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Sirri Considers Cooperative Approach to Foreign Securities Trading

Erik Sirri, the director of the Division of Market Regulation, said the time has come to reconsider the SEC's approach to trading in foreign securities to allow access to foreign exchanges and broker-dealers under conditions that would protect U.S. investors and maintain the integrity of the U.S. markets. In a recent speech in Boston, Sirri noted that foreign securities firms and markets have inquired about access to the U.S. markets without U.S. regulation based on the nature and quality of their supervision. Sirri outlined a cooperative approach and the conditions that would be appropriate if the SEC were to agree to a system of mutual recognition. His remarks are posted on the SEC's Web site.

With the exception of a few exchanges, Sirri noted that most trading done outside of the U.S. is electronic. Access to those exchanges is through a trading screen. The domicile of the exchange is what counts for regulatory and business purposes, he said. Every market that meets the definition of an exchange must register under the 1934 Act or be exempted on the basis of limited transaction volume or as an alternative trading system. Direct access to exchanges is limited to registered broker-dealers. No foreign exchange can put one of its trading screens in the U.S. unless it registers, Sirri explained.

Market information from foreign exchanges is widely available in the U.S., so the restrictions on foreign exchanges basically limit them from admitting U.S. persons as members, Sirri explained. The SEC has provided one small volume exemption in 1999 to Tradepoint Financial Networks plc. Sirri said that many critics believe that registration is onerous and that the SEC's regulations amount to economic protectionism. Sirri believes the regulations provide valuable protection to U.S. investors, but agreed that the SEC's approach could benefit from considering the developments in the capital markets.

Sirri noted that a major U.S. online broker-dealer recently announced a new global trading platform that will allow individual investors in the U.S. to buy and sell foreign securities in their local currency. He said others are likely develop similar foreign trading systems.

Foreign markets have questioned whether the registration of exchanges and brokers in the U.S. is essential to investor protection if the foreign jurisdiction provides comparable regulation. European countries in particular have complained about the protectionist U.S. regulations, according to Sirri. He disagreed that the U.S. regulatory requirements are protectionist-motivated and said investors are not denied fundamental access to foreign securities or markets. Sirri also acknowledged that the SEC may be able to reduce costs and the problems associated with purchasing foreign securities in the U.S.

Sirri does not favor allowing foreign exchanges and broker-dealers to conduct business within the U.S. without any conditions or regulations. The SEC has broad authority to exempt persons from the 1934 Act which would allow it to adopt a cooperative framework without compromising its mandate of investor protection. Sirri said the SEC would have to determine that any exemption was in the public interest and consistent with the protection of investors.

Sirri said one key issue is U.S. broker membership in the foreign exchanges. He suggested that U.S. brokers could join foreign exchanges in jurisdictions that provide regulation and oversight standards similar to the U.S. and where the jurisdiction cooperates with the SEC in assuring investor protection and other statutory requirements. The SEC could establish the conditions for the exemption and any material breach of the conditions would result in a withdrawal of the foreign exchange's exemption.

The conditions would include a jurisdiction that protects investors and the integrity of the markets, and one that provides reciprocal regulatory relief for U.S. exchanges seeking to conduct business in its jurisdiction. The exchange must provide full disclosure of any differences from the U.S. The exemption should apply only to access to foreign securities, rather than to U.S. registered issues, in Sirri's view. Further, the foreign exchange should not provide direct access to U.S. persons other than registered U.S. broker-dealers.

Sirri said the exempt foreign exchange should not unfairly discriminate among U.S. and foreign broker-dealers in access to services. The SEC and the home regulator should coordinate their oversight, including inspections and information-sharing. Sirri added that he would want the SEC to have access to audit trails of orders executed on the foreign exchange by U.S. members and to trading information. The privacy laws of the home country should not impede the SEC's ability to review the books and records related to U.S. activities, he said.

Sirri noted that the SEC raised the concept of mutual recognition for brokers 17 years ago, but it remains a novel approach. The SEC must be deliberate in its consideration of such an approach, but Sirri believes there is much to be gained.

Jacquelyn Lumb