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The Imperial SEC? - Foreign Policy and the Internationalization of the Securities Markets, 1934-1990

Internationalization of the Securities Markets

A New Era: The Removal of the IET

"If administration of the federal securities laws…is conducted with a heavy hand, and an unbecoming shortness of sight, we may dissuade foreign investments in American enterprise and choke off a useful source of capital."

- September 25, 1973 "The Internationalization of Our Securities Markets," Speech by SEC Chairman Ray Garrett, Jr. to the Boston Stock Exchange (courtesy of Harvey L. Pitt)

As the Income Equalization Tax and other restrictions were removed in the mid-1970s, some at the SEC were cognizant that internationalization of the U.S. markets was going to be a significant issue. The IET had allowed the SEC to defer the problems created by an internationalizing marketplace for over a decade. What was less certain was how the SEC was now going to respond.

In 1973, Carl Bodolus, then Chief of the SEC's Office of International Corporate Finance, wrote a law review article, "The Internationalization of the Securities Markets," in which he argued that the IET and other U.S. controls served to internationalize the European securities markets. At the same time, Japan was opening its securities markets to outside investors. Bodolus presciently asserted that when U.S. controls were phased out in 1974, the U.S. markets, like Europe, would be internationalized. Deeming U.S. securities regulation to be the most developed and mature in the world, he criticized European regulation for its lack of mandatory disclosure, centralized agencies and insider trading laws. In spite of this, Bodolus was optimistic that uniform standards could be developed.

Bodolus reminded his readers that the SEC had made a large variety of accommodations to foreign issuers and would continue to do so. He wrote, "clearly, then, the SEC has not and need not apply blindly all the technical requirements of our Acts, nor should we apply blindly United States securities laws extraterritorially. This could tend to restrict the flow of capital internationally, continue the competitive disadvantages of the United States securities markets and, in the long run, perhaps operate to the detriment of United States investors."(71) Bodolus' article gestured towards the possibility of a new era in which the SEC might create a more hospitable environment for foreign issuers.

The IET and other controls caused the U.S. markets to lose their post-World War II dominance and reinvigorated London as the world's financial center. In order to regain a competitive stance, the SEC would have to reevaluate how it treated foreign issuers in order to make the U.S. markets more competitive. Although many at the SEC could agree upon this, what it meant in practice was another question.

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