Passports, Private Choice, and Private Interests: Regulatory Competition and Cooperation in Corporate, Securities, and Bankruptcy Law

Abstract

This paper discusses international regulatory competition in the related areas of corporate, securities, and bankruptcy law, contrasting two different forms that regulatory competition may take. The first is private choice, or "direct competition." In this arrangement, firms are free to elect the regulatory regime that will govern their affairs, regardless of the location of a firm's assets, personnel, registered office, or transactions. The paradigmatic example is corporate charter competition among US states. The second form of competition is the "regulatory passport" arrangement, which has also been variously described as "mutual recognition" and "reciprocity." In this scenario, nations agree to recognize the extraterritorial reach of firms' home country regulatory regimes, forswearing territorial regulation by host countries. These two forms of regulatory competition are distinguishable along several dimensions, a point that is sometimes obscured. Some analysts have tended to lump regulatory passport arrangements together with direct competition in discussing the promise and prospects of regulatory competition generally. Regulatory passport arrangements appear to be much more common than instances of direct competition, and some seem fond of characterizing passport systems as a step "toward" direct competition. Care should be taken not to conflate direct competition with regulatory passports. Not only are the competitive effects very different, but the politics are as well. Structurally, direct competition would likely be far more effective than a regulatory passport system at placing competitive pressures on lawmakers. However, questions exist concerning the prospects for achieving the choice of law harmonization necessary for direct competition, which must overcome entrenched interests of regulators and their important constituents. These political obstacles are likely to prevent development of the requisite choice of law cooperation. Direct competition among US states over corporate charters may be a peculiarity of the US federal system. Similar political considerations suggest that regulatory passport systems are more likely to emerge. Even with regulatory passports, though, political considerations in the negotiation and implementation of such arrangements will tend to blunt the competitive pressures meant to be focused on national regulators. This paper, part of a symposium on Exploring the Need for International Harmonization, offers a general discussion of the competitive promise of regulatory passports, contrasting the ideal type with direct competition and with the regulatory passport arrangements that exist.