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US financial services firms, especially investment banks operating in Europe,
have complained loudly and consistently ever since, and US officials have taken no
chances in the way they have responded.
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The companies have been concerned for two
good reasons. The first is that at the time of the directive’s adoption, US supervision was
based on a different operating principle and would not have met the new EU standards.
The second is that an EU finding of non-equivalency might be extremely harmful to US-
based companies because they would face costly and unwanted changes that included
accepting an EU authority as its global consolidated regulator.
While still suspicious about European intentions and irritated by the FCD,
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US
regulators had little choice other than making their regulations more compatible with the
new EU law, forcing far-reaching adjustments that resulted in the creation of the
Supervised Investment Bank Holding Company enabled by provisions in the 1999
Financial Modernization Act.
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This alternative to the SEC’s traditional net capital rule
allows securities firms to calculate on a consolidated basis. The SEC can look at the
whole capital of a firm, just as its EU counterparts do.
The new rule represents a major change. The American supervision of financial
services companies is deeply rooted in the Depression-era Glass-Steagall Act, the
consequential industry structure of separate investment and commercial banking firms
and the underlying objective of protecting investors. This combination produced the
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See the Securities Industry Association’s key issues section at
www.sia.com
. Also see reports by the
Financial Services Roundtable’s Global Financial Issues Committee at www.fsround.org.
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Some in Washington believe that the FCD was a UK competitive bid to pressure US global financial
firms into making the City of London their home base. Others think the directive reneges on a bargain
from the late 1980s whereby US financial firms would use London to access the EU while keeping the SEC
as their primary supervisor. The SEC, for its part, never agreed that its previous regulations would not
meet EU equivalency.
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The SEC publicly downplays the adjustments it has made, claiming “the new rules formalize and
strengthen” the SEC’s role as a consolidated supervisor (Tafara 2004; SEC 2003a).
Convention