Curbing Corruption through Securities Regulation

Anna Wong, 3L, Volume 81 Senior Editor

The increasingly central role of publicly traded corporations in today’s economy places securities regulators in a unique position to reduce corruption and promote good governance among market actors. This is because securities regulators may leverage their regulatory capabilities to protect investors and standardize corporate disclosure to regulate secondary corporate behaviour that has a nexus with financial market stability. Foreign anti-corruption laws like the American Foreign Corrupt Practices Act, which is partially enforced by domestic securities regulators, demonstrate that such behaviour undeniably includes corporate engagement in corrupt activity, which can threaten both the financial and reputational integrity of companies by investors.

 

Securities regulators can leverage their delegated powers to draft and implement new regulations, actively investigate suspected cases of regulatory non-compliance, and hold violators accountable with both monetary (i.e., fines) and non-monetary penalties (e.g., cease trade orders, stock exchange de-listing) [1]. Regulatory disclosure requirements and investigative efforts contribute to the evidentiary foundation on which additional penalties can be levied through more general anti-corruption legislation, including provisions enforced through the criminal law system. As a result, securities regulators are particularly useful in the anti-corruption space, because they are capable of independently carrying out anti-corruption programs while also providing the regulatory basis for heightened disclosure requirements essential to effectively enforcing larger anti-corruption regimes. Here, we unpack three features of securities regulations that bolster the composite anti-corruption system: (i) their oversight by regulators with technical expertise in the financial market; (ii) their extraterritorial reach to non-resident corporations; and, (iii) their ability to reduce government monitoring and enforcement costs by transferring these costs from public institutions to the private sector.

Expert Oversight

Regulatory bodies with technical expertise have the advantage of being able to develop policies which are sensitive to the behaviours that their own regulated constituents actively pursue. Securities regulators can leverage their specialized financial and corporate governance knowledge to impose tailored disclosure requirements which protect investors, such as the disclosure of material information asymmetries between a corporation’s management and shareholders. Here, the regulatory imposition of clear accounting reporting obligations enables the identification and punishment of financial misconduct in triplicate: shareholders may discipline directors through board elections or misrepresentation class actions; securities regulators  may levy the full range of their available administrative penalties; and, other administrative or criminal bodies may additionally seek to pursue enforcement of their own conterminous anti-corruption regimes [2].

 

Further, unlike most anti-corruption legislation that only targets behaviour involving public officials, general corporate financial transparency requirements enable securities regulators to detect and punish corrupt behaviour involving public officials and private individuals alike. Given the large and growing number of corporate actors subject to securities regulations, as well as the increasing push by securities regulators to expand their oversight of privately held issuers [3], this tailored form of anti-corruption legislation thus provides a powerful mechanism to curb corruption at both the public-private and private-private levels.

Extraterritorial Scope

Beyond expanding the scope of corrupt behaviour punishable at the domestic level, securities regulators can promote transparency and good governance at the international level through their regulatory power. All corporations listed on a stock exchange are subject to the jurisdiction of that exchange’s local securities regulator. As a result, domestic securities regulators can demand regulatory compliance by all non-national corporations listed on exchanges within their jurisdiction [4]. While explicitly international anti-corruption regimes frequently face jurisdictional enforcement challenges, securities regulation enforcement activities can generally escape this obstacle as they are limited to actions or assets within the enforcing state’s own sovereign and territorial boundaries. This enables anti-corruption measures developed under domestic securities regulations to actively induce international corporate behavioural change by exploiting the territorial basis of enforcement jurisdiction, which is generally considered uncontestable under international law.

 

Anti-corruption measures codified through securities regulations–particularly when intentionally harmonized across jurisdictions–carry the additional benefit of tying international corporate financing opportunities to domestic regulatory compliance. When combined with primary sector-specific legislation, such as Canada’s Extractive Sector Transparency Measures Act, securities regulations can provide developing economies with additional governance safeguards to prevent the unbridled expropriation of their natural resources by foreign entities [5]. In this way, securities regulations can serve as a pivotal equalizing mechanism within international anti-corruption systems to prevent multinational corporations from availing themselves of stable, regulated capital markets in high-income countries while simultaneously exploiting institutional weaknesses in lower-income ones.

Private Sector Cost-Shifting

Finally, anti-corruption measures implemented through securities regulations can provide a notable degree of cost-saving. The financial and opportunity costs borne by government actors tasked with the implementation of anti-corruption programs are significant. To enhance domestic monitoring, investigation, and enforcement capabilities, governments must either divert a subset of finite public resources away from other desired policy programs or independently raise new funds to support the operation of these activities. By imposing reporting obligations on corporations and encouraging shareholders to autonomously survey for signs of financial mismanagement, securities regulations transfer monitoring costs from public securities regulators to the private sector [6]. While critics argue that a consequence of this cost-shifting may include providing corrupt corporate actors with the opportunity to abuse financial transparency requirements by over-disclosing their financial records and burying illicit payments in plain sight [7], this argument overlooks the financial and accounting expertise held by large institutional investors who specialize in evaluating corporate records and disciplining poor performers. In particular, the ability of those institutional shareholders to replace a non-compliant corporation’s managing board, reduce its executives’ bonuses, or sell a corporation’s shares (and in doing so, depress the value of executive stock compensation packages) serve as strong non-statutory corporate accountability measures which can bolster government enforcement activities without imposing additional costs on the public purse.

Conclusion

Securities regulations offer governments a powerful and cost-effective administrative vehicle to incentivise the good behaviour of corporate issuers. Their development and enforcement by industry experts ensures the disclosure of financially relevant corporate flows at all operational levels, while their nexus with domestic stock exchanges provides regulators with a clear jurisdictional basis to pursue an expansive range of enforcement activities against resident and non-resident corporations alike. By reducing duplicative disclosure requirements and leveraging the sanctioning functions of private corporate stakeholders, securities regulations enable the reduction of anti-corruption expenditures without diminishing the health of publicly-funded transparency and accountability programs. In these ways, securities regulators occupy a dual role within the overarching anti-corruption framework to both heighten general standards of financial reporting and specifically discipline incidences of supply-side corporate corruption.

Securities LawUniversity of Toronto Law Review