By James Hamilton, J.D., LL.M.
Against the backdrop of continuing cross-border exchange mergers, Chairman Cox has directed the SEC staff to develop a proposal regarding the mutual recognition of foreign exchanges and brokers by this Fall. In a statement delivered at hearings of the Senate Securities Subcommittee, the SEC emphasized that the goal is to develop a regulatory approach that strikes a balance between securing the benefits of greater cross-border access to investment opportunities, while vigorously protecting investors.
The mutual recognition approach would permit foreign exchanges and foreign broker-dealers to provide services and access to U.S. investors under an abbreviated registration system. This approach would depend on these entities being supervised in a foreign jurisdiction providing ``substantially comparable oversight’’ to that in the U.S. In addition, this approach could require that the home jurisdiction of the foreign exchange and the foreign broker-dealer provide reciprocal treatment to U.S. exchanges and broker-dealers seeking to conduct business in that country.
Currently, a foreign exchange conducting business in the U.S. for example must register the exchange and the securities trading on the exchange with the SEC. In addition, foreign broker-dealers inducing trades by investors in the U.S. generally must register with the SEC and at least one SRO. The SEC has, however, provided exemptions to foreign broker-dealers engaging in a limited U.S. business, such as effecting transactions with U.S. institutional investors with the participation of a U.S.-registered broker or dealer.
The mutual recognition regime contemplated by the SEC would consider under what circumstances foreign exchanges could be permitted to place trading screens with U.S. brokers in the U.S. without full registration. Mutual recognition would also consider under what circumstances foreign broker-dealers subject to an applicable foreign jurisdiction's regulatory standards could be permitted to have increased access to U.S. investors without the need for intermediation by an U.S.-registered broker-dealer. While this approach could reduce frictions associated with cross-border access, cautioned the SEC, it would not address the significantly greater custodial and settlement costs that are incurred when trading in foreign markets.
The exemptions from registration would depend on whether the foreign exchange and the foreign broker-dealer are subject to comprehensive and effective regulation in their home jurisdiction. To make this determination, the Commission would need to undertake a detailed examination of the foreign jurisdiction's regulatory regime, considering whether it adequately addresses such things as: investor protection, fair markets, fraud, insider trading, registration qualifications, trading surveillance, sales practice standards, financial responsibility standards, and dispute resolution.