a U.S. exchange merge with a U.K. or European exchange. For example, a senior officer in the U.K. Treasury has announced that the government will introduce legislation to impose a barrier against the imposition of Sarbanes-Oxley on firms trading in London should the London exchange merge with a U.S. exchange. As Ed Balls, the economic secretary to the Treasury, said with understatement: "The Sarbanes-Oxley regime in the United States is not a regime that some companies find easy to deal with."
In fact, it is Ed Balls MP, Economic Secretary to the UK Treasury (who is also quoted on page xi (13 of 152)), whose name is being used for the colloquial moniker of the Investment Exchanges and Clearing Houses Bill, namely the 'Balls Clause.' It was introduced in Parliament two weeks before the Report was published and is currently swiftly progressing toward Royal Assent. (See here to follow the Bill’s House of Commons proceedings live.)

In short, the Bill is a measure to "disallow excessive regulatory provision." Or, put differently, it is a measure against the threat of US 'regulatory creep' just in case NASDAQ were to buy or merge with the London Stock Exchange. The Report on the same page:
U.S. proponents of equity markets globalization-both market officials and regulators-have countered that extraterritorial reach should not be a problem. They argue that even after a trans-Atlantic merger, trades executed in the United Kingdom or European venues of the merged exchange, and issuers listed there, will not be subject to U.S. laws or rules. Many in Europe remain skeptical.
So true…

Regarding the second Bill, the Committee, on page 18 (34 of 152) under the heading 'Shareholder Choice of Remedies', suggests that "[t]he SEC should permit shareholders to adopt alternative procedures for resolving disputes with their companies. These procedures might include arbitration (with or without class actions) or the waiver of jury trials (a waiver commonly made in a variety of circumstances)." The Queen was there first, also by a good two weeks. In her annual Speech (as part of the State Opening of Parliament) she introduced the Fraud (Trials without a Jury) Bill thus: "A Bill will be introduced to provide for trials without a jury in serious fraud cases." It’s a controversial measure: see Legal Week for same day industry response, here for some historical background and for more recent coverage, here.

On the day of the Report’s publication (30 November), Steven Toll of Cohen, Milstein, Hausfeld & Toll, PLLC was quoted in the FT ('Experts seek to give the US back its edge', p.26), seemingly in anticipation of the Report but he could as well have responded to the Fraud Bill (an excerpt):
It [the Committee] is also expected to urge companies to ask shareholders to waive their right to a trial by jury - a move that could reduce damage pay-outs. [Which indeed it does, as noted.] Investor advocates are not convinced. Shareholder lawyer Steve Toll, of Cohen Milstein Hausfeld & Toll, called the proposal to do away with jury trials for shareholders "insane… Did anyone forget what just happened with Enron?"
As discussed previously here, he might as well already be based in the UK?

And finally, Tuesday next week (5 December) Glenn Hubbard, Co-Chair of the Committee, will be online for an hour to take Financial Times readers’ questions from 7am EST (12pm noon GMT), here. You may submit questions or comments in advance by sending an e-mail to or using the form at

Daily Trivia: Is 'on holiday,' as they say in the UK, but will return for your amusement tomorrow.

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