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

Dr. Felice Batlan, Curator
Opened December 1, 2008

Introduction

As the economic crisis of 2008 has demonstrated, the world’s markets are deeply connected to each other.  What appeared to be a serious, but somewhat contained, crisis in the U.S. housing and financial markets quickly spread to become a deep global economic crisis affecting markets, financial institutions and economies from Russia to Iceland to all of Europe and Asia.

For a brief moment in September 2008, some European leaders proudly stated that, due to European regulations which were more stringent than U.S. regulations, Europe would be immune from the types of problems witnessed in the United States.  This proved not to be the case as newspaper headlines soon screamed that the “contagion” of the U.S. markets had spread around the world. 

Such language, and the increasing understanding that U.S. regulations and regulators had failed to adequately supervise the financial markets, represent a historic change.  For over sixty years, the U.S. Securities and Exchange Commission was concerned that foreign markets were inadequately regulated, and that if a significant economic crisis were to occur, it would come from abroad.  The SEC believed that the United States had the most efficient and stringent system of regulation, which it needed to spread to the rest of the world.

Although we may believe that such interdependence and internationalization is a new phenomenon, it is quite old. From its founding in 1934, the SEC was keenly aware of foreign markets and their impact upon the U.S. economy. This gallery examines the history of the SEC's interactions with foreign markets, regulators, government officials, and corporations from 1934 to 1990.

The international role of the SEC, however, extends far beyond securities markets, whether domestic or foreign. The SEC participated in shaping U.S. foreign affairs and foreign economic policy. Little has been written about the SEC's international role and much of this history until now has been lost. This gallery is intended to ignite further interest and scholarship as it brings together a trove of extraordinarily rich primary materials.

The story that this gallery tells is one of continuities, ruptures and tensions. From 1934 to World War II, the SEC's experience with international markets was colored by the massive foreign sovereign debt defaults and abuses of the 1920s. This resulted in the SEC being suspicious of foreign issuers and foreign traders and investors. It is fair to say that the SEC took an isolationist perspective. The SEC also maintained the steadfast position that foreign issuers who entered the U.S. markets should be subject to the same securities laws as U.S. issuers.

Following World War II, as the U.S. became the world's dominant economic power, the SEC participated in shaping U.S. foreign economic policy, especially through its work with the International Bank for Reconstruction and Development, now known as the World Bank. At times, this new internationalist perspective conflicted with what the SEC believed to be its domestic responsibilities of protecting American investors and American markets.

With the Cold War raging, the U.S. began providing massive aid to Europe and developing countries in an attempt to win allies and spread capitalism. SEC personnel became Cold War warriors, fanning out across the globe, hoping to create mini-SECs in places as far flung as Pakistan and Brazil. The SEC continually asserted to both developed and developing nations that U.S.-style securities regulation was the best and most efficient. This attitude at times created significant conflicts with foreign countries. Moreover, while the internationalization of the securities markets was proceeding, events in the 1960s involving the U.S. economy resulted in the imposition of various restrictions that had the effect of essentially isolating the U.S. capital markets.

By the time these restrictions were removed, internationalization had carried on in other countries, especially the United Kingdom. The SEC was now torn between making the U.S. markets attractive to foreigners while maintaining that U.S. securities laws would equally apply to foreign and U.S. issuers. As these significant tensions continued, the Berlin Wall fell. Recognizing an enormous opportunity, the SEC aggressively reached out to Eastern Bloc countries with a wide range of programs and technical assistance, continuing a process which had began fifty-five years earlier.

As we look at this long history of the SEC's involvement with international markets, a number of themes emerge. The SEC was consistently confronted with the question of whether U.S. securities laws should fully apply to foreign corporations in the U.S. or whether it should make certain concessions in connection with the disclosure requirements of the 1933 Act. Related to this was the issue of whether the SEC should encourage or discourage Americans from purchasing securities of foreign corporations and governments. Likewise, should it encourage foreigners to purchase U.S. securities and how it should respond when U.S. securities were traded on foreign markets?

Regarding various fraud and other provisions of the 1933 and 1934 Securities Acts, there was the continual question of how the SEC would react when supposed frauds and securities law violations were perpetrated from abroad and whether foreign governments would recognize the SEC's jurisdiction and cooperate with it. The SEC consistently asserted that the United States had the best securities laws in the world and that other countries needed to adopt a similar regime. How the SEC confronted these various issues would change over time, as the economic, military, and cultural power of the United States ebbed and flowed.

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Photos

Early 1990s

James Doty, Barbara Greene, Richard C. Breeden, Linda Quinn and Michael Mann

(Courtesy of Michael Mann )

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