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U.S. Securities and Exchange Commission

Speech by SEC Staff
Foreign Issuers & the U.S. Securities Laws 2008:
Strategies for the Changing Regulatory Environment


Erik R. Sirri

Director, Division of Trading and Markets
U.S. Securities and Exchange Commission

New York, New York
April 30, 2008

Thank you for the invitation to talk this morning about the regulation of the capital markets and market participants given the exponential growth in cross-border financial services. Before I begin my remarks, let me remind you that the views I express are my own and not necessarily the views of the U.S. Securities and Exchange Commission, the individual Commissioners, or my colleagues on the Commission staff.1

The world's capital markets have undergone substantial changes during the past three decades, deepening the globalization of capital. Recent alliances and mergers between U.S. and foreign exchanges underscore market participants' ability and desire to raise and invest capital across geographic boundaries. For example, we've seen the combination of NYSE and Euronext, Eurex's acquisition of the International Securities Exchange, Nasdaq's acquisition of OMX effected through a transaction with Borse Dubai, and the completion of a merger between the London Stock Exchange and Borsa Italiana.

But while globalization is moving apace and technological advancements are making it easier to engage in cross-border trading, there are still real hurdles to achieving a truly global marketplace. Some of these hurdles are a result of securities market regulation that is national in nature. In a globalized, fully electronic trading world, maintaining national standards presents challenges. It can impose duplicative costs and regulatory compliance burdens that, in some cases, do not necessarily offer meaningful additional protections to investors. This regulatory friction and overlap can be a real impediment to cross-border trading, standing in the way of investors realizing the benefits that true cross-border access can offer.

For example, when a foreign exchange conducts business in the U.S., it immediately implicates U.S. exchange registration requirements. Of course, U.S. registration would subject the exchange to the U.S. regulatory requirements, as well as a full set of regulations at home. In addition, foreign broker-dealers that trade with U.S investors — even large U.S. institutional investors — generally must fit within an exemption designed two decades ago, in virtually another era, or register with the SEC and at least one self-regulatory organization, and comply with both U.S. and home country regulations. This can impose duplicative costs and regulatory compliance burdens on these markets and market participants. This, in turn, can impede the flow of cross-border activities between U.S. and foreign entities and investors.

We should view our markets as part of the larger global marketplace and implement a truly global strategy. It is time to fully embrace the reality of global capital markets. Thus, I have asked my staff to focus on a way to secure the benefits of increased cross-border access while upholding the Commission's mandate to protect investors, maintain fair and orderly markets, and facilitate capital formation. We remain committed to preserving the standards that have made our markets honest and transparent and have protected our investors over time. Yet, at the same time, the increased demand and opportunity for cross-border trading activity has provided the opportunity to reevaluate the appropriate regulatory approach to cross-border access, while maintaining the statutory requirements that safeguard investor protection, facilitate capital formation, and promote fair, orderly, and efficient markets.

Over the past year, the Division of Trading and Markets, the Office of International Affairs, and the Division of Corporation Finance have been working closely together to develop a framework for mutual recognition. The form a framework would take has not been settled. One possibility, if adopted by the Commission, could provide foreign exchanges and foreign broker-dealers an exemption from certain U.S. registration and regulatory requirements, as long as those exchanges and broker-dealers were regulated in a foreign jurisdiction with a comparable securities regulatory regime that achieves similar results in addressing certain core principles that we view as integral to our own system of regulation. In other words, the foreign regulatory regime would have to provide investors with a high level of protection similar that provided under U.S. law.

A mutual recognition regime has the potential to realize the benefits associated with greater access to global capital markets and international market intermediaries. For example, mutual recognition could simplify U.S. investors' ability to diversify their market portfolio by broadening their investment choices and increasing their access to information about foreign investments, as well as by increasing efficiency and lower transaction costs (such as duplicative costs and regulatory compliance burdens on markets and market participants operating on a cross-border basis). While seeking to achieve these benefits, however, it is important to recognize, evaluate, and protect against potential risks to investors by maintaining appropriate standards for investor protection.

As part of the process for considering a mutual recognition regime, the SEC recently issued a press release in which it announced that it contemplates exploring initial agreements with one or more foreign regulators, examining adoption of a formal process for engaging foreign regulators, and developing a framework for discussions with jurisdictions with multiple securities regulators tied together by a common legal framework.

The SEC also announced in a press release that it has already begun formal discussions with the Australian Securities and Investment Commission and the Australian Treasury Department to explore the development of a mutual recognition arrangement for the two nations' securities markets. The discussions between the SEC staff and the Australian authorities represent the first step toward a possible bilateral arrangement and are designed to cover potential recognition that would allow each country's broker-dealers and exchanges to operate in the other country's markets.

In my view, a mutual recognition arrangement generally should be based on a cooperative process between the SEC and the foreign regulator, including a comparability assessment by both regulators of one another's regulatory structures. As part of a comparability assessment, the SEC would look to determine whether foreign markets and intermediaries are subject to comparable regulation in their home jurisdiction. In so doing, the Commission would assess the foreign regulatory regime, considering whether it comprehensively addresses core aspects of the U.S. regulatory scheme including the level of protection for investors. Discussions between the SEC staff and the foreign securities authority would focus on the principles on which each jurisdiction's securities regulatory system is based, and which each system seeks to advance.

Integral to a comparability analysis would be general investor protection principles (such as prohibitions against fraud and manipulation), the vigor of the inspections and enforcement regime, and the effectiveness of the clearance and settlement system. In the context of foreign exchanges, the SEC staff would focus on market integrity and reliability, market transparency, fair access to markets, customer order handling practices, business conduct, net capital requirements, risk management arrangements, and internal controls. Some of these factors would also be applicable with respect to foreign broker-dealers' activities in over-the-counter markets, including factors such as market transparency and customer order handling practices. In addition, with respect to foreign broker-dealers, the SEC staff would focus on factors such as the fair treatment of customers, effective supervision of broker-dealers' employees, the system for regulatory oversight of the broker-dealer, and arrangements for risk management, internal controls, financial resources, customer protection, and recordkeeping.

Securities regulations in a particular jurisdiction are likely to be tailored to the types of markets that have developed there over time. Thus because differences in markets may justify differences in regulation, the assessment would not require that the approaches be identical, but rather would focus on results achieved in addressing core securities regulatory principles.

I would recommend that the SEC work collaboratively with a foreign securities authority to determine the scope of recognition, or the conditions under which the Commission could recognize the foreign securities authority's regulation of foreign exchanges or broker-dealers. Upon making the appropriate determinations, the SEC could then grant exemptions for foreign exchanges and market participants subject to regulation by the foreign securities authority.

As the SEC staff works to develop recommendations for mutual recognition arrangements, the staff is endeavoring to be vigilant in our efforts to ensure any such arrangements provide for adequate disclosure by issuers and regulatory oversight of markets and intermediaries. To mitigate the incentive for regulatory arbitrage, under the contemplated structure, foreign exchanges and broker-dealers would only be granted greater access to U.S. markets upon a finding by the SEC that a foreign securities regulatory regime is comparable. In addition, as currently contemplated by staff, the SEC could conduct periodic reviews of the foreign regulatory regimes that have been recognized as comparable to the U.S. For instance, in the context of foreign broker-dealers, the overall regulatory arrangements in a jurisdiction would need to be adequate for the protection of U.S. investors that would be utilizing applicable services before a regime could be found to be comparable.

In my view, U.S. investors transacting under a mutual recognition regime should be provided with appropriate notice before effecting transactions with a foreign broker-dealer and before having orders executed in foreign markets. Moreover, the antifraud provisions of the federal securities laws would remain applicable to all transactions under a mutual recognition approach, including the fair dealing standards that have evolved under these provisions.

Chairman Cox has also announced that the Commission plans to consider proposing reforms to Exchange Act Rule 15a-6. In my view, the Commission's experience with Rule 15a-6 since its adoption in 1989 has shown that there are areas where the rule may impose unnecessary impediments to U.S. investor access to foreign broker-dealers. Possible revisions to Rule 15a-6 would likely focus on streamlining the rule's intermediation requirements.

As a general matter, I expect that any relief the staff would recommend to the Commission regarding mutual recognition for foreign broker-dealers would be separate from, and in addition to, any possible revisions to Rule 15a-6. I believe that the advantage of pursuing both measures is that foreign broker-dealers that would not meet the conditions for relief under the mutual recognition framework, or that operate in a jurisdiction that was not a party to mutual recognition, would be able to conduct transactions under a revised Rule 15a-6.

Conceptually, the staff is engaged in a holistic review of cross-border securities business. That is a reflection of the world today — and the future. In so doing, I do not believe it is wise to think of these multiple pieces in isolation. The "international" initiatives that the Chairman discussed at the 2008 SEC Speaks program earlier this year are all part of the overall effort to properly address market and business realities.

It's been a pleasure to join you today. Thank you very much.



Modified: 05/01/2008