CHAPTER 3
SOME POSSIBLE REGULATORY APPROACHES
Introduction
3.1 The purpose of this Chapter is to canvass, in general terms, some
possible regulatory approaches to the issues raised previously. Before
considering these approaches, some preliminary observations should be
made.
3.2 First, it should be noted that the circumstances faced by regulators
dealing with electronic commerce are not unique. Analogies are often drawn
with other legal situations in which issues cannot be determined simply
by reference to geographical boundaries. For example, as noted in the
Report of the Electronic Commerce Task Force to the Commonwealth Law Enforcement
Board:
electronic networks in cyberspace might be considered akin to
the high seas over which no country may purport to exercise sovereignty.
Some approaches for dealing with jurisdictional issues developed in
the law of the sea might provide insight into dealing with comparable
jurisdictional issues in cyberspace. [1]
3.3 Intellectual property law, air navigation law, and telecommunications
law have also confronted cross-jurisdictional issues - with varying degrees
of success - in ways that may provide some useful precedents for approaching
the regulation of electronic commerce.
3.4 It should also be recognised that developments in electronic commerce
are still in their infancy, but are rapidly evolving. We are currently
confronting the ramifications of the growing internationalisation of markets.
However, many of the ramifications of technological change have not yet
appeared or been imagined. There is little to be gained by constructing
a regulatory regime which deals only with what is currently occurring,
or is imminent. This was recognised by the Wallis Committee which observed
that:
While it is not possible to forecast with any certainty the precise
impact that technology will have on the shape of financial services
and service delivery, it is certain that the impact will be considerable.
These developments make flexibility critical. The regulatory framework
must have the flexibility to cope with changing institutional and product
structures without losing its effectiveness. [2]
3.5 A third (and related) observation is that a regulatory approach may
seek to anticipate change, or simply react to it. The Committee notes
that the ASC has, to date, adopted a pro-active approach (while not seeking
to influence the technological course ultimately followed by the market),
[3] and sees advantages in such an approach.
3.6 Finally, attempts to regulate global electronic markets would seem
to require a major change in regulatory philosophy. As SEC Commissioner
Mr Steven Wallman recently observed:
The pace of change and innovation requires an increased emphasis
by regulators on macro or "goal-oriented" regulation - as
opposed to dictating substantive regulatory standards for specific problems.
This necessitates a massive change in the way regulators think about
regulating, and in the way laws are written ...
Let me provide a simple illustration. Last October, the [US Securities
and Exchange] Commission published, for the first time, full interpretive
guidance regarding the use of electronic communications to fulfil the
delivery requirements of the federal securities laws ... Given the advantages
afforded by electronic media, we determined that our goal should be
to encourage electronic delivery of information, even to the point of
preferring it over paper in the long-run. However, instead of taking
a "command and control" approach to this issue and dictating
specific formats that alone would suffice for electronic delivery of
information along with a dozen conditions limiting electronic communications
use, as had first been suggested, our interpretive release focuses on
two goal-oriented issues: whether the electronic communication provides
investors with notice of and access to information similar to that which
would be received by traditional paper delivery. It is left to the market
to create innovative ways to satisfy these two concepts. [4]
3.7 Given these preliminary observations, the remainder of this Chapter
canvasses a number of possible regulatory approaches. There are obviously
numerous approaches that are not discussed below, and comments need not
be restricted to matters outlined in this Paper.
Do nothing
3.8 One regulatory approach may be simply to recognise that there is
no action that national governments can take, or should take, in this
area. While such an approach avoids dangers such as inappropriate regulation,
or regulation which places unnecessary limits on change, in a practical
sense, in the words of the Chairman of the ASC: "when something goes
wrong ... aggrieved parties will expect there to be laws, rules and regulations
in place to assist them, just as they do in the paper world". [5]
3.9 However, taking no action does not mean that electronic commerce
must necessarily be conducted "lawlessly" - emerging electronic
markets may themselves develop appropriate rules and protocols. As some
commentators have noted, while the Internet in its present form is chaotic
and unruly, business cannot be conducted successfully without the order
that rules create:
[I]t is important to realize that the current lack of rules does
not necessarily mean that governments will send in the cavalry or that
companies will walk away in despair, leaving the Internet to the hackers
and the chat lines. Instead, it simply means that companies need to
think carefully before making any headlong leaps into cyberspace. Rather
than just posting pages on the World Wide Web, for instance, companies
may want to move more selectively, clustering themselves into on-line
communities where rules prevail and commerce can proceed ...
These sorts of on-line communities will create a very different
form of electronic commerce from the one envisioned today by many Internet
adherents. The communities will not be open to all; they will increasingly
charge customers for their services; and they will not permit information
to flow across seamless borders. They will change the current spirit
of the Internet and bring order and management to the Net's unruly tangle.
By writing the rules for commercial transactions, on-line communities
will also shift the balance of power between business and government
toward business. That evolution will occur not because of the power
of particular companies, or because business is opposed by nature to
an open Internet or a free flow of information. Rather, commerce will
move toward on-line communities simply because companies need a basic
infrastructure of rules to survive. [6]
3.10 In this scenario, the commercial promise of the Internet will lie
in the ability of companies to form well-defined communities to protect
their property and promote their own interests, and the companies which
will reap the greatest profits are the pioneers who will write, support
and enforce the new rules. [7]
3.11 There is much force in this view. To some extent it simply echoes
the development of modern commercial law itself:
Just as merchants in medieval times developed the customs and
practices that eventually became commercial law in Europe, so can contemporary
companies and entrepreneurs create the rules of electronic commerce.
[8]
3.12 However, electing to take no action may also:
- give a jurisdiction and its government little or no public voice in
the development of any new rules that are to operate;
- lead to the development of rules that are appropriate for larger,
economically significant jurisdictions, but that may be inappropriate
for others;
- lead to the development of rules that may favour particular groups
of participants over others; or
- lead to inadequate, inaccessible or excessively costly methods for
enforcing the rules developed.
National legislation
3.13 As noted in para 2.63, legislation in some countries, including
Australia, currently attempts to regulate electronic transactions that
are accessible in those countries. For example, in considering investment
schemes or advice offered to Australian investors from overseas, the ASC
states that:
If the schemes or advice are being offered to investors in Australia,
generally the requirements in the Corporations Law will apply to the
scheme or advice (even though it is being offered from overseas).
You should be aware that generally it may be more difficult to
enforce your rights against a person operating from an overseas jurisdiction.
[9]
3.14 While national legislation may provide a measure of certainty in
determining the responsibilities of, and standards to be met by, those
using electronic commerce in Australia, in the absence of international
support, there is obviously considerable uncertainty when it comes to
considering enforceability. National legislation may also expose 'reputable'
businesses operating internationally to multiple, potentially inconsistent,
legal requirements.
3.15 Any such legislation (and its interpretation) may either facilitate
or impede the development of electronic commerce. The Committee notes
the facilitative approach taken by the ASC to, for example, the availability
of electronic prospectuses, the electronic lodgment of documents, and
electronic company searches. Such an approach seeks to ensure that the
benefits of electronic commerce are realised, while monitoring and responding
to possible abuses.
International co-operation
3.16 In general terms, electronic commerce exacerbates the legal differences
between jurisdictions. Greater harmonisation reduces these differences,
and minimises the problems faced by 'legitimate' Internet users. Therefore,
the most frequently mooted approach to the regulation of electronic commerce
involves greater international co-operation between jurisdictions. Regulation
by reference to geography is in the process of being replaced by greater
co-ordination between regulators. As Graham Greenleaf, associate professor
of law at the University of NSW, recently observed "electronic commerce
will mean we'll see a greater proliferation of multilateral treaties and
international co-operation between law enforcement agencies". [10]
3.17 Co-operation may take many forms. Some have envisaged "reciprocal
arrangements and harmonisation of law between partner jurisdictions".
[11] Others have referred to multilateral
arrangements through formal representative organisations. Co-operation
may involve specific international agreements between governments or regulators,
or the passing of parallel statutory provisions in a number of jurisdictions.
It may also focus on the development of some fundamental regulatory principles
which might then be accepted by a number of jurisdictions.
3.18 The ASC participates actively in initiatives sponsored by the International
Organisation of Securities Commissions (IOSCO). Throughout the 1990s,
IOSCO, through its Technical Committee Working Groups, has attempted to
enable member organisations:
- to understand better the fundraising regulatory requirements applicable
in other jurisdictions; and
- to reduce the regulatory barriers to multinational capital raising
efforts, while protecting the soundness and integrity of the world's
capital markets. [12]
3.19 For example, one IOSCO Working Group recommended that regulators
be encouraged to achieve the aim of a single disclosure document for all
jurisdictions in which an offering is made by:
- harmonising disclosure standards;
- mutual recognition among jurisdictions of documents prepared in the
issuing company's home jurisdiction; or
- a combination of these. [13]
3.20 IOSCO Working Group No 5 analysed relevant international law and
practices covering cross-border offerings of collective investment schemes.
The analysis identified a number of fundamental regulatory concepts that
underpinned the variety of approaches taken by different countries. The
ASC has since adopted key regulatory requirements for foreign collective
investment schemes which are substantially similar to these core principles.
3.21 In addition, this Working Group has developed:
- two draft agreements for either bilateral or multilateral use, as
a starting point for negotiation between regulatory authorities;
- a Draft Mutual Recognition Agreement, based on recognition and acceptance
of the collective investment scheme core principles referred to above;
and
- a Draft Declaration on Co-operation and Supervision of Cross-Border
Investment Management Activity, which was designed to be a practical
means by which regulatory authorities might co-operate in relation to
surveillance activities and the exchange of information. [14]
3.22 The ASC also participates in bilateral arrangements. On 21 May 1996,
it announced the signing of its first information sharing agreement -
with the US Securities and Exchange Commission. Under the agreement, the
SEC will notify the ASC of publicly announced regulatory action against
companies whose securities trade in both Australian and US markets. This
information includes:
- the delisting or suspension of a company's securities from a US regulated
exchange or market; and
- the initiation by the SEC of administrative or civil proceedings against
a company. [15]
3.23 Greater international co-operation was seen as vital by the Electronic
Commerce Task Force. In the absence of international acceptance, specific
legislative amendments in one jurisdiction might be rendered ineffective
or unenforceable. The Task Force went on to observe that policy issues
as well as matters of overall legal frameworks should also be the subject
of international debate and, where possible, agreement:
Forum shopping is not only used to pick favourable jurisdictions
in litigious matters. It is a practice which is used by those who choose
a less rigorous regulatory base for their activities and then bring
commercial pressures to bear on regulatory authorities in other jurisdictions
to adopt the lowest common denominator approach to regulatory requirements,
lest they find their markets are by-passed by the latest technologies.
To avoid being "picked-off" one by one, regulatory authorities
need to take consistent approaches. [16]
3.24 Greater international co-operation was also supported by the Wallis
Committee. Noting that such cooperation among regulators was "both
necessary and worthwhile", and that Australian regulators had already
begun to establish new formal and informal alliances, the Committee recommended
that the (newly established) Corporations and Financial Services Commission
(CFSC) should "work with overseas regulatory and industry bodies
to provide consumer protection for cross-border financial transactions
and to avoid the potential for fraud". To this end, the CFSC should
be empowered to:
- enter into bilateral and multilateral mutual assistance treaties with
overseas counterparts;
- encourage the creation of international codes of conduct;
- develop mutual industry recognition or harmonisation regimes; and
- develop, with industry, education programs for consumers on cross-border
dealings. [17]
An international regulator
3.25 For some commentators, greater international co-operation represents
an interim step on the path to creating a single international regulator
for global financial markets. For example, Dr Henry Kaufman advocated
the establishment of a new international institution - a "Board of
Overseers of Major International Institutions and Markets" - to serve
as a focal point for regulatory harmonisation in financial markets. This
Board would be empowered to set mutually acceptable minimum capital requirements
for all major financial institutions, to establish uniform trading, reporting
and disclosure standards for open credit markets, and to monitor the performance
of institutions and markets under its jurisdiction. [18]
3.26 Others have doubted that such a goal is realisable. For example,
Commissioner Steven Wallman doubts that it can be realised "within
any time frame relevant for those of us discussing it today". He
also argues that:
the existence of multiple regulators of international financial
service organizations having different perspectives and regulatory philosophies
is advantageous. It reduces the likelihood that innovation will be stifled
by a single, stodgy regulator. Sometimes, regulatory arbitrage has its
benefits. [19]
3.27 Similarly, referring specifically to the regulation of international
trading in futures, the Chairman of the ASC observed that:
in our five-year strategic planning we address all sorts of issues
about what might happen in the future. We do not yet have, even on a
five-year time zone, a global regulator. But, if I was doing a 10- to
15- year time zone, I would say that consideration of a global regulator
will be on that time line. It will not happen in 10 to 15 years but
it will be clearly an issue by then. [20]
3.28 Some versions of such organisations do currently exist (for example,
the World Trade Organisation).
Branding
3.29 Mr Steven Wallman, an SEC Commissioner, recently suggested that
certain Internet 'products' - specifically nominating electronic prospectuses
- might be regulated through 'branding'. He outlined, as an example, a
reputable investment bank perhaps adding its name to an offer or issue
of securities, though not necessarily as an underwriter. [21]
3.30 Such an approach might be capable of wider use. For example, it
might be possible for specific purpose organisations or even regulators
to state or even 'certify' that a prospectus or other document complies
(or does not comply) with the statutory or other requirements in particular
jurisdiction, or even that it has been 'vetted' by the organisation or
regulator. Clearly, such an approach would involve regulators adopting
a very different "non-prohibitive" regulatory philosophy, as
noted above.
Education and user-awareness
3.31 Providing users with a greater awareness of the advantages and uncertainties
of the electronic marketplace represents probably the most obvious and
immediate regulatory approach. The Committee notes that the ASC is already
working in this area, having produced a series of relevant Media Releases,
Policy Statements and advices. Much of this information has also been
made available in electronic form through the ASC's home page. It may
also be appropriate for regulators to place relevant information directly
onto electronic bulletin boards or other forums - an approach adopted
by the SEC in America. However, constant monitoring of all of these forums
may prove a time-consuming task.
3.32 Issuers might also be required to include in their offer documents
various 'consumer' warnings, disclaimers or hypertext links to regulatory
information.
3.33 Given the rapid evolution of electronic commerce, many of the advantages
and uncertainties of the electronic marketplace are not yet evident. In
these circumstances, maintaining user-awareness obviously involves an
ongoing commitment.
Other technology-based approaches
3.34 As noted above, the emerging technology may itself be used to make
users more aware of its capabilities and possible abuses. It also has
an obvious role in addressing various technical issues (such as ensuring
transaction security).
3.35 The new technology may be used in various other ways - not all of
them free from difficulty. For example:
- regulators may seek to obtain direct access to certain company records
at certain times, in a manner similar to that seemingly permitted by
regulations under the new Pawnbrokers and Second-Hand Dealers Act
(NSW) - these apparently require antique businesses in that State
to invest in a computer and a modem, and allow random access to the
business's records by any police officer - any such approach in the
case of electronic capital raising or share-trading would obviously
involve significant privacy considerations, and may not be efficient
or appropriate for many securities-based transactions;
- regulators (or other organisations) may make available or endorse
computer software that analyses the information included in an electronic
prospectus or other offer document; and
- regulators may seek to impose duties, or a measure of liability, on
technical intermediaries or others who assist issuers in disseminating
information.
Footnotes:
[1] Electronic Commerce Task Force, Report
to the Commonwealth Law Enforcement Board, para 4.2.15.
[2] Wallis Committee Report, p 197.
[3] Alan Cameron, 'The ASC's Experience', a
paper delivered at Regulating the Marketspace, ASC Electronic Commerce
Conference, (Sydney) 4-5 February 1997, p 2.
[4] Steven Wallman, 'Regulating in a World of
Technological and Global Change', a paper delivered at Regulating the
Marketspace, ASC Electronic Commerce Conference, (Sydney) 4-5 February
1997, p 7.
[5] Alan Cameron, 'The ASC's Experience', a
paper delivered at Regulating the Marketspace, ASC Electronic Commerce
Conference, (Sydney) 4-5 February 1997, p 3.
[6] Debora Spar and Jeffrey J Bussgang, 'Ruling
the Net', Harvard Business Review, May-June 1996, p 126.
[7] Debora Spar and Jeffrey J Bussgang, 'Ruling
the Net', Harvard Business Review, May-June 1996, p 126.
[8] Debora Spar and Jeffrey J Bussgang, 'Ruling
the Net', Harvard Business Review, May-June 1996, p 128.
[9] Australian Securities Commission, 'Frequently
Asked Questions About Securities Transactions and Information on the Internet'
.
[10] 'Unknown, untaxed and free for all; The
Hidden Economy', Australian Financial Review, 1 May 1996 p 18.
[11] Roger Clarke, 'Regulating Financial Services
in the Marketspace', a paper delivered at Regulating the Marketspace,
ASC Electronic Commerce Conference, (Sydney) 4-5 February 1997, p
13.
[12] Debra Russell, 'Foreign securities offerings:
the position in Australia so far', ASC Digest, SPCH 207 at p 212.
[13] ibid, p SPCH 213.
[14] ibid, pp SPCH 213-4.
[15] Australian Securities Commission, 'Media
Release ASC 96/88', reproduced in ASC Digest p MR 134.
[16] Electronic Commerce Task Force, Report
to the Commonwealth Law Enforcement Board (November 1996), p 106.
[17] Wallis Committee Report, p 295.
[18] Henry Kaufman, 'Structural Changes in
the Financial Markets: Economic Policy and Significance', ASX Perspective,
Issue 1, p 29.
[19] Steven Wallman, 'Regulating in a World
of Technological and Global Change', a paper delivered at Regulating
the Marketspace, ASC Electronic Commerce Conference, (Sydney) 4-5
February 1997, p 8.
[20] Joint Committee on Corporations and Securities,
Committee Hansard, Statutory Monitoring role: role of the Australian
Securities Commission (29 March 1995) p 165.
[21] 'Regulators still nervous about rule of
cyberspace', Australian Financial Review, 13 February 1997, p 23.
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