Consult nations

For its issuance of new standards for the securities sector, Iosco has instigated a full consultation process aimed at moulding protections for the future. By Edward Fleischman

The process by which laws come into being, at least in a popularly elected legislature, has been analogised to the making of sausage. The process by which administrative rules, carrying the force of law, come into being could be similarly analogised to the taking of photographs with a camera obscura from beneath a large, dark cloth.

Within that obscurity, the ‘consultation process’, to the extent adopted by administrative agencies, elicits both applause and criticism from affected persons and their counsel: applause for the willingness of the particular agency to expose its deliberative processes for guidance as to the scope of its action; and criticism of the agency’s fear that fuller exposure would somehow limit its ability to apply a rule against wrongdoers.

It is in that spirit that this article examines the International Organisation of Securities Commissions’ (Iosco) recent adoption of a consultation policy and procedure, paying particular attention to “the issuance of international standards and principles for the securities sector”.

Last October, during an Iosco open conference in New York on regulators and the global marketplace, a crucial, although unheralded, presentation addressed the “convergence” of regulatory standards through the Iosco process. Iosco is directing its efforts increasingly to the development of “standards and principles” on a wide range of issues – including complex security structures, market intermediaries, debt markets and corporate governance – in an attempt to mould common solutions for its members.

The disquieting effect of this process was illustrated by a recounting of one trade association’s discussions with its national regulator, discussions that were interrupted when they reached matters covered by an Iosco 2002 statement of principles, as those matters were deemed no longer open to consideration at the national level. Against that background, the subsequent, almost casual, reference to publication by Iosco of draft procedures and policy on consultation came as something of a life preserver to one who had been swept overboard.

Securities markets participants in the UK and the US and their counsel are accustomed to a formal consultation procedure mandated by Section 155 of the Financial Services and Markets Act 2000 (FSMA) and by the US Administrative Procedure Act (APA) respectively.

Under the FSMA, the publication of proposed rules generally must be accompanied by, among other things, a cost/benefit analysis, an explanation of purpose and of the Financial Services Authority’s (FSA) reasons for believing the proposed rules to be compatible with its general duties, and a notice as to the time within which comments concerning the proposals may be made to the FSA. Upon adoption, publication of the final rules must include an account of the comments received and of the FSA’s responses to the comments, as well as a description of the details of significant difference from the draft rules as circulated and a cost/benefit analysis relating to those details.

US practice under the APA is similar, but somewhat more formal and a good deal more formalistic, and a body of judicial decisions exists as to agency compliance or non-compliance with APA requirements.

Iosco, for its part, has now adopted and posted on its website a definitive consultation policy and procedure. The policy states that “Iosco will conduct public consultations” to achieve 10 objectives, including:

to benefit from the expertise of the international financial community when assessing and analysing regulatory issues;

to obtain information and views on the potential impact, benefits and costs of any proposed standards and principles;

to provide an opportunity for alternative regulatory approaches to a specific proposal to be proposed;

to continue to increase transparency regarding Iosco’s activities and work programme;

to continue to enhance consistency, where appropriate, by facilitating an early dialogue with the private sector regarding proposed approaches to dealing with common concerns; and

to assist in a determination of whether concern exists, which requires a regulatory response, and if so, what form of action is appropriate.

While indicating that the decision to seek public consultation on specific issues may turn on the presence or absence of certain listed factors, the policy declares: “Work projects that contemplate the issuance of international standards and principles for the securities sector will generally include the conduct of a public consultation as part of the project.” The policy also declares: “In conducting public consultations, Iosco generally will aim to consult the full spectrum of the inter- national financial community.” Both of these statements in the final policy are a degree firmer and broader than their predecessor proposals. While counsel are nowhere mentioned, inclusion of counsel within “the full spectrum of the interna-tional financial community” is clearly easier than would have been inclusion within the “range of interested parties, including… market intermediaries… investors [and] auditors” in the proposed language.

The definitive consultation procedure sets the consultation period “generally” at three months. There is a mandate for the publication of consultation reports on the Iosco website, as well as a mandate for all comments received to “be made public and posted on the Iosco website”. Furthermore, “a summary explanation of the manner in which public comments have been addressed, or the reasons why they have not been addressed” are to be set out in a memorandum accompanying each final report.

The comment process on Iosco’s draft consultation policy and procedures should have afforded Iosco a high degree of confidence in open consultation. Comment letters varied from the brief and complimentary (the World Bank and the International Monetary Fund), requesting only a stronger commitment to the use of consultation, to the lengthy and thought-provoking (London Investment Banking Association), suggesting commitment to a fundamental regulatory philosophy based on Iosco’s own objective of “whether concern exists, which requires a regulatory response, and if so, [deciding on] what form of action is appropriate”.

Although no memorandum analysing changes has been made public, review of the posted comments does reveal clues to the evolution of Iosco’s chosen language.

For all of us in the “spectrum of the international financial community”, for whom the protections of our own national procedures may be subject to attenuation by virtue of Iosco’s new process for promulgating principles and standards, the more confidence in consultation that Iosco can gain, the more comfortable in the transnational regulatory process we can be.

Transparency in rulemaking is vital to efficient markets. Willingness to expose the deliberative process, not fear of the consequences of that exposure, should be the dominant motivation of regulators and regulated alike.

Edward Fleischman is senior counsel at Linklaters and formerly a commissioner at the US Securities and Exchange Commission