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SEC to Develop Proposal for Mutual Recognition of Foreign Exchanges and Brokers

SEC Chairman Christopher 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 a hearing of the Senate Securities Subcommittee, Erik Sirri, the director of the Division of Market Regulation, and Ethiopis Tafara, the director of the Office of International Affairs, testified on behalf of the SEC 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.

The mutual recognition regime contemplated by the SEC would consider the circumstances under which foreign exchanges would be permitted to place trading screens with brokers in the U.S. without full registration. Mutual recognition would also consider the circumstances under which foreign broker-dealers subject to an applicable foreign jurisdiction's regulatory standards would be permitted to have increased access to U.S. investors without the need for intermediation by a U.S.-registered broker-dealer. While this approach could reduce frictions associated with cross-border access, 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 to consider whether it adequately addresses such issues as investor protection, fair markets, fraud, insider trading, registration qualifications, trading surveillance, sales practice standards, financial responsibility standards and dispute resolution

Other requirements or limitations may also be appropriate. For example, any exemptions permitting mutual recognition could be initially limited to trading in foreign securities. Exemptions also could be limited to trades with market professionals and large sophisticated investors who appreciate the risks of trading directly with foreign markets and intermediaries.

James Hamilton