Talking Balls

Nasdaq Bid for LSE

I am not one of those who is dismissive of or hostile to either Americans or the United States. As an English lawyer who is also a member of the American Bar Association, I see commercial canniness and professionalism shown by American firms which we over here could learn lessons from.

Therefore I neither take a little Englander nor anti-American slant to the prospect of the American (New York-based) Nasdaq multi - billion pound bid for the London Stock Exchange (LSE) succeeding. In principle I have no difficulty with the idea of foreign ownership. The practice however is rather different.

The LSE and AIM

The City of London is a huge economic powerhouse of increasing value and importance to the economy. That spills over into legal and commercial activity. The LSE is flying at the moment. It has made great strides at the expense of New York. A key part of this is the lighter regulatory touch in London, designed to secure relevant protection without becoming unduly burdensome. Lighter generally, but also allowing even less regulation where appropriate to allow capital to be raised on the Alternative Investment Market (AIM). As the LSE website puts it, AIM caters for "the 'companies of the future'", is "the international growth market of choice for smaller companies", and gives a "secure yet flexible trading environment for both companies and investors". Compare this to United States, where the reaction to the Enron scandal has been the heavy-handed Sarbanes-Oxley regulation, driving work abroad. (It obviously makes sense to list in London and take advantage of the more user-friendly regulatory regime).

Post Clementi

Quite apart from the overall benefits for the economy and the legal profession from the strength of the LSE, the AIM market is almost certainly where adventurous legal firms will seek to raise capital in the post - Clementi regime. Therefore the importance is obvious of the continuing existing firm but fair success of the LSE, including AIM.

The SEC

The US Securities and Exchange Commission (SEC) is the federal regulatory agency, not exactly renowned for its light and deft approach to regulation. It is inevitable that it will see any activity of a New York-based owner as within its remit. It will just regard the LSE as a part of the New York-based exchange. I regard it as inevitable that it will seek to interfere.

In response Ed Balls, the Economic Secretary, has suggested new legislation that will allow the Financial Services Authority (FSA) to prevent new rules from foreign regulators applying to UK exchanges in certain circumstances. The idea being to allow the FSA to stop the SEC interfering.

No protection

I approve of the idea, and wish Mr Balls every success, but I think we are living in dreamland if it is thought that will be any protection. For starters, the track record of willingness to take on and confront US authorities is not exactly convincing. Even if the will is there, the entire ground rules will have changed. Instead of having a regulatory regime which is designed with the needs of the market in mind (balancing investor protection with the need to minimise regulation) the SEC is likely to call the tune with in certain circumstances the FSA possibly seeking to disallow certain effects if they are disproportionate. The massive difference between the two scenarios is immediately apparent.

Nasdaq may comply voluntarily

It also ignores the fact that, mindful of the need to placate the SEC, Nasdaq might well change various LSE practices "voluntarily". How will the FSA deal with that? In addition the SEC is unlikely to be content with rules specified by it and rejected by the FSA being inapplicable to US companies listing in London. That part of the market could immediately be affected. Nor should the impact of the new extradition regulations be ignored. I propose to explore those in a future article, but it is now extremely easy for United States authorities to obtain extradition of British subjects, the judges have very limited power to intervene, and the crime of choice for which this is used is overwhelmingly financial services crime, not terrorism. I doubt that many would be willing to risk inadvertantly assisting some criminal offence in the United States which could lead to them being extradited. If in doubt there will not be too many willing to do anything other than "voluntarily" follow the SEC line, just in case they inadvertently assist in the contravention of some linked provision of US law. Even if extraditionthat is a remote possibility, the prospect is so appalling that people will shy away from it.

It is good that Mr Balls sees there is a problem which needs addressing. Sadly all that the present steps are likely to achieve is to give people a false sense of security that things will not go pear shaped if the Nasdaq bid succeeds. Hopefully for one reason or another it will fail and we will never find out the truth.

Michael J. Booth QC