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In an article to be published in the Harvard International Law Journal Ethiopis Tafara, SEC Director of the Office of International Affairs, and Robert Peterson, Senior Counsel for the SEC Office of International Affairs propose a new framework to apply to foreign financial service providers accessing the U.S. capital market, by providing investment services and products not otherwise available on the U.S. market. Rather than requiring such foreign stock exchanges and foreign broker-dealers to register with the SEC, the proposed framework relies on a system of substituted compliance with SEC regulations.
Instead of being subject to direct SEC supervision and U.S. federal securities regulations and rules, foreign stock exchanges and broker-dealers would apply for an exemption from SEC registration based on their compliance with substantively comparable foreign securities regulations and laws and supervision by a foreign securities regulator with oversight powers and a regulatory and enforcement philosophy substantively similar to the SEC’s.
The SEC would still retain jurisdiction to pursue violations of the anti-fraud provisions of the U.S. federal securities laws. The comparability finding would need to be complemented by an unambiguous arrangement between the SEC and its foreign counterpart to share extensive enforcement- and supervisory-related information. This should greatly reduce the transaction costs investors currently pay when investing overseas, and allow the current situation of overlapping and duplicative registration and oversight requirements for certain stock exchanges and broker-dealers to end.
This proposed framework could clearly represent a significant departure from the SEC’s existing regulatory policies. The authors note, however, that the concept of a comparability assessment may prove highly unpopular with those jurisdictions that the SEC determines do not have a comparable regulatory regime.
Some may object that this approach, even with its promotion of substituted compliance, still imposes too much SEC and U.S. oversight over foreign financial service providers.
The framework offers an increased access by foreign market participants to the U.S. capital market, with a dramatic reduction in duplicative and unnecessary regulatory oversight, in exchange for a system that creates a true partnership between the SEC and the home regulator.