U.S. Trading On Foreign Exchanges Will Become Easier

April 2008

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If regulators are able reach a "mutual recognition" agreement, it would mark a radical shift in how international markets are overseen. The Securities and Exchange Commission (SEC) currently requires foreign trading firms to comply with its rules even though they are fully supervised in their home market. Consequently, a foreign exchange conducting business in the U.S. must register with (i) the exchange and (ii) the SEC for the securities to be traded. In addition, foreign broker-dealers inducing trades by investors in the U.S. generally must register with the SEC and at least one SRO.

Last week, the SEC unveiled steps aimed to better coordinate the SEC’s regulation of the U.S. capital markets with its overseas regulatory counterparts. This is expected to make it easier for US brokers and investors to access foreign stock exchanges and improve global cross-border trading. Specifically, the SEC announced that it:

"...contemplates taking the following actions:

Exploring initial agreements with one or more foreign regulatory counterparts, which would be based upon a comparability assessment by the SEC and by the foreign authority of one another's regulatory regimes.
Considering adoption of a formal process for engaging other national regulators on the subject of mutual recognition. This process could be accomplished through rulemaking or other appropriate mechanisms, possibly informed by one or more initial agreements with other regulators.
Developing a framework for mutual recognition discussions with jurisdictions comprising multiple securities regulators tied together by a common legal framework, including Canada (which has no national securities regulator, but rather provincial regulators) and the European Union (whose national securities regulators are subject to supranational legislation and directives).
Proposing reforms to Rule 15a-6 in order to improve the process by which U.S. investors have access to foreign broker-dealers.”

SEC Chairman Christopher Cox said in a related statement:

"The steps we are announcing today are designed to better coordinate SEC regulation of the U.S. capital markets with our counterparts' regulation in the larger global marketplace. … By beginning to build a sturdy basis for cooperation among securities regulators who share the same concerns, we can greatly improve investor protection and market efficiency worldwide,"

Mutual recognition permits foreign exchanges and foreign broker-dealers to provide services and access to U.S. investors under an abbreviated registration system. This approach depends on the foreign entities being supervised in a foreign jurisdiction providing “substantially comparable oversight’’ to that in the U.S. In addition, from a political and practical perspective, this approach requires that the home jurisdiction of the foreign exchange and the foreign broker-dealer provide reciprocal treatment to U.S. exchanges and U.S. broker-dealers seeking to conduct business in that country.

The SEC did not specify with which countries the agency is exploring the agreements, although it is likely that Canada and the European Union are first choices.

There are four exchange groups that are attempting to create integrated international exchanges through acquisitions and technology integration, but are being thwarted by regulatory constraints. They are:

A breakthrough in the SEC’s move to make U.S. markets more internationally friendly was the recognition of international accounting standards and a removal of the requirement of foreign companies to reconcile their accounts to U.S. Generally Accepted Accounting Principles. For more on this see, SEC Allows Foreign Reporting Standards in the U.S.

Fulcrum Inquiry performs business appraisal and forensic accounting services.