(The news featured below is a selection from the news covered in SEC Today, which is distributed to subscribers of SEC Today.)

Atkins Concerned That Mutual Recognition Discussion May Divert SEC From Near-Term Goals

SEC Commissioner Paul Atkins believes that global mutual recognition in the regulation of securities firms and exchanges is not likely to be achieved any time soon, and he is concerned that the mutual recognition discussion could divert the Commission from more practical near-term goals. One such objective is the modernization of 1934 Act rule 15a-6, which governs the activities of foreign broker-dealers in the U.S., he said. Atkins spoke in Paris before the Association of Chartered Certified Accountants and his remarks are posted on the SEC's Web site.

He noted that the recent article by Ethiopis Tafara, Director of the Office of International Affairs, and Robert Peterson, Senior Counsel in the Office of International Affairs, has brought renewed attention to the issue of mutual recognition. He said that their vision is to make a financial intermediary's eligibility to participate in U.S. markets contingent on its supervision under a foreign regime that has a regulatory scheme substantially comparable to that in the U.S. Atkins said that he has long been a proponent of more flexible treatment of non-U.S. firms in the U.S. markets.

However, he noted that when talking about "mutual recognition" and "substitute compliance," the SEC should be careful about terminology and how it sets out to achieve its goals. It can be too easy to insist on actual harmonization of regulations between various jurisdictions, such as a rule-by-rule comparison of how each regime puts its principles into effect, he said. If the rules are not in harmony, he asked, will jurisdictions then be required to bring them into harmony?

That may be an admirable goal, Atkins said, but he believes it is a bottom-up approach that would result in a completely unworkable and potentially never-ending process. Unfortunately, the process suggested by the article would too easily devolve into this sort of impractical approach, he said.

He believes the article's suggested process is not practical and not achievable in the near-term. It would begin with each individual foreign firm's applying for an exemption from SEC registration, he said. The SEC would then engage in discussions with the regulatory regime overseeing the firm and, if necessary, seek to eliminate any regulatory gaps. The process would also include an assessment of the firm, he noted, with a public notice-and-comment process before approval of the exemption. To top it off, Atkins said, the article suggests that the U.S. could enter into a series of bilateral treaties with each counterpart nation.

He favors a top-down approach as an alterative to the framework suggested in the article. In this regard, he believes the SEC can learn from other U.S. regulators such as the CFTC and Federal Reserve. The CFTC first identifies the important elements that a compatible regulatory jurisdiction should embody, he noted. In the SEC's case, this would include investor protection standards, such as protection against misappropriation of customer assets, fraudulent sales practices, financial responsibility of registered entities, effective examination, and licensing and qualification of brokers, he said. Then, instead of examining each rule of the foreign jurisdiction, the Commission would assess the adequacy of that jurisdiction's oversight. Thereafter, a firm could be eligible for exemption, he suggested.

Atkins believes the SEC has many achievable, near-term goals on which it should be focused right now. He noted that rule 15a-6 started out in the 1980s as a reform of previous rules, but has caused consternation and increased costs for both brokers and investors. A rule that recognizes the reality of the modern markets, including the different needs of institutional investors, is long overdue, in his opinion.

The SEC also should be working to address problems with account intrusions from overseas, he said. In these cases, individuals break into brokerage accounts, sell the account holder's existing securities, and purchase for that account securities of a company that is the object of a market manipulation scheme. Their object is not necessarily to steal the money of the account holder, he noted, but to further a pump-and-dump scheme to drive up the price of the manipulated stock. Their illicit profit comes from the manipulation, he said.

Atkins noted that earlier this year, the SEC sued three people residing in India and Malaysia who allegedly used computers in India and Thailand to break into American brokerage accounts for this purpose. Other recent cases have involved people with insider information sending their tips to people outside the country, who then act on those tips from abroad. The money sometimes makes its way out of the country before the SEC can intervene, he said.

The SEC has also seen instances of overseas boiler rooms reaching into the U.S. Atkins questioned how much easier it would be for boiler rooms to defraud U.S. investors if they had direct access to retail investors, as proposed under a mutual recognition scenario.