Cox Details SEC's Conditions for Mutual Recognition of Foreign Exchanges and Brokers

As at a time when US investors are demanding foreign investment opportunities and technological innovations have eliminated physical barriers to market access, SEC Chairman Christopher Cox believes that adopting a mutual recognition regime is absolutely urgent. Reaffirming the SEC’s longstanding commitment to investor protection, the chair said that such mutual recognition is conditioned on developing proper metrics for judging the comparable investor protections of different national regulatory regimes. His remarks were delivered at a recent roundtable on mutual recognition.

At the same time that an ever increasing share of investors’ capital is allocated outside of their home countries, he noted, the markets themselves are responding through alliances and mergers of securities exchanges, including the creation of NYSE Euronext and the stake that NASDAQ has acquired in the LSE. For its part, the SEC is working as never before with its counterpart regulators around the world to develop a regulatory approach that captures all of the potential benefits of greater cross-border access to investment opportunities while providing the highest level of investor protection.

Where the SEC shares common concerns about investor protection and market efficiency, the Commission has been able to move quickly to execute new information sharing arrangements on both the regulatory and the enforcement sides. And, promised the SEC chair, this is just the beginning.

Currently a foreign exchange conducting business in the United States has to register the exchange and the securities trading on it with the SEC. And foreign broker-dealers that induce or attempt to induce trades by investors in the U.S. generally must also register with the SEC as well as with at least one SRO.

By contrast, selective mutual recognition would permit foreign exchanges that are subject to comparable home country registration and regulation to place trading screens with U.S. brokers in the United States without need of compliance with effectively duplicative regulations.

Selective mutual recognition would similarly permit foreign broker-dealers subject to comparable regulatory standards in their home countries to have increased access to U.S. institutional investors without the U.S. investors having to pay double for both a foreign and a U.S. broker-dealer.

The SEC and the regulators of every nation need to deal with the reality of global markets, emphasized the chair, and the Commission needs to ensure that the great potential benefits for U.S. investors and not the new array of risks and dangers are what manifest themselves in the months and the years ahead. According to Mr. Cox, the SEC wants U.S. investors to have choices, to enjoy lower transaction costs, and to have greater opportunity for diversification. The SEC also wants them to have more access to better information about foreign investments, emphasized the chair, all within the context of the accustomed high standards of investor protection.

Chairman Cox went on to spell out how selective mutual recognition would work. It begins with an analysis of a foreign jurisdiction's regulatory regime to determine if, in its overall effects and results, it is substantially comparable to the SEC’s. If it is, the Commission would then consider whether investment services already provided in the foreign jurisdiction might be offered to domestic investors without U.S. investors having to pay the full costs of both regulatory regimes.

Always guided by the principle of investor protection, the SEC would have to become comfortable with its ability to fairly evaluate the regulatory regimes of different countries in comparison with its own and to determine whether they produce results that are substantially comparable to the SEC’ approach.

At a minimum, continued Chairman Cox, this sort of undertaking would include a comprehensive review of the jurisdiction's commitment to investor protection by looking at, among other things, the regulatory mandate of the foreign jurisdiction and how it is implemented and enforced. For foreign exchanges and foreign broker dealers, the SEC would be interested in seeing how the home country addresses such things as fraud and manipulation and insider trading; and how they deal with such issues as registration qualifications, trading surveillance, sales practice standards, financial responsibility standards and dispute resolutions. And, the SEC would expect that the foreign jurisdiction would provide reciprocal treatment to U.S. exchanges and broker-dealers seeking to conduct business in that country.