Could competing stock exchanges accomplish everything the SEC does?

[ojc02]

So, I have been thinking recently about the need for the SEC and wanted politics folk's opinion...

It seems like every function of the SEC is either unnecessary or could be accomplished by the free market.

For example:
If you wish to IPO your stock on exchange A, they make you sign a contract agreeing to submit accounting details yearly, and if requested, you have to allow officers of the exchange to audit your company.
However, on exchange B, you don't have to submit any accounting information.

Now, as an investor, I realize that I have very little reliable information to go on with companies in exchange B, so I prefer to buy stock in companies on exchange A, raising their price and funneling more commission to exchange A.

As the owner of a company looking to go public, I realize that the higher capital level in exchange A outweighs the cost of preparing the accounting information so I IPO with them.

Now, say there's another exchange (exchange C) where they decided on a set of accounting standards (let's call them, oh, I dunno... Sarbox) so draconian that if you miss anything they put the CEO to death (ok, maybe a bit of an exaggeration but not far off) and the costs of complying with the regulations are completely insurmountable for any company with revenues lower than hundreds of millions of dollars.

Would anybody choose to join that exchange?

[iron81]

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Would anybody choose to join that exchange?

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Sure they would. I know this because a similar situation exists today. The NYSE has several reporting requirements above what the SEC requires in order to get listed on that exchange. They're not exactly hurting for customers.

[ojc02]

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Would anybody choose to join that exchange?

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Sure they would. I know this because a similar situation exists today. The NYSE has several reporting requirements above what the SEC requires in order to get listed on that exchange. They're not exactly hurting for customers.

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Well all public companies on all exchanges are required to abide by Sarbox. So we have no idea whether companies prefer sarbox or no sarbox because they can't escape it.

Those additional requirements in the NYSE might work out well. They may result in higher cost for the company but even higher revenue for the shareholders in terms of increased value, thus making it correct to be on the NYSE.

[mosdef]

I think that the idea of competing accounting standards is internally inconsistent. In my experience at work, the primary benefit of having accounting standards is to have results reported the same way by all companies so that their results are not only understandable, but also comparable. Since the most desirable "product" that private accounting standards providers would be selling in uniformity, at the end of the day you still end up with one standard. I don't think there would be a market for different standards.

[bobman0330]

The philosophy underlying government securities regulation goes something like this:

Most people are stupid wrt securities. Some people are smart. In a capital market, smart people will generally produce prices for securities that are roughly accurate. (Google efficient market hypothesis if you're unfamiliar with it.) The accurate prices produced by these smart people will, in turn, protect stupid people from their stupidity. Sure they'd be willing to buy GOOG at $700 because they think it's wonderful, but smart people keep it at a reasonable price, so the dummies are protected.

According to most variations on the efficient market hypothesis, prices cannot be accurately set if everyone in the market does not have access to the relevant information. But it's mostly the smart minority of investors who actually want all that information. Punters are willing to gamble whether they're informed or not.

If that theory is roughly true, then a competing SketchEx might do very well for itself in an unregulated market. No disclosure requirements, so most smart investors and reputable companies stay away. But dumb people flood in and conmen take their money.

EDIT: As iron alluded to, a lot of securities law was farmed out to stock exchanges, particularly before SOX. The exchanges have lots of listing requirements, corporate governance rules, arbitration provisions, and broker qualification rules that they aren't required to have in place by law.

[ojc02]

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I think that the idea of competing accounting standards is internally inconsistent. In my experience at work, the primary benefit of having accounting standards is to have results reported the same way by all companies so that their results are not only understandable, but also comparable. Since the most desirable "product" that private accounting standards providers would be selling in uniformity, at the end of the day you still end up with one standard. I don't think there would be a market for different standards.

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Oh sure, there would be a big network effect here. It would make a lot of sense to adopt uniform accounting standards, but if those standards became too outrageous, other exchanges would be able to leave and use their own standards and it's likely most others would follow them.

My only point is that, in the event that the established standards are unreasonable, mandating those accounting standards prevents even the possibility of having your company listed on an exchange with reasonable accounting standards. Frankly, I think an oligopoly of standards would be more efficient than those proposed by mssrs Sarbanes and Oxley.

[ojc02]

[ QUOTE ]
The philosophy underlying government securities regulation goes something like this:

Most people are stupid wrt securities. Some people are smart. In a capital market, smart people will generally produce prices for securities that are roughly accurate. (Google efficient market hypothesis if you're unfamiliar with it.) The accurate prices produced by these smart people will, in turn, protect stupid people from their stupidity. Sure they'd be willing to buy GOOG at $700 because they think it's wonderful, but smart people keep it at a reasonable price, so the dummies are protected.

According to most variations on the efficient market hypothesis, prices cannot be accurately set if everyone in the market does not have access to the relevant information. But it's mostly the smart minority of investors who actually want all that information. Punters are willing to gamble whether they're informed or not.

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I agree but my whole point was that these accounting standards would exist in a free market without government regulation.

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If that theory is roughly true, then a competing SketchEx might do very well for itself in an unregulated market. No disclosure requirements, so most smart investors and reputable companies stay away. But dumb people flood in and conmen take their money.

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Yeah, but how long would that state of affairs go on? I really don't think it would take too long for everyone to realize what was up. It would certainly be written about it the media, the better exchanges would make sure of that.

[ojc02]

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EDIT: As iron alluded to, a lot of securities law was farmed out to stock exchanges, particularly before SOX. The exchanges have lots of listing requirements, corporate governance rules, arbitration provisions, and broker qualification rules that they aren't required to have in place by law.

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I might be wrong, but I feel like you guys are trying to use this as part of an argument for the existence of the SEC but I think it totally validates what I have been saying.

Those exchanges have chosen of their own accord to implement certain rules because it increases investor confidence in the companies listed on their exchange. Now, why not all the other functions of the SEC? Assuming of course that those functions make the market more efficient.

[bobman0330]

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Yeah, but how long would that state of affairs go on? I really don't think it would take too long for everyone to realize what was up. It would certainly be written about it the media, the better exchanges would make sure of that.

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I strongly believe that you underestimate the folly of the average investor. You know the spam emails you get touting stocks? People, a lot of people, actually go out and buy those stocks based on the email recommendations. Some people might be put off by press coverage, but I think there would be plenty queueing up to get scammed.

[iron81]

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I might be wrong, but I feel like you guys are trying to use this as part of an argument for the existence of the SEC but I think it totally validates what I have been saying.

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You are wrong. I wasn't really trying to argue a position, I just answered your question. I agree with you that an AC stock exchange could enforce corporate accountability. Now all you have to do is convince PVN that corporations would exist in ACland.