The Securities and Exchange Commission should develop a framework to open the U.S. capital markets to direct access for some foreign exchanges and broker-dealers. That was the consensus among most experts at a recent gathering to explore the topic of mutual recognition.
Exactly how to get that done—well, that’s less clear.
With cross-border consolidation of stock exchanges ever accelerating, the SEC has said it is considering changing its rules to allow foreign exchanges and broker-dealers to sell products and services to U.S. investors without first registering with the SEC, provided that their home countries’ regulatory regimes are substantially similar to that of the United States.
The SEC convened a roundtable last week to seek input on whether and how it should move to mutual recognition, as well as on how such a change would affect market participants. The forum made it clear that there are still far more questions than answers on the subject.
Mutual recognition would be a major policy departure for the SEC. Currently, it requires foreign exchanges that conduct business in the United States to register both the exchange itself and the securities trading on it with the Commission, even if the exchange operates outside the United States and the securities it lists are registered in their home countries.
Cox
SEC Chairman Christopher Cox has noted that innovations in technology have “eliminated many physical barriers to market access.”
“At a time when U.S. demand for foreign investment opportunities from retail and institutional investors alike is growing, carefully evaluating the benefits and risks of selective mutual recognition is urgent business,” Cox said at the June 12 roundtable. He noted that the SEC is “looking toward potential action this year on this topic.”
Several panelists during the half-day event, including three former SEC commissioners, said such a move is necessary for the United States to remain competitive in an era of globalization.
Ketchum
“If the Commission is going to maintain its leadership from a capital markets and regulatory standpoint, the time to begin is now,” said Richard Ketchum, chief executive of NYSE Regulation and former director of the SEC’s Division of Market Regulation.
Ketchum was part of a panel that talked about how to define and measure the comparability of regulatory regimes. Two other panels weighed the effect on U.S. market participants of increased foreign market access and the effect of increased foreign broker-dealer access.
Most observers said they’d support some sort of staged approach that would open direct access to U.S. markets on a limited basis, and urged the SEC to start a dialogue with other regulators.
Former commissioner Harvey Pitt, CEO of consulting firm Kalorama Partners (and a Compliance Week columnist), stressed the need for the SEC to take a collaborative approach. He said the SEC should input at the outset from other regulators, including the Commodity Futures Trading Commission, which already relies on a mutual recognition approach.
“The goal is to get people to start talking and thinking about the issues, rather than coming to the table with a set of conclusions that will dictate whether people find the process attractive,” Pitt said.
And while they said the SEC shouldn’t rush ahead too quickly, Pitt and others also cautioned the SEC not to let potential problems it may face in developing a mutual recognition framework keep it from proceeding. “If we try to envision everything that could go wrong, we will never get started,” Pitt said.
Who Gets In The Club
One thorny issue is how the SEC would determine which countries’ regulatory regimes it would deem acceptable. Several panelists noted that such decisions could become awkward political issues for the Commission.
Alan Beller, former director of the SEC’s Division of Corporation Finance and now a partner in the law firm Cleary Gottlieb, said he supports a staged approach to mutual recognition that would initially open the markets to some issuers in some countries, but he also noted the need to make such decisions quickly.
“The major financial players are as at home in London, Tokyo, and Hong Kong as they are in New York, and they are agnostic as to where they execute.”
— Alan Beller
Former Director,
SEC Corporation Finance Division
“The markets and investors aren’t going to wait for kinds of comparability analyses [the SEC would] have to do in 38 jurisdictions,” Beller said. He urged the SEC to “look more closely at thresholds and disclosure to solve some problems, as opposed to outcomes.”
Beller said “the major financial players are as at home in London, Tokyo, and Hong Kong as they are in New York, and they are agnostic as to where they execute.”
If the SEC allows foreign market access into the U.S., Beller said, “It’s also good for U.S. investors and competition if our domestic markets can provide access to those same securities.”
Kinney
Likewise, Catherine Kinney, president and co-chief operating officer of NYSE Euronext, said that if the SEC allows foreign participants into the United States, the SEC should seek reciprocity from other regimes so U.S. exchanges can do business in foreign markets.
Kinney urged the SEC to move toward mutual recognition in registration statements first and then globalize trading by opening foreign screens to all investors.
Stephen Bepler, an investment adviser at Capital Research and Management Co., said smaller investment advisers and individual investors would stand to benefit the most from mutual recognition, since large broker-dealers and institutional investors already have access to foreign markets. He said the move would also benefit market participants by increasing competition for best execution.
While most supported the idea overall, some panelists did raise concerns about opening up direct access to U.S. markets.
Urging a cautious approach, Nasdaq Executive Vice President Christopher Concannon warned that mutual recognition, if not done carefully, could bring along the danger of regulatory arbitrage.
Some members of a panel to weigh the effect of mutual recognition on U.S. investors also raised concerns about retail investor protections. Among them was Harold Evensky, president of financial advisory firm Evensky & Katz, who said retail investors shouldn’t be “guinea pigs for this evolutionary process.”
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