SEC Moves Forward with Mutual
Recognition Framework

Against the backdrop of continuing cross-border exchange mergers, the SEC will accelerate its implementation of the concept of mutual recognition for high-quality non-US regulatory regimes. The Commission will explore initial agreements with foreign regulatory counterparts based on a comparability assessment by the SEC and by the foreign authority of one another's regulatory regimes. The SEC will also consider adopting a formal process for engaging other national regulators on mutual recognition through rulemaking or other appropriate mechanisms. More broadly, the SEC plans to develop a framework for mutual recognition discussions with jurisdictions comprising multiple securities regulators tied together by a common legal framework, including Canada and the European Union. The SEC also plans to propose reforms to Rule 15a-6 in order to improve the process by which U.S. investors have access to foreign broker-dealers.

The mutual recognition concept 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.

In reaffirming its commitment to mutual recognition, the SEC reasoned that globalized markets and increased cross-border access offer many potential benefits for U.S. investors, including broader investment choices, lower transaction costs, improved integration of cross-border trading, diversification, and more access to information about foreign investment opportunities. At the same time, taking advantage of these developments requires greater international cooperation to ensure consistent and strengthened investor protection.

Moreover, regulatory overlap from different national securities regimes can pose impediments to cross-border trading. This overlap can result in additional costs for U.S. investors and regulatory compliance burdens on market participants without consideration of whether such costs afford any additional meaningful investor protections.

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.

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.