Law Reform, Administrative Authoritarianism and Power in China

I was rereading Stanley Lubman’s article, “Bird in a Cage: Chinese Law Reform After Twenty Years,” 20 NW. J. INT'L L. & BUS. 383 (2000). For Lubman, a foundational source of China’s difficulties with the creation of law and legal systems, of course, is the fundamental problem of the Communist Party and the place of the CCP within the state apparatus. See, e.g., id., at 405. I do not deal with that here, but have suggested an alternative approach elsewhere. Larry Catá Backer, “The Rule of Law, the Chinese Communist Party, and Ideological Campaigns: Sange Daibiao (the 'Three Represents'), Socialist Rule of Law, and Modern Chinese, Journal of Transnational Law and Contemporary Problems,” Vol. 16, No. 1, 2006 .

Still, Lubman makes a point in that article the consequences of which are worth developing. He reminds us that “To give concrete form to economic reforms, the Chinese state has generated an extraordinary amount of legislation. . . . As a result of this energetic legislative activity, which has been but sketched here, China now has a large body of legal rules.” Id., at 386. But, Lubman suggested, lots of rules do not necessarily make a legal system. Among the several factors contributing to what he calls Chinese legal fragmentation (Id., at 390), one is particularly interesting for my purposes here:

“The language and phrasing of Chinese legislation and rules create wide scope for administrative discretion in interpretation because a major goal of Chinese legislative drafting is "flexibility." As a result, at all levels Chinese legislation is intentionally drafted in "broad, indeterminate language," which will allow administrators to vary the specific meaning of legislative language with circumstances. Standard drafting techniques include the use of general principles, undefined terms, broadly worded discretion, omissions, and general catch-all phrases.” Id., at 391.

There is a small but interesting insight here that is buried but worth extracting. The rapidity of changes to Chinese law (the Company Law, the securities laws, anti-takeover legislation, for example, and related economic regulation) has two effects. The first is the intuitively straight forward, well expressed by Lubman—the attempt to create a system of laws that might propel China closer to conformity with a least minimal Western or global expectations of rule of law systems). The second is intimated by Lubman’s observation of the effect of Chinese legislative “flexibility.” Lubman is right that this flexibility gives bureaucrats a certain degree of power. But the power to which Lubman refers is merely that given in any current statute.

I would posit that the extent of bureaucratic power is actually far greater. Administrative power is not merely a function of the ambiguity in any given statute, it is also a function of the rate at which these rules are themselves amended. Rapid rule amendment tends to shift power to those who create and administer the rules and away from those who must change their behavior to conform with the rules. The more quickly rules change, the more dependent the target population is on administrators for guidance. As well, the less effective the non-governmental sectors are in defending people against administrative determinations. As a result, the population remains more dependant on the state and its apparatus. While a formal rule based system is created, there are lots of rules, the state retains a monopoly of knowledge about the workings of those rules. Without a stable law system, outside lawyers and other elements of the non-state sector cannot build the necessary expertise to adequately defend clients in proceedings, or to effectively use the law for the benefit of their clients.

A moral worth some thought—sometimes rapid legal change can be as destabilizing as no change at all. Sometimes great changes can work to perpetuate an authoritarian political structure more effectively than a stubborn refusal to enact a complex formal system of law. Sometimes, even a formally adequate legal system can, by appropriate control of the rate and nature of changes in its content, can reduce the value of that system to insignificance. Chinese experience suggests the continued value of Aristotle’s insight of the danger of legislative changes, a danger much augmented by a great increase in the rate and extent of change: “For the law derives all its strength from custom, and this requires long time to establish; so that, to make it an easy matter to pass from the established laws to other new ones, is to weaken the power of laws.” Aristitle, Politics, Bk II, ch. VIII (A web translation of Aristotle’s Politics may be found by clicking on this link).

Rapidly changing law loses its substantive effect, becoming a shadow of itself. The production of a swiftly changing set of legal codes may generate no legal system at all. Worse, it may produce a certain instability. On the one hand, the system vests great power in those who control the production of legal rules and the formal sites of their administration—the courts and the bureaucracy. On the other hand, the system risks losing authority as people avoid the arbitrariness of the new and changing patterns of compelled behavior, through the development of alternative private or informal systems. Aristotle decribes this tension as a balancing act of sorts: “for the alternations will not be of so much service as a habit of disobeying the magistrates will be of disservice.” Aristotle, id. Luhman intimates this result. Other commentators have demonstrated this tension and the resulting reality in the decade after Luham wrote. See Symposium: China: Law, Finance, Security, Journal of Transnational Law and Contemporary Problems,” Vol. 16, No. 1, 2006.

Beneath the formal and official system of laws, then, what remains is a very real and powerful system of custom and habit. In China this traditional system, like the formal system weaved in the legislative looms of Beijing, and the system for the enforcement of those norms, remain in the hands of the governmental class with the authority or power to impose it. The consequence is a continuation of what, to Western eyes looks like an authoritarian administrative state in which legal alterations may have little effect. But unbderstand also, that the custom and habit of which I refer is not merely the usual reference to the old Confucian mandarinate system or the socio/legal culture which it sustains. I refer, instead, inthe first instance, to the customs and patterns of institutonal behavior forged over the course of the last half century under the Chinese Communist Party. Those networks of relationships, power diffusion, and habits of decision making cannot easily be overcome by "paper" statutes or "paper" rules. The reality of the socio/legal culture of China, and especially of the continued existence of multiple power apparatus (State and Party), complicates any attempts at Western style positivist legal reform (that is, of legal reform through the expediant of enacting pretty words on clean paper by a formally constituted legislature for the outside world to see and approve). Larry Catá Backer, “The Rule of Law, the Chinese Communist Party, supra. I do not mean to suggest that rule of law is impossible in China. I also do not suggest that harmonization of economic regulatory standards is impossible. I do suggest that pressuring China to conform to Western forms of rule of law society is playing a fool's game--a game that the Chinese will be more than happy to play for its own advantage. Frankly, were I in the Chinese leadership I would do the same. But this strategy poses a great danger for China in the long run. The danger for China is that, while its legislative organs are busy producing framework legislation satisfying to the West (and of dubious internal effect, especially given the penchant for less Western oriented implementing regulatory systems, the point that Lubman is at some pains to correctly stress (“Bird in a Cage: Chinese Law Reform After Twenty Years,” 20 NW. J. INT'L L. & BUS. 383 (2000)), the Chinese leadership will lose sight of the critical necessaity of shaping their own indigenous rule of law socio-political culture. Recent Party ideological campaigns point in the right direction, but it is unclear whether there is the will to follow through. Fifty years of Party insttutionalization provides at least the normative foundation for order beyond individual will. Is there a sustained courage among Party leaders to implement these norms effectively in a way that is sensitive to individuals, the collective, and effective political organization?

Aristotle reminds us that formal legal structures have definitive limits, and may actually further objectives inimical to their forms. Thus, he tells us, authoritarian states “where the supreme power is in the laws, may not be democratic, and yet in consequence of the established manners and customs of the people, may be governed as if it were.” Id., Bk. IV, ch. V (A web translation of Aristotle’s Politics ). But states that appear to adopt a more law based system may instead produce an inclination to what Aristotle describes as oligarchy, “for the people do not easily change, but love their own ancient customs; and it is by small degrees only that one thing takes the place of another; so that the ancient laws will remain, while the power will be in the hands of those who have brought about a revolution in the state.” Id (A web translation of Aristotle’s Politics). Using conformity to Western legal standards as a veil behind which to entrench limitless individual discretion and the will of factions will do more to undermine recent efforts at socialist market ecopnomy and democratic authoritarianism centered in the Party than any concerted efforts by the West to undermine the current system of Chinese governance.

A Valuable “Cultural Learnings of America”: Borat, College Boys, and Law as Protection Racket

Sacha Baron Cohen, has made brilliant use of the media in a variety of comedy sketches that provide a tremendous amount of mocking socio-cultural commentary to a society, in England and the United States, that had, until recently appeared to lose their sense of humor. The boyakasha website provides a tremendous amount of fan based information.

One of his characters, Ali G, rocketed Cohen to stardom first on England’s Channel Four and then on the U.S.’s HBO. Ali G purports to be a person of indeterminate ethnic extraction whose entire persona is based on his interpretation of British Black street culture. He has interviewed a great number of prominent people from John McCain, to Ralph Nader, to Noam Chomsky to high ranking English clergy.

Cohen developed a number of subsidiary characters to more sharply draw on the possibilities of mocking the foibles of modern Anglo-American culture, society and politics. One of them, Bruno, purports to be a gay Austrian television presenter. The other, one of the most successful was a character named Borat Sagdiyev, a television reporter ostensibly from a send up Republic of Kazakhstan, whose reporting on the goings on in the United States and England brought all of our hypocrisies, cultural pimples and self delusions into stark relief.

All of these characters are at their most effective when they are able to induce the people interviewed, from high profile members of the elite to the most ordinary of people, to drop their guard. Usually it is quite funny, sometimes it is disturbingly revealing. “The British comedian has perfected his act as the apparently naive reporter whose enthusiastic offensiveness either leaves his interviewees in shock or persuades them to reveal a little too much of their own prejudices.” Ian Youngs, “How Borat Hoaxed America," BBC, Oct. 23, 2006.

The elite, and especially the social, political and media elite, does not approve. Media coverage of Cohen’s characters has been stiff at best, and usually disapproving. This approach was especially intense in connection with the release of the first full length treatment of the Borat character, as he interviewed his way across the united States. The movie, “Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan” released Nov. 3, 2006 in the United States. An example is recent coverage in the BBC (cited above) on the way in which Cohen is able to “dupe” the “victims” who participate in his mock interviews in the making of “Borat: Cultural Learnings.”

Most of Borat's victims were ensnared in a similar way. They would be contacted by a woman calling herself Chelsea Barnard from a fictional film company, One America Productions.

They would be told about the foreign correspondent making a film about life in the US, with the pitch tailored to each person's specialist subject.

Then on the day of the interview, they would be presented with a release form at the last minute, be paid in cash and, finally, Borat would amble in, beginning with some serious subjects before starting his provocative routine.

"We're all primed to do an academic dissertation, we did our homework," says yoga teacher Grace Welch, another member of the three-strong feminist panel.

"And as we're talking, out of the blue, he says: 'Do you know Baywatch?'

"I knew something was going on but I didn't know what it was. I'm looking at the cameramen and everyone was stony-faced. And then he would come out with outrageous things."

Ms Stein first tried to throw Borat out when he started talking about women having smaller brains than men.

The producer persuaded her to carry on, apologetically explaining that Borat did not realise he was saying anything wrong.

But the final straw came when Borat asked the women to lift up their shirts at the end of the interview. Id.

The coverage drips with “moral” judgment, barely concealed accusation, and a bit of condescension; and not just the press. The Republic of Kazakhstan has shown both an inclination to suppress and to humor the Borat character. In November 2005, reports began floating of possible legal action against Cohen by the government of Kazakhstan. See “Kazakh Challenge to Ali G,” BBC, November 14, 2005 (“The Kazakh Foreign Ministry said it may move to prevent Cohen presenting the country in a "derogatory way".”). By December 2005 the Kazakh government shut down Cohen’s Ali G web site; see “Kazakhs Shut Ali G Star’s website," BBC, Dec. 14, 2005. Still, by September 2006, the Kazakh government had toned down its rhetoric, though distribution of media products containing the Borat character would likely remain in short supply within Kazakhstan. See “Kazakhs ‘See Funny Side of Borat,’” BBC, September 29, 2006. Yet, in the same month it was announced that the president of Kazakhstan would fly to the United States ahead of a Kazakh publicity campaign to combat the image of Kazakhstan portrayed by Borat; reportedly the President of Kazakhstan intended to raise the issue of Borat with American President Bush. “Bush to Hold Talks on Ali G Creator After Diplomatic Row,” The Daily Mail, Sept. 12, 2006 (“President Nazarbayev will visit the White House and the Bush family compound in Maine when he flies in for talks that will include the fictional character Borat.”). It seems that Cohen no longer has to write his own material; but, then, that is the point.

Life imitates art on other fronts as well. For example, consider the reaction in Germany to the “Borat: Cultural Learnings” movie. It appears that a human rights group has filed a complaint against the movie in Germany. The Age.com reported on November 2, 2006 that the European Centre for Antiziganism Research apparently filed a complaint with the Hamburg state prosecutor arguing that the movie slanders gypsies. But not a peep from the Germans about the sequences featuring Jews, including the already notorious song sequence, “In My Country There is Problem (Throw the Jew Down the Well)” sequence. The cultural impact of that number is hinted at by its imitations on You-Tube. Of course, the notoriety (and perhaps even infamy) of this sequence rests not only on the song itself—its lyrics as a condensed thesis of core ideas shaping Jew hatred at its most irrational—but also for the way it has “outed” a stratum of thought that, like that in the lawsuit discussed below is usually nicely concealed).

In a greater twist of life imitating art, the New York Times reported on November 11, 2006 that a lawsuit had been filed in Los Angeles County court by several people who had been interviewed by Borat, and whose interview appeared in the movie “Borat: Cultural Learnings.” Ben Sisario, “Students Sue Over “Borat” Roles,” The New York Times, Nov. 11, 2006 at A18. The plaintiffs, a number of students at an unnamed university in South Carolina, were appear in the movie making racist and misogynistic comments to Borat. The New York Times reported that the plaintiffs allege that they were “plied with liquor by the production crew before their scene and thus ‘engaged in behavior that they otherwise would not have engaged in.’” (Id.). The suit seeks injunctive relief (to prohibit displays of plaintiffs’ likeness in the movie) and for monetary damages (of course). (Id).). At least one web site has posted the complaint, John Doe v. One America Productions, Superior Court of California, Los Angeles County, Case No. SC 091723. The Complaint, filed November 9, 2006, asserts causes of action for (1) fraud, (2) rescission of contract, (3) common law false light, (4) statutory false light, (5) appropriation of likeness, and (6) negligent infliction of emotional distress.

While the Complaint, as a whole, suggests that Borat could be right—life tends to imitate art, even at its most absurd, I will focus a socio-legal comment or two on one aspect of the litigation—the fist cause of action for fraud. Several key allegations are worth noting in that regard. First, the Complaint alleges that the plaintiffs were induced to appear in the movie because they had been told by defendants that the movie would not be shown in the U.S. (and that this was a lie). Complaint paragraph 12. Before the filming began, the plaintiffs (at least one of whom was under 21 years of age (Complaint paragraph 13)) were allegedly induced to drink heavily. Complaint paragraphs 13-14. Now nice and drunk, the plaintiffs were induced to sign a “Standard Consent Agreement. Complaint paragraph 14. The participation of the plaintiffs in the movie, accompanied by more drinking, immediately followed. Complaint paragraph 15. Now here is the key:

“Believing that the film would not be viewed in the United States, and at the encouragement of DEFENDANTS, PLAINTIFFS engaged in behavior that they would otherwise not have engaged in. Then Film was indeed released in the United States and PLAINTIFFS’ said behavior was included as part of the FILM without their consent.” Complaint paragraph 17.

Let us briefly consider this cluster of allegations and their purported legal effects. There are a number of ways of looking at these factual allegations.

1. The facts might suggest that the plaintiffs appeared to be happy to reveal their opinions about women and minorities, but only for foreign audiences. That suggests that they are engaging in serial acts of fraud every time they speak on these matters in the United States and fail to reveal their real opinions. Where the people to whom they speak suffer damage as a consequences, I guess the plaintiffs have now opened themselves up to multiple lawsuits crafted on the framework they themselves use for their own suit. Funny!

2. Let’s try another one: plaintiffs suggest that “demon liquor” made them act involuntarily. Essentially, plaintiffs appear to suggest that the liquor released their inner demons that made them act unlike themselves. It was the liquor talking, not them. I don’t have much to say about this, other than that generations of people have used this line effectively to cover a host of antics, more of less successfully, in the court of inter personal relations. Alcohol and volition have had an interesting relation in law. I am sure that strange relationship will only be amplified in this case (assuming it survives long enough to get to trial).

3. Here is another variation, I suppose: our innocent plaintiffs were tricked into “acting out” by a combination of alcohol and manipulative statements. Effectively, our innocents were, in ways intimately understood by the criminal defense bar, entrapped into committing offense—or better put, into revealing their baser opinions. Entrapment is discouraged in law—though not necessarily in everyday human interaction. These opinions, no less deeply held because they remained unuttered, are effectively protected against disclosure by the law. Trickery can constitute an involuntary disclosure that is somehow actionable.

Plaintiffs appear intent on teaching us a lesson that Sacha Cohen as Borat could only intimate in the film: fraud is a contextual thing, and the law privileges some kinds of fraud over others. In the world as plaintiffs might construct it, it is perfectly acceptable to pass through life perpetrating a fraud on all they deal with respecting their own identities and opinions. In plaintiffs’ world, law protects their freedom to suggest to women and members of minority groups, perhaps like those from whom they seek jobs or other favors, that they hold opinions irreconcilable with those they actually hold, without cost, irrespective of the costs to the persons who hear this stuff. But giving plaintiffs permission to speak their minds (by suggesting to them, for example, that their truthfulness will never be revealed to the groups they want to continue to mislead) itself can constitute a fraud against which the law provides redress.

Alternatively, plaintiffs seem to suggest that law protects socially constructed constraints (sobriety) and actively guards the boundaries of permissible consent. Indeed, one might see in the way the Complaint is constructed both a sensitivity to these principles and a great effort to exploit them. Thus the heavy emphasis on alcohol, the corruption of the under aged, the sweet-tongued lies of older and more powerful people (drawing on the inequities of power disparities with overtones to sexual harassment discourse), and the encouragement to say things that perhaps they did not mean to please the people for whom they were performing. But perversion comes in a variety of flavors and taints in a number of ways. It is possible to use good concepts for bad ends. It is likely that great protections can be turned into useful means of avoiding responsibility. The courts will eventually tell us which is the better way to construct the plaintiffs in this case—innocents tricked into “not being themselves” or ordinary humans indulging an opportunity to be themselves without cost who, when the true cost is revealed try to seek cover in principles that were never meant for them. Whichever way the court leans, there remains the lingering feeling that if the suit is successful legally cognizable fraud will have been used to privilege a socio-cultural fraud. Surely that ought not be right.

It may well be true that “Mr. Cohen and his staff lie really well” (Complaint paragraph 2), but the truths that his characters reveal is a sight to behold. And the attempts to use the law of fraud to permit those who participated to perpetrate their own fraud—the unchecked power to spin comments that they make—is both the greatest irony and the greatest lesson of “Borat: Cultural Learning.” The lawsuit, more than the movie, perhaps, provides us with a window onto the greatest “cultural learning” of our own society, its law, and its pathologies.

On the Conviction of Sadam Hussein

So, Saddam Hussein has been convicted and sentenced to death by hanging. As reported in Yahoo News today

”The nine-month trial had inflamed the nation, and three defense lawyers and a witness were murdered in the course of its 39 sessions.

"Long live the people and death to their enemies. Long live the glorious nation, and death to its enemies!" Saddam cried out after the verdict, before bailiffs took his arms and walked the once all-powerful leader from the courtroom. There was a hint of a smile on Saddam's face.

With justice for Saddam's crimes done, the U.S.-backed Shiite prime minister called for reconciliation and delivered the most eloquent speech of his five months in office.

"The verdict placed on the heads of the former regime does not represent a verdict for any one person. It is a verdict on a whole dark era that was unmatched in Iraq's history," Nouri al-Maliki said.” Steven R. Hurst and Hamza Hendawi, “Saddam Co-Defendants Sentenced to Hang, Yahoo News, Nov. 5, 2006

I don’t write about the trial or the verdict, other than to say that Saddam Hussein has joined a long list of monarchs condemned to death after public proceedings in the form of a trail—Charles I of England, Louis XVI of France, and the defeated leaders of Nazi Germany and militarist Japan, and the political enemies of Marxist Leninist Regimes (especially under Stalin in the 1930s and Mao Zedong in the 1960s). In each case, the trails were meant as theatre. They served to discredit the ancien regime and legitimate the process of regime change. They also served to strip authority from the body of the representative of the prior political order. Then, with that representative reduced to mere man, the man—and not the state—is condemned as mere criminal; he suffers the same penalties as other bandits and outlaws. The state is preserved and punishment for its sins inflicted on the body of its proxy. The state is now reborn. In the case of the Marxist Leninist Regimes they served either counter revolutionary purposes or as an element of "cold" civil war.

All of this is necessary I suppose, as humans indulge in the ceremonials of legitimacy and the passage of power. The Yahoo News report quoted above captures this aspect of the trial and conviction quite well. The new political order sits in judgment on the old. The old order is represented by proxy. Saddam Hussein becomes the old order. But he is also less. He is merely a man, no longer the representative of the state. He sits as a thief, a usurper of state power. Now just a man, his actions, which until his removal were also the actions of the state (and thus that of the people), are now just the criminal acts of an individual. The tension between Saddam’s physical and symbolic bodies is nicely framed by the quotations by Saddam (still the head of state) and that of Nouri al-Maliki, condemning the man as well as the superseded regime.

But it should be clear that the source of these ceremonials, these rituals of passage, have only the most tenuous relation to law. To the extent this might be considered law, it is the law of state passage, of the passage of sovereignty, of revolution—stripped of its violence. We live in an age of managed conflict—there is no reason to treat revolution differently from other forms of political warfare. To legitimate the law of revolution, a template is necessary. The West has, over the past four centuries chosen the criminal law as its template. And why not? The criminal law is at the heart of the legitimate power of the state. It represents the legitimate use of violence. It is through the criminal law that the people assert self discipline. There is no better way to de-legitimate the old regime and its head than by the deployment of the criminal law. The symbolism is powerful and serves the successor regime well.

But more importantly, perhaps, it spares the state from looking too closely into its own complicity in the acts of the old once legitimate state. Saddam serves as a great mediating object. Responsibility is imposed on the leader, who perversely, is now stripped of the legitimacy of leadership. The state and its citizens are free to indulge the idea that they were either stripped of any power of resistance (at least prior to the revolutionary events leading to change) or that they were the innocent victims of the ferocious criminality of the leaders of the prior regime. As a consequence, the state remains intact and can, under its new leadership, pick up where it left off. Power has shifted, and the normative basis of the social order may have changed. A little de-Baathification and the nation is ready to rock and roll again.

But this has little to do with law. We have taken the language of law and now contorted it for another purpose—the management of politics. This is not necessarily a bad thing. But it has its dangers. Conflating the ordinary approaches of the criminal law to the extraordinary circumstances of revolutionary change (including changes in the aftermath of war) reduces the enormity of the actions subject to trial (Saddam Hussein was convicted of multiple murders) and makes every criminal activity potentially political. But in a political community founded on principles of democratic governance might find such a conflation uncomfortable. The United States is already experiencing the difficulty—where it has become increasing common, for example, to charge any threat (between spouses, on a school yard, etc) as making a terroristic threat.

Yet we have institutionalized this approach in domestic legal orders and now in the system of the International Criminal Court of the Rome Statute. With the institutionalization of conflict management, including the management of revolution and war, the world will become a very different place. We have a sense of the new criminal law of politics and war in the trial and conviction of Saddam Hussein. We may see the rise of a new political law of crime as well. Only time will tell whether this new form of conflict management is more successful than the one it seeks to replace.

Monitor and Manage: MiFID and Power in the Regulation of EU Financial Markets

I presented the following work as part of a panel Panel on Financial Services: Free Movement and Harmonization in the EU. This was one of a number of panels at the recently concluded conference: EU Financial Services Regulation: Completing the Internal Market, held at the Institute of Advanced Legal Studies, London, United Kingdom, October 26, 2006 and excellently organized by the Academy of European Law and the Centre for C Commercial Law Studies, Queen Mary, University of London) (Event 206R08). My thanks to the organizers for putting together an excellent event, and particularly to Professor Takis Tridimas of the University of London Queen Mary, and Dr. María Pilar Núñez Ruiz, Course Director/Responsable de Projet/Projekleiterin European Business Law, Academy of European Law (ERA).

A summary of my presentation, Monitor and Manage, follows:

MiFID, the Market in Financial Instruments Directive (Directive on Markets and Financial Instruments 2004), is due to come into force on 1st November next year. MiFID will exact a greater degree of transparency—echoing American principles of market regulation. It will also require adherence to a "best execution" standard for all clients. Most analyses have focused on the costs and implementation of these requirements. Transparency is viewed as either a burden (or opportunity) because of the need to produce, keep and manage more data. Markets in information will surely grow. The “best execution” standards provide a greater means of standardizing industry practices—with the potential benefit to regulators to which power over market behavior should flow.

MiFID is one of a batch of harmonizing legislation proceeding from the so-called "Lamfalussy process" (EC Commission Staff Document 2004). The process involves the enactment of framework legislation (Level 1) to be followed by more detailed implementary legislation based on the framework adopted (Level 2). This is eventually to be followed by a comitological process among regulators for greater integration in fact (Level 3) (Ferrarini 2006) and strengthening enforcement (Level 4). The framework provisions, constituting the "Level 1" text, came into force on 30 April 2004 (Directive on Markets and Financial Instruments 2004). Level 2 legislation has started coming down the regulatory pike in the form of an implementary regulation (Implementing Regulation 2006) and directive (Implementing Directive 2006). Level 3 will focus on implementation and enforcement of Levels 1 and 2 requirements through “supervisory convergence” among the regulatory authorities of the Member States and has been advanced in two influential reports of the EU’s Financial Services Committee (the Franq Reports of 2005 and 2006) (Financial Services Committee 2006; Financial Services Committee 2005).

I will focus on the potential ramifications of the surveillance and regulatory aspects of MiFID in terms of nature of the character of the regulatory power in the financial products sector. Specifically I will focus on the effects of the creation of the markets for information created or augmented through MiFID in terms of the regulation of financial markets and the entities they serve. Particular attention will be paid to the effects of MiFID on consequences in terms of public and private anti-corruption campaigns, the use of these regulations to influence the behavior of issuers and market middlemen, and the potential utility of these regulations to elements of civil society and the media in their campaigns for corporate and capital social responsibility.

The E.U. has portrayed MiFID as a multi-objective innovation in legislation. In a June 2006 press Release,

“Internal Market Commissioner Charlie McCreevy said: "MiFID is a ground-breaking piece of legislation. It will transform the landscape for the trading of securities and introduce much needed competition and efficiency. It is good news for investors because it will both increase their level of protection and give them greater choice. It should drive down the cost of capital, generate growth and boost our competitiveness. Once the European Parliament has finalized its formal work, we must move quickly and robustly to ensure equivalent and effective implementation by November 2007. All firms in the business should now prepare.

MiFID will remove obstacles to firms' use of the EU-wide investment 'passport', foster competition and a level playing field between Europe's trading venues, and ensure a high level of protection for investors across Europe.

The implementing (or "level 2") measures develop a number of the provisions set out in the framework (or "level 1") Directive adopted in April 2004. Having emerged from a lengthy consultation and negotiation phase, they are balanced, proportionate and sensible. They will protect investors and consumers without imposing unnecessary compliance burdens on firms” (E.C. Commission 2006).

The EC Commission offered seven (7) reasons for pushing MiFID as a necessary replacement to the Investment Services Directive (ISD) (Commission Directive 93/22/EEC). The Commission argued that ISD (1) failed to provide sufficient harmonisation to prevent dual/multiple regulation of firms doing cross-border business; (2) offered little consumer protection with respect to business models and market structures that emerged after adoption of ISD; (3) failed to regulate the full range of investment services; (4) did not provide a satisfactory framework for competition between exchanges and other marketplaces; (5) fragmented liquidity and created barriers to cross border transactions through its failure to adequately harmonize the regulation of exchanges and other marketplaces; (6) failed to provide an adequate level of supervisory co-operation within and between member states; and (7) was generally otherwise out of date and inflexible (H.M. Treasury 2005, 9).

Of special concern was the perceived need to control and harmonize regulation of alternative markets, and in particular (i) multilateral trading facilities (MTF), (ii) other over the counter facilities and particularly systemic internalisers, firms executing orders from their own account (SI). “The MiFID requirements on transaction reporting263aim to ensure that firms report details of transactions in any financial instruments admitted to trading on a regulated market quickly and accurately to the appropriate competent authority.” (Financial Services Authority 2006).

With respect to Multilateral trading facilities (MTF), the Treasury had this to say in its December 2005 Report: “Since the mid-1990s there has been a growth in organised marketplaces which have not sought designation as exchanges. These have been run by investment firms and banks using a wide variety of business models and trading a wide variety of financial instruments. MiFID defines such markets as MTFs and establishes a EU-wide set of regulatory standards for them. The purpose is to help facilitate competition between venues for the execution of orders, at the same time as guaranteeing that all market places are governed by standards which seek to protect market integrity.” (H.M. Treasury 2005, 10).

The Treasury report extracts two objectives that may not be as compatible as one might like. The setting of uniform regulatory standards is not necessarily competition enhancing, especially if regulatory competition has economic and market efficiency effects. If one views the development of off regulatory markets as evidence of the opinion of the markets on the efficacy of the current regulatory framework (and its potential privileging of some forms of market making over others), then the effort may well have perverse effects.

Like MTFs, SIs present a unique regulatory opportunity from which MiFID does not shy. And indeed, the case of Sis is emblematic of the overarching purposes of MiFID, which is to construct a comprehensive regulatory regime over markets as they have metastasized since the good old days of markets as physical spaces in which people (licensed by the state) traded specific instruments (controlled by the state). The Financial Services Agency was blunt in its July 2006 Report about this aspect of the MiFID regulatory scheme, an aspect it sought to embrace. Referring to MiFID, the FSA had this to say:

“It creates a new, comprehensive EU-wide pre- and post-trade transparency regime for trades in any share admitted to trading on an EU RM, whether those trades are executed on an RM, an MTF or by an investment firm operating outside those systems – i.e. Over-the-Counter (OTC).
• The details of the pre-trade requirements differ according to type of trading venue and trading methodology. They will apply to transactions on RMs and MTFs and also to trading undertaken by investment firms – designated as ‘systematic internalisers’ (SIs) – which, on an organised, frequent and systematic basis, deal on own account by executing client orders outside RMs and MTFs. The details of the post-trade transparency requirements are the same across all trading venues.
• MiFID ends the discretion which Member States had under the ISD to require certain transactions to be executed on an RM (the so-called ‘concentration’ rule). The UK had not exercised this discretion.
• There are also changes to the present provisions requiring the reporting to competent authorities of transactions in instruments admitted to trading on an RM. The main purpose of these changes is to help regulators uphold the integrity of markets by enabling them to obtain a more complete picture of their firms’ trading activities than they can at present” (Financial Services Authority 2006).

Yet even this approach already shows the difficulties and contradictions of the regulatory scheme. Comprehensiveness might well be an object—but the universe within which comprehensiveness is sought is quite constructed indeed. Thus for example, this wholly regulated world (at least for the moment) is restricted to instruments admitted for trading on an EU RM (Regulated Market). While those securities may include securities (essentially equities traded on MTFs and Sis (though they might not!) they certainly do not include the growing range of securities not registered on RMs. There appears to remain a large unregulated space still in the securities markets more appropriately conceived.

Lastly, it is clear to all regulators, at least in Britain, that the new transparency obligations can lead to new markets in information provision. With respect to the growth industry in private information services that MiFID creates, the FSA appears intent on a robust global market:

“We are proposing that firms could use their choice of FSA-approved Trade Data Monitor/s (TDM) to meet their MiFID post-trade publication obligations. Firms could choose on a per trade basis which TDM they want to use. However, to avoid double counting, each trade should be reported only once and to only one TDM” (Financial Services Authority 2006, 106).

We do not intend to regulate the number of TDMs. RMs, MTFs, data publishers and new service providers could choose to be TDMs and be admitted to our list of approved entities. This could include non-UK RMs and other non-UK entities. Some TDMs may also act as data publisher/ consolidator. We would publish a list of TDMs on our website so data consolidators would know where to source the trade information (id. 107).

It is possible that some TDMs may choose to outsource some of their services. It is important to note that TDMs would still remain ultimately responsible for meeting their obligations irrespective of whether there are separate outsourcing or other agreements in place. (Id. 107).

MiFID carries over certain ISD exemptions under MiFID Article 3, that permit Member States to exempt firms providing investment advice and/or receiving and transmitting orders. Exemptions are only available where those firms are otherwise regulated at the national level, not be allowed to hold clients’ funds or securities and only transmit orders to a limited list of entities. There is a significant consequence to exemption: Where a member state exercises this exemption the firm inside it cannot provide cross-border services or establish a branch in another member state without applying for separate authorisations in the country or countries concerned.

With the possible exception of the new markets in information, the U.K. Treasury’s response to MiFID has been guarded:

1.5 MiFID requires revisions to UK legislation (mainly to the Financial Services and Markets Act 2000 (FSMA) and its secondary legislation) but also to the Financial Service Authority’s (FSA) Handbook. This consultation document covers the changes to legislation that are required. The FSA will publish consultation documents in the first half of 2006 on proposals for required changes to its Handbook.
1.6 The Treasury and FSA are working together on the implementation of MiFID. This consultation document has been extensively discussed with the FSA. Likewise, the Treasury is involved in the preparation of the FSA’s consultation document. This is to ensure consistency across the implementation of the directive.
1.7 The Treasury and FSA have both committed to only go beyond the minimum necessary in implementing EU financial services directives where this is consistent with better regulation. This means where there is a market failure which requires correcting and the benefits of doing so demonstrably exceeds the costs. This approach will be applied to the implementation of MiFID (H.M. Treasury 2005, 4).

But the FAS has been more enthusiastic, appearing ready to transpose the language of MiFID into its regulation. The FAS might be less concerned because, other than a change in vocabulary, MiFID does little violence to the normative regulatory universe within which FAS has been comfortable. And it offers a bonanza of sorts to the industry facilitators—at least forma cynical perspective. It will take a tremendous amount of effort to learn and incorporate the new vocabulary and make the dozens of small but significant changes to operations that the new MiFID language might require.

So there you have it. From the EU’s perspective, the MiFID solves any number of problems. Even problems at are essentially conflicting in nature—for example consumer protection, efficiency and competitiveness in Europe. From the UK’s perspective, there is little to MiFID that is earth shattering—the vocabulary is different but the changes might be more or less marginal. I suspect that neither position has it right. More over, I am not convinced that MiFID solves as many old problems as new problems (or perhaps better put—new opportunities for making money from regulatory market distortions) it creates or at least facilitates.

Looking at the totality of that extremely complex project that is MiFID, it is possible to discern two very broad issues with which the entire project is effused:

A. The first is the relationship between regulating states and markets.

1. MIFID broadens the definition of markets (this is a key objective of the new framework)
--MTF (multilateral trading facility)
--SI (systemic internalisers)

2. MiFID looks to the creation (or more complete correspondence between) markets and regulators or regulatory units.

3. But at the same time it preserves the EU traditional segmentation approach to markets and securities regulation (one not unknown in the United States). The effect is to reinforce the policy that markets or trading in different forms of securities merit distinct regulatory frameworks. The issue is only in conceptualizing the differences and constructing the categories. But there is controversy with respect to both.

a. In the case of MiFID, that means that MiFID regulation is substantially limited to markets in equity securities;

b. Coupled with a willingness in the statutory framework to consider extension to other forms of securities markets after a trial run in equities regulation.

B. The second is that MiFID imposes a more focused regulatory regime targeting

1. Information generation; and

2. An enhanced power in the state (and its regulators) to intervene in the management of covered markets.

3. The basic objective is to broaden and deepen governmental power to directly intervene in the functioning of capital markets through the medium of “transactions in shares.”

I want to take this opportunity to highlight what I consider to be six most interesting ramifications of MiFID raised within the context of the broader issues with respect to which I have suggested MiFID is largely concerned. There are seven broad but related issues that MiFID raises that will be worth sustained review as this new broad attempt at regulating markets is implemented.

1. The ability of the private sector to organize markets beyond the regulatory powers/purview of the state will always outpace the ability of the regulating entity (the state/EU/etc.) to extend its regulatory matrix.

A. The move over fifteen years or so from the ISD to MiFID provides a template for the future. There is likely to be a MiFID II in the next decade.

B. There are already examples of possible available venues beyond the MiFID regulatory framework:

i. SI markets below current trading thresholds (this one is particularly interesting for the politics it has generated on the eve of the transposition of MiFID. In 2005 there were press reports of the problems to be created when the EC Commission indicated a desire to set the SI threshold at trading 15% of their own shares, with predictions of the addition of 400 new “markets” adding an additional compliance burdens in the tens of billions of Euro (City Compass 2005). By the summer of 2006, the Commission had retreated: “However, the European Commission dropped the 15% rule in early September. As a result, the compliance costs of MiFID for European securities firms have reduced significantly to a total spending of $1 billion, estimates TowerGroup” (FinExtra 2006).

ii. Virtual markets, internet markets (including games and simulations, virtual securities and the like)

iii. float markets

C. The regulatory framework—comprehensiveness within a limited universe of market trading in securities—invites avoidance. MiFID will increase incentives for the creation of new forms of investment vehicles. More importantly, it may adversely affect competitiveness by enhancing incentives for the creation of new (unregulated or differently regulated) fora in which to trade regulated and unregulated (or differently regulated) securities.

D. At the margin, it may create incentives for moving markets abroad. As the Americans learned after the paroxysm of burdensome regulation from Sarbanes-Oxley through the terrorism and surveillance provisions post September 11, 2001, markets are global and securities (and capital generally) easily translatable (Karmel, 2005).

E. The segmentation of regulation (in the case of MiFID through an initial concentration on equities markets) may result in market distortion (or at least have a market effect) by creating incentives to other forms of securities by people seeking to avoid regulatory burdens of MiFID.

i. MiFID thus can change character entirely, from a process-oriented scheme to a scheme with significant substantive value.

ii. There are parallels with similar American efforts in this regard. Compare, for example, the recent American efforts in regulation through Reg. NMS (Securities and Exchange Commission 2005); another attempt to recapture regulatory monopoly over markets by extending traditional forms of market regulation to markets that have evolved to avoid either the inefficiencies of those forms of markets or the burdens of the regulations over them. Like its EU counterparts, American regulators are seeking to recapture regulatory control of markets that have evolved beyond the forms reflected in traditional regulatory regimes.

a. As one market analyst suggested in the American context: “connectivity providers, such as extranet, direct market access, and FIX engine vendors, are the biggest beneficiaries of Reg NMS. Connectivity becomes increasingly important as the markets become more electronic and more formally linked. While the SEC’s intention was for investors to reap the biggest benefits, this unfortunately is not the case. The typical retail investor will likely see no difference in the way he or she participates in the equity markets, and the typical institutional investor’s job just got harder” (Celent Communications 2005).

b. I suspect a similar result in the wake of MiFID.

2. Governmental regulatory systems remain inefficient and incapable of a comprehensive extension of their control/coercion frameworks as long as regulation is limited by the territorial principle—however broadly applied. This is a lesson that Americans have slowly begun to learn even as they were congratulating themselves of the benefits of regulatory extension to the ends of the federal Republic. While the efficiencies of breaking through Member State regulatory barriers are positive, capital is no longer confined, even within the borders of the E.U. This will be a hard lesson for a Brussels newly come into its power.

A. An example of this limitation in MiFID: the connection between regulation and shares admitted to trading on EU regulatory markets.

i. This raises a tangential question: will shares traded only by EU MTFs and Sis now qualify as shares admitted to trading on EU RMs? Or better put, will such shares if not otherwise registered for trading on RMs now be required to so register? The effects on trading may be significant.

ii. But the FSA was clear that the MiFID would apply broadly even if only to a limited universe of financial instruments. They offered as an example the execution of a trade of a share traded on both the London and New York markets. Even if the trade was effected in New York, if the shares were also listed in London, MiFID would apply. However, if the shares are listed only abroad, MiFID might not extend to domestic execution.

B. Consider the perverse incentives:

i. Outsourcing of trading, and the constriction of complex multinational corporate trading enterprises to take advantage of territorially distinct trading environments.

ii. Emigration of “citizenship” of trading vehicles; with a consequential incentive to move capital transactions outside the EU.

iii. Enhancement of movement to a global free movement of capital model. In this effort the Europeans will be aiding efforts already (inadvertently enhanced by American regulatory effects).

a. Firms may seek to lower transaction costs in trading within unregulated (or differently regulated) global markets (or national markets) beyond the reach of EU regulators and MiFID.

b. This effect may be especially useful with respect to multi-listed shares when regulatory transaction costs are lower elsewhere.

c. There is an irony here: to the extent that MiFID does not apply (to certain advisors, certain securities, and certain markets) devolves back to the Member States, MiFID compounds the problems of territorially induced regulatory fracture. This may enhance regulatory competitiveness but works against market transactional efficiencies.

3. Likewise: MiFID perpetuates the foundational regulatory difficulty of the American approach (an approach that made sense perhaps in the 19309s but which increasingly appears more of an impediment than an enhancement to the attainment of policy goals in a global environment); a focus on transactions and not on consumers.

A. This approach substantially weakens the consumer protection effects of MiFID (but not its costs) and facilitates avoidance.

B. This approach provides the appearance of protection but avoids its substantive effects to any appreciable degree.

C. And it raises a related and quite troublesome issue: the resulting complexity of regulation appears to create the sort of markets in avoidance that tends to benefit the middleman classes—principally lawyers and regulators,

i. It is thus possible to characterize MiFID as a regulator’s scheme rather than a consumer or market efficiency program. There is a sense that MiFID, like the earlier MAD (the Market Abuse Directive) is a regulator’s undertaking.

ii. Complexity requires interpretation and usually increases the need for further regulation. The cycle is well known.

iii. There is another beneficiary—the political classes: regulatory complexities in the purported service of the populace increase the modalities of popular dependence on regulators and other professional classes of “protectors.”

a. The dependency model of the relationship of individuals to the state has only increased in the last century.

b. This is not necessarily a policy objective that has been fully aired or resolved. For some there is in MiFID another brick in the construction of a new feudalism

4. The transaction costs o regulation create great incentives to avoidance as capital seeks its most efficient modality on a global basis.

A. The effect is felt in both legitimate and criminal capital markets (cynically speaking, efficient financial crime pays).

B. The “tax effects” of regulation cannot be understated:

i. It is a necessary result of attempted regulatory monopoly (at least within a political territory); though on a global scale segment market monopolies (to the extent that regulatory monopolists compete) disfavors monopolist power.

ii. The generated costs of these effects are inevitably reflected in the market and the pricing of its products. If these costs generate comparative inefficiencies they can (a) reduce profits on an individual or aggregate scale) or at the limit (b) reduce the size and power of the market.

iii. It produces wealth leakages—to middlemen (lawyers, information purveyors, etc.).

a. It is unclear if aggregate welfare is increased. Substantial empirical study is required.

5. The greatest effect of MiFID is the creation (potentially at least) of robust markets in information.

A. Consider for examples the power in this regard of the new Trade Data Monitoring regimes described in the FSA 1006 report.

B. This new regime will produce significant competitive pressure on traditional information sources—especially traditional regulated markets that had enjoyed substantial information monopolies.

i. Are the Exchanges now closer to obsolescence? The recent merger activity among traditional exchanges suggests that they are conscious of this effect.

C. The extent of the effect will be a function of the success of MiFID in disaggregating markets in transactions for securities (the traditional primary activity of markets) from markets for information on transactions in securities (a new product that MiFID enhances). Disaggregation is the key here to industry creation (information) and regulatory segmentation.

D. The emerging markets for information on transactions in securities will generate its own regulatory distortions and interventions.

i. The FSA’s 2006 Report already points in that direction (pp. 105 et seq.).

6. MiFID continues and deepens a global process of privatizing surveillance. In this sense, MiFID may be not only a regulators’ undertaking, but more precisely an undertaking for the benefit of the police authority of the state (Backer 2004).

A. Since the last quarter of the 20th century, the state (at least in the West) has sought to do two things simultaneously:

i. It has sought to gather more and more information on all operations within its territory (and beyond to the extent relevant). The information has a variety of uses:

a. Law enforcement

b. Source of information in ongoing development of policy.

c. Availability for the benefit of various sectors of its stakeholders (the disclosure regimes of the American Securities laws for the benefit of the investor class is a classic example).

d. Development and influence on (in totalitarian regimes control of ) political, social, economic and other aspects of culture (that is information gathering has normative consequences well exploited by the state) (Foucault 1977, 170-177; Foucault 1978, 89-91).

ii. It has sought to privatize information gathering for its own use in the disciplining of social organization. Government has sought to make surveillance a reflex. It is organized as a “multiple, automatic and anonymous power; for although surveillance rests on individuals, its functioning is that of a network of relations from top to bottom, but also to a certain extent from bottom to top and laterally; this network ‘holds’ the whole together and traverses it in its entirety with effects of power that derive from one another: supervisors, perpetually supervised” (Foucault 1978, 176-177>).

B. MiFID represents another step in the implementation of systems of “[h]ierarchized, continuous and functional surveillance” (Foucault 1977, 176) through which “disciplinary power became in ‘integrated’ system, linked from the inside to the economy and to the aims of the mechanism in which it was practiced” (Id.).

C. The population itself embraces systems through which it serves as the very instrument of its discipline, but with a twist—resistance to participation in surveillance itself becomes a transgression. The emphasis is so great because the stakes have become so high—stability and the management of the state and its relations both domestic and international. This leads to the last point.

7. MiFID is a crucial element in another field of regulation. It serves as an important element in the management of conflict and crime. It serves as a nexus point for the regulation of economic activity, crime and political conflict.

A. MiFID’s multiple objectives thus add a layer of additional complexity, the resolution of which is deferred.

B. While the direct objectives of MiFID are to benefit consumers and the market (efficiency, competitiveness, protection); its more potent beneficiaries may be the police, military and secret service sectors of governments. Information, like munitions in an earlier age, appears to have become among the most important components of war. And war, like any other activity, is difficult enough to maintain without capital.

i. Market regulation in this sense can be understood as a method for the management of crime:

a. Anti-corruption campaigns (World Bank and Chinese Communist Parties are at the forefront of these at the moment; there is an irony there that I was pass by with only a nod).

b. Money laundering (gang activity as the leading form of banking for political and military campaigns waged by insurgent and anarchist groups)

c. Financial fraud (there is a growing conflation between banditry and politically motivated violence; consider the reluctance of the House of Lords to approve the extradition treaty with the United States (Nov. 2, 2006) in the wake of the use of anti-terrorism based extradition powers on English bankers and other financial types for violation of U.S. financial fraud or securities laws).

ii. Market regulation is also a weapon in the political and economic aspects of modern warfare:

a. Financing of terrorist or politically violent movements.

b. Attempts at market disruptions as a tactic of war by combatant organizations.

c. Criminal financial activity with politically destabilizing effects.

C. Where these activities are conflated there is a necessary convergence of the need for market surveillance and for the use of markets as a source for data gathering and the needs of the police and military wings of the state apparatus.

Putting all of this together, MiFID can be better understood. Indeed, it is impossible to understand MiFID except in its broader context. MiFID is at once about market regulation, the creation of new industry (information production), the privatization of governmental functions (surveillance and data gathering), and also the management of crime and of political conflict. Ironically, as a means of subsidizing traditional exchanges (by bringing competitors within the regulatory matrix within which they operate, MiFID’s utility is doubtful at best. It will have substantial effect.


Reference List:

Larry Catá Backer. 2004. “Surveillance and Control: Internal, External and Governmental Monitoring of Corporate Insiders After Sarbanes-Oxley.” Michigan State Law Review 2004:327.

Celent Communications. 2005. “Press Release: Regulation. NMS: One Rule to Bind Them All, Report Published by Velent.” New York, April 18, 2005.

City Compass. 2005. “Estimates of 400 new Exchanges from Brussels for MiFID” (July 27, 2005).

E.C. Commission. 2004. “Commission Staff Working Document The Application Of The Lamfalussy Process To EU Securities Markets Legislation A preliminary assessment by the Commission Services” (SEC(2004) 1459; Nov. 15, 2004).

E.C. Commission. 2006. “Markets in Financial Instruments Directive ("MiFID"): implementing measures close to adoption.” Brussels, 26 June 2006 (IP/06/846.).

Ferrarini, Guido. 2006. “The Harmonisation of Capital Markets Law in the EU: Assessments and Prospects.” Paper presented at the Conference: EU Financial Services Regulation: Completing the Internal Market (London, October 27, 2006).

Financial Services Authority. 2006. Implementing MiFID for Firms and Markets (July 2006).

Financial Services Committee (FSC) (2006), Report on Financial Supervision (‘Francq Report II’), February 2006.

Financial Services Committee (FSC) (2005), Report on Financial Supervision (‘Francq Report II’), July 2005.

FinExtra. 2006. “MiFID compliance bill could reach $1 billion” (October 4, 2006.

Foucault, Michel. 1977. Discipline and Punish: The Birth of the Prison. Trans. Alan Sheridan. New York: Vintage Books.

Foucault, Michel. 1978. The History of Sexuality; Vol. I: An Introduction. Trans. Robert Hurley. New York: Random House.

Gabaix, Xavier and David Laibson. 2006. “Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets.” The Quarterly Journal of Economics 121(2):505-540.

H.M. Treasury. 2005. Consultation Document: UK Implementation of the EU Markets in Financial Instruments Directive (Directive 2004/39/EC) (December 2005).

Karmel, Roberta. 2005. "Reform of Public Company Disclosure in Europe," 26 University of Pennsylvania Journal of International Economics Law 26:379.

Kentouris, Chris. 2006. “Regulations Rule: Despite Differences Reg. NMS and MiFID Converge on Best Execution and Require Metrics.” Security Industry News (September 4, 2006).

Lannoo, Karel. 2006. “European Financial Systems Governance.” CEPS Policy Brief 106:1-7. Brussels: Centre for European Policy Studies Paper (July 2006).

Sants, Hector. 2005. Speech by Hector Sants, FSA Annual Public Meeting 21 July 2005.


Legislation

Directive on Markets and Financial Instruments. 2004. Directive 2004/39/EC of the European Parliament and of the Council of of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC.

Implementing Directive. 2006. Commission Directive 2006/73/EC of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment f irms and def ined terms for the purposes of that Directive. OJ L 241/26 (Feb. 9, 2006).

Implementing Regulation. 2006. Commission Regulation (EC) No 1287/2006 of 10 August 2006 implementing Directive 2004/39/EC of the European Parliament and of the Council as regards record-keeping obligations for investment firms, transaction reporting, market transparency, admission of financial instruments to trading, and defined terms for the purposes of that Directive. OJ L 241/1 (Feb. 9, 2006).

Securities and Exchange Commission. 2005. Regulation NMS (effective Aug. 29, 2005). Release No. 34-51808; File No. S7-10-04, RIN 3235-AJ18.

Constitutional Abominations: President Bush’s Crusade Against “Activist Judges,” a Betrayal of the American Revolution?

As he has on so many occasions, the current holder of the presidency has used the prestige of his office to effect a constitutional abomination, and in the process to betray a fundamental purpose of the American Revolution. During the course of the current round of stump speeches for candidates in Georgia, the President was quoted as again blaming “activist judges” for the social imbroglio the nation has gotten itself into, this time in the form of the so-called gay marriage debate. He suggested that these judges were inappropriately “making law” rather than enforcing it. And he implied that the whole of the law making power of the nation rested with the Congress and the President, where it was placed over two hundred years ago by the Founders.

I will not comment here on the substantive aspects of his speeches. Whether or not this polity ought to embrace or suppress the institutionalization of marriage or marriage like institutions among people of the same sex is part of a larger debate among the members of the Republic’s polity respecting the nature and character of its social ordering. Those sorts of debates have rocked this nation almost since its inception and has touched on all manner of what had been highly charged debates involving slavery, language, religion, assimilation, and the rights of women. This issue is not different, and I expect some sort of resolution necessarily will be had for good or ill at the political level (including perhaps at the ultimate political level—the inclusion of socially coercive provisions in the national constitution). The value of that exercise is not my focus here.

Instead, I wish to comment on the President’s insistence on laying the “problem” (this time of gay marriage but it could be anything else; it doesn’t really matter) at the feet of a judiciary he charges with acting beyond the limits of its own powers. The courts, the President suggest, are not acting like courts, but like legislatures. To the extent that they indulge this penchant, they act extra-constitutionally. And those actions are not only wrong, but they might be void. Had he thought a little bit about it, he might also make a connection between this idea of “activist judges” and what the Supreme Court itself suggested (at least with respect to the actions of the Supreme Court of Florida in Bush v. Gore, 531 U.S. 98 (2000); available at http://www.law.cornell.edu/supct/html/00-949.ZPC.html ) in the election that first brought him to office. I have written about this in a slightly different context (Larry Catá Backer, “Race, 'the Race', and the Republic: Re-Conceiving Judicial Authority After Bush v. Gore,” Catholic University Law Review 51(4):1057-1114 (2002) available at http://www.personal.psu.edu/lcb11/complete%20articles.htm. There is a very definite idea underlying these references to “activist judging” and its harm to the state. That idea would posit that all of the lawmaking power is vested in the state, and the institutions of the state solely authorized to make law are its legislature (assisted by its executive). Judges are to serve that law making power by confining their activity to interpreting law, in a narrow sense, and to otherwise leave law to the lawmakers.

Sadly, what neither he nor the people who put these ideas in his head think about is that the arguments he is now making are very similar to those made several hundred years ago, not in the United States, but in Hampton Court, and not by an American President but by a king—James I of England and VI of Scotland. In 1608, James I/VI began what would ultimately end with the head of his son on a pike—the quest for an acknowledgement that lawmaking power was vested in the king and that he had the power to make (or unmake) the whole of the Common Law. A member of his judiciary, Francis Bacon, agreed, and in a well known essay suggested that “Judges ought to remember that their office is jus dicere, and not jus dare; to interpret law and not to make law, or give law; else it would be like the authority claimed by the Church of Rome, which, under pretext of exposition of Scripture, doth not stick to add and alter, and to pronounce that which they do not find, and, by show of antiquity, to introduce novelty” (Bacon, Francis. 1612. Essays and New Atlantis. No. 56, 225. Roslyn, N.Y.: Walter J. Black, Inc. (for Classics Club editions 1942)).

To this argument the great Common Law judge Edward Coke responded for the judiciary of England. In an equally well known set of writings, suggesting that the law making power of neither King (nor later King in Parliament) was absolute, and that such power to legislate as they might have was limited by the Common Law that stood apart from the legislative power of the state. The rights guaranteed by the great Common Law, starting with the principles of Magna Carta, could not be undone by the state but reflected the ultimate protection of the people against its agents. This great law was to be safeguarded by the judiciary. And thus in Dr. Bonham’s Case, Coke wrote reminded the us that “when an Act of Parliament is against Common right and reason, or repugnant or impossible to be performed, the Common Law will controll it, and adjudge such Act to be void” (Bonham’s Case 1610 275). Common Law stood against the lawmaker, and the judiciary was its great guardian. It was Coke’s notion of the limitations of state power, rather than that of Francis Bacon idea that the law was always subject to the whim of the legislator, that animated the Founders of the American Republic. While the English quickly embraced the idea of Parliamentary supremacy in the 18th century, the American colonial experience was more closely attuned to Coke’s ideas of “higher law” expounded by the courts, as a bulwark against state power and as a limitation on the power to legislate. It was in part to protect their Common Law rights as free English subjects that the colonists first sought to restrain Parliament, and then to rebel against the usurpations of that legislature when its acts were enforced by the Crown. While the great protection of these “higher law” standards was initially left to the “High Court of Parliament” (in Coke’s terminology), that idea eventually in the United States became vested in the judiciary when (unlike England) the judicial function was detached from the workings of Parliament.

In this sense, then, judges are not activists when they perform their most important judicial function—to interpret the “higher law” of the constitution. That the interpretation is unpalatable among some of the electorate does not in any way diminish the authority to say what the law is. First the Common Law, and then the "higher law" of the Common Law, preserved in a written constituion in the United States were created to stand apart and about the ordinary legislative power of king, or king in Parliament, or (eventually an American) Congress. It is in relation to that law that the judiciary's power becomes clear. And it is in the sense that the judges must speak the law, must apply what Coke called "Common right and reason" (Dr. Bonham's Case, supra), and must actively interpose the Law for the protection of the people against Congressional or Presidential usurpations. It is thus in this sense (not in its rdaical and liberal) twentieth century sense, that Madison's admonition in Federalist No. 78, the foundation of the American Federalist Society, must be understood: "The courts must declare the sense of the law; and if they should be disposed to exercise WILL instead of JUDGMENT, the consequence would be the substitution of their pleasure to that of the legislative body" (The Federalist No. 78 (Madison)). The courts MUST exercise judgment, they must interpose the law against the pleasure of the legislative body. But because they act as guardian's of the law rather than its master, because they represent the spirit of the nation (in a sense), then they may not substitute their own will for the will of the people inherent in the structure and principles of the law. Thus Madison commands activism of the American judicary but only in a fiduciary capacity (Locke is helpful here in understanding this notion of the fiduciary nature of authority in the American republic) in the exercise of its judgment. Yet the polity (and only the polity) has always the right to impose on itself another version of the “higher law” to which it wishes to bind itself and its judiciary. I have recently written in more detail on these ideas. Larry Catá Backer, Reifying Law: “Let Them be Lions, Yet Lions Under the Throne.” Law at the End of the Day, available at http://lcbackerblog.blogspot.com/2006/10/reifying-law.html.

Thus, when President Bush criticizes the judiciary, he stands in the shoes of James I, as an advocate of the supremacy of the legislator over law, and speaks the language of Francis Bacon, the king's apologist. One should remember, that this criticism of the judiciary is radical, that the Republic was founded by those who held to the inverse principle—of law over legislator, and who saw in the descendants of the Law Lords a protection in law against both Crown and Parliament. If the President dislikes the Law, then let him convene the people to reform it. The Constitution can always be changed when the people muster a sufficiently strong political will to do it.

When the President seeks to effect a similar result by hobbling the judges, he goes against a strong founding principle of the Republic. It is also undemocratic, substituting the lawmakers for the people in the construction of the fundamental rights of citizens. Just as Coke did, and later Locke (Locke, John. 1690. Second Treatise of Civil Government. Oxford: Penguin Classics (1964)), I prefer a stronger judiciary occasionally making errors of interpretive judgment, than a lawmaking power with unmake the law at its leisure.

But who is there to play Coke against President Bush's James I? The answer is surprizing perhaps--the current Chief Justice of the Supreme Court of the United States, John G. Roberts, Jr. In an address to the American Law Institute on May 15, 2006, the Chief Justice had this to say:

"I do want to touch briefly, this morning, on a topic that has been in the news lately, and that is the independence of the judiciary and what seems to many judges at least to be ever-escalating rhetoric attacking judicial independence. . . . The one thing we cannot do is have attacks on judges, whether in the form of insufficient resources, insufficient pay, or other more direct attacks that are motivated by disagreements with judicial decisions." John G. Roberts, Jr., Remarks at the Opening Session of the American Law Institute, Washington, D.C., May 15, 2006.

The Chief Justice was careful to tie notions of judicial independence to notions of the independence of law. Judicial independence, the Chief Justice suggested, is "vital . . . to implementing the rule of law." Id. This relationship between independent judiciary and law is something that should not be taken for granted. Id.

Like the Chief Justice, I have no quarrel with the President’s attempt to seek a political settlement of a social issue that remains quite contentious. I have even less quarrel with attempts to hard wire a solution to this social controversy in our constitution (though I wonder about the great fuss made over this issue in particular). But I would not like to see this issue used as a subterfuge for undoing the great foundational construction of the Republic. The campaign against “activist judges” is thus (and ironically so) both radical and liberal from an 18th century standpoint. It does not reflect the original understanding of the Founders of the differences between the relationship of law to state in the colonies and as it had evolved in England. The President is likely unaware of the consequences of this latest radical liberal crusade of his. But radical it is, in ways that strike against the heart of perception of right reason on which this Republic was founded. And that is a shame.

Reading a Mandatory Stakeholder Model of Corporate Governance in the EC Treaty?

At the recently concluded conference: EU Financial Services Regulation: Completing the Internal Market, held at the Institute of Advanced Legal Studies, London, United Kingdom, October 26-27, 2006 and excellently organized by the Academy of European Law and the Centre for C Commercial Law Studies, Queen Mary, University of London), Beate Sjåfjell, of the Faculty of Law, University of Oslo Centre for European Law presented an intriguing paper offering insights on the Takeover Directive. During the course of that presentation, Ms. Sjåfjell raised a point in passing that is worth thinking about. In discussing the issue of stakeholder involvement in economic matters, and especially corporate combinations, she suggested that the EC Treaty might have something to say on the matter: specifically that the focus on “sustainability” in the EC Treaty’s Preamble and objectives, as well as in Article 2 EEC (on the tasks of the Community) may provide a legal basis for increasing stakeholder involvement in merger review procedures.

I believe this point is worth expanding. Article 2 EEC provides that:

The Community shall have as its task, by establishing a common market and an economic and monetary union and by implementing common policies or activities referred to in Articles 3 and 3a, to promote throughout the Community a harmonious, balanced and sustainable development of economic activities, a high level of employment and of social protection, equality between men and women, sustainable and non-inflationary growth, a high degree of competitiveness and convergence of economic performance, a high level of protection and improvement of the quality of the environment, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States." (Consolidated Version of Treaty Establishing the European Community.

Is it possible to derive form this provision a requirement that corporate governance must abandon the shareholder maximization model for a stakeholder model of corporate governance? While the answer is not clear, I might suggest that the language at Art. 2 is broad enough to provide the institutions of the EU with the legal basis to do just that.

The European Commission has considered issues of corporate governance as part of its general efforts to harmonise company law in the EU. That harmonisation process has been both very long and only mildly successful. In 2003, the Commission published an Action Plan—Modernising Company Law and Enhancing Corporate Governance in the European Union COM (2003) 284 final; the published Frequently Asked Questions document may be helpful. While the Action Plan was long on reform, it was careful not to disturb the fundamental principle of corporate governance—shareholder wealth maximization. Indeed, the Action Plan was targeted toward the two traditionally preeminent stakeholders in the corporation—shareholders and creditors. As such, the Action Plan did not deviate much from the usual cluster of proposals for company law reform—strengthening shareholder power through enhanced principles of shareholder democracy, increasing and deepening disclosure requirements, and increasing the number and responsibilities of independent members of corporate boards of directors. But none of this suggests, in any measure, an attempt to upset the “natural order” of corporate law by privileging other actors with authority in the management or operation of corporations.

But consider Art. 2 again. It tasks the EU institutions with the establishment of a common market “and by implementing common policies or activities referred to in Articles 3 and 3a, to promote throughout the Community a harmonious, balanced and sustainable development of economic activities.” The current focus of regulation derived from this charge is focused on environmental issues. The “European Commission, Directorate-General for Enterprise and Industry promotes the integration of sustainable development into enterprise policy and aims to ensure that the definition and implementation of policy instruments for achieving environmental goals foster entrepreneurship and encourages innovation, thus contributing to competitiveness” (European Commission, Enterprise and Industry, “Competitive Aspects of Sustainable Development”). For this reason, perhaps, there has been little attention paid to other aspects of sustainable development that might be read into Art. 2.

Yet consider “sustainable development” from its corporate governance perspectives. It seems to me more than plausible that this language can be used as a basis for the assertion of a governmental power to regulate corporate organization to promote “a harmonious, balanced and sustainable development of economic activities” and that this power may include regulations designed to vest governance power of some sort in all corporate stakeholders—including labor, consumers, and government. It might be argued, for example, that the promotion of a harmonious, balanced and sustainable development of economic activities might necessarily invoke consideration of the general welfare of the communities affected by economic activity. But the general welfare ought not to be determined only by those with a capital investment in the economic entity. Sustainability and balance require input from the other important sectors of economic activity—from the communities in which economic activity is conducted, to the employees, consumers, suppliers and the like.

Now we come close to the understanding of sustainability and stakeholder involvement that has been developing within the U.N.’s human rights institutions in Geneva, which was eventually derailed. See Report Of The United Nations High Commissioner On Human Rights
On The Responsibilities Of Transnational Corporations And Related Business Enterprises With Regard To Human Rights. In particular, European Human rights NGOs have long argued a conflation of business and human rights. Amnesty International (UK) for example has advanced the idea that

Human rights violations destabilise the investment climate. At stake are employee safety, company assets, project viability and corporate reputation. As the influence of global companies grows in the world economy, and as their impact on the societies in which they work deepens, it is becoming evident that their licence to operate and their reputation depend on their acceptability to society at large. (Amnesty International, Economic Globalization and Human Rights, Why Do Human Rights Matter to Business?).

It is just a short step from this framing of the issue of corporate governance and the idea that balance, and sustainability require intervention in the regulation of corporate governance models. And it is an even smaller step from that notion—and the idea that sustainability, when coupled with the idea of comitology and consultation that stands at the heart of the EU’s regulatory framework—to the idea that the EU’s governance framework suggests adoption of a stakeholder model of corporate governance. And indeed, read in its entirety, Article 2 seems to suggest a need for stakeholder involvement in all aspects of economic activity. Thus the provision requires the promotion not only of a harmonious, balanced and sustainable development of economic activities, but it also requires promotion of a variety of other goals, including “a high level of employment and of social protection, equality between men and women, sustainable and non-inflationary growth, a high degree of competitiveness and convergence of economic performance, a high level of protection and improvement of the quality of the environment, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States." Applied to the governance of economic enterprises within the EU, this might well seem to tie economic activity to the general welfare. Thus tied, there might well be a legal basis for the reordering of corporate governance to reflect this emphasis. Indeed, it might be possible to argue that corporate governance systems that privilege one of the stakeholders—shareholders—might actually not be permitted under the regime described in Art. 2.

Indeed, from a global perspective, this notion is not that far fetched anymore. Consider the increasingly popular idea of corporate sustainability reporting. The Australian Department of the Environment and Heritage describes corporate sustainability reporting as emerging from a recognition among corporate actors of “the value of demonstrating transparency and accountability beyond the traditional domain of financial performance. This trend has come about through increased public expectations for organisations and industries to take responsibility for their non-financial impacts, including impacts on the environment and the community.” Australia, Department of the Environment and Heritage, “Corporate Sustainability—Corporate Sustainability Reporting”. Much of these efforts are still voluntary, but the governance framework is already there. Thus, for example, again in Australia, the Department of the Environment and Heritage “The Department of Environment and Heritage works cooperatively with Australia's financial services sector (investment, insurance and lending institutions) to facilitate integration of sustainability issues into the services, products and operations of the sector.” Australia, Department of the Environment and Heritage, “Financial Services Sector”.

Some of this springs from efforts from out of the civil society sector—for example the Global Reporting Initiative, which seeks to create a global consensus around the idea that “reporting on economic, environmental, and social performance by all organizations becomes as routine and comparable as financial reporting. GRI accomplishes this vision by developing, continually improving, and building capacity around the use of its Sustainability Reporting Framework.” Global Reporting Initiative, “A Common Framework for Sustainability Reporting."


I have just suggested a potentially radical rewriting of the foundations of corporate governance. I have suggested before that this rewriting, at least at the international level, might have been without legal basis, though it might have been able to end run the legal orders of states by resort to private law. Larry Catá Backer, “Multinational Corporations, Transnational Law: The United Nation’s Norms on the Responsibilities of Transnational Corporations as a Harbinger of Corporate Social Responsibility as International Law,” Columbia Human Right. Law Review 37:287 (2006). This foundation, a mainstay of corporate regulation for more than a century, might have seemed well grounded in the legal orders of the West. But I have just suggested that this traditional approach may be easier to destabilize than previously thought plausible. This does not mean that a stakeholder model is necessarily a good foundation for corporate governance or that reconstituting corporations as entities with a more direct public aspect is a good idea, especially in the context of the relationship between economic and political communities. But it does suggest that the legal framework within which these conversations might proceed has already been established in the EU.

The Values of Free Movement: Lessons for Globalization From the E.U.’s Experience With Free Movement of Capital and Labor

The European Union is a model for the ability of a group of states to come together under a system in which the free movement of goods, people, capital and services is privileged. Perhaps more than the United States, the E.U. suggests a pattern for cooperation among political communities for the facilitation of movement among their respective citizens.

Three recent experiences on a trip to London have brought home to me both the reality of free movement of goods and people as an everyday lived experience, and the way that experience has something to say about the development of economic globalization in the coming decades. I use these experiences here not because of their uniqueness (indeed in many ways they are each quintessentially ordinary). Nor am I attempting to use them as a substitute for the kind of careful empirical work for which academics are sometimes known. Consider these experiences as an intertwined parable, expressing the essence of today’s lived experience among people increasing thrown together in new and sometimes destabilizing ways.