Schapiro cool to ‘mutual recognition’ efforts

Bold efforts by the Bush administration Securities and Exchange Commission to open the doors to foreign brokerage firms are likely to be put on hold by new Chairman Mary Schapiro.

With industry support, the SEC in August signed its first “mutual recognition” agreement with Australia. The agreement would allow securities firms and exchanges in Australia and the United States, starting this year, to apply for an exemption that will let them do business in the other country without having to register.

Such arrangements are based on findings that the two nations’ systems of regulation are comparable.

Separately, amendments to SEC rules proposed in July would open the doors to foreigners even more.

The proposals would end the “chaperon” rule, which requires foreign firms to enter into partnerships with U.S. broker-dealers in their dealings with U.S. institutional investors.

Significantly, the changes would also allow foreign firms to deal directly with individual investors who have at least $25 million in assets, as well as pension plan fiduciaries and some municipal entities.

Under current rules, foreign firms are limited to dealing with institutions that have at least $100 million.

At her confirmation hearings last month before the Senate Banking Committee, Ms. Schapiro said that she was concerned about how quickly mutual recognition efforts were being developed by the SEC.

Easing access by foreign firms is “another area where we’ll take a big step back,” she told the committee, referring to the pending changes to the chaperon rule.

Investor advocates welcomed Ms. Schapiro’s promise to go slow on easing foreign access.

“It’s one of the many issues on which we’re hoping to see a more investor-friendly” attitude on the part of the SEC, said Barbara Roper, Pueblo, Colo.-based director of investor protection for the Consumer Federation of America in Washington. “It doesn’t mean you don’t build foreign cooperation, but this trend of relying on foreign regulation as a substitute [for U.S. oversight] is potentially very harmful to in-vestors.”

By contrast, business interests have been ardent supporters of relaxing home-country rules to facilitate cross-border trade. The Investment Company Institute of Washington and the Securities Industry and Financial Markets Association of New York and Washington both supported the amendments that would end the chaperon rule.

ICI spokeswoman Ianthe Zabel and SIFMA spokesman Travis Larson declined to comment.

In a comment letter last September, SIFMA said that the proposals would allow U.S firms to “streamline operations to meet customer demands” and allow customers of foreign broker-dealers “to pursue global trading strategies seamlessly.”

SEC spokesman John Nester declined to comment.

‘DIFFERENT LIGHT’

Given the financial crisis and the new administration, deregulation is “more likely to be viewed with a different light,” Ms. Roper added.

“It would probably be a good thing” to put on ice any new mutual recognition deals, said Ken Kivenko, an investor advocate and retired engineer in Toronto and vice chairman of the Small Investor Protection Association Inc. in Markham, Ontario. Canada has been talked about as a likely candidate for another mutual recognition deal. But the country is among the worst-regulated markets in the developed world, Mr. Kivenko said.

Observers say that the proposed amendments to eliminate the chaperon requirement could be much more far-reaching than one-off mutual recognition deals.

If the SEC moves forward with the changes, foreign firms domiciled anywhere would be allowed easier access to a broader range of U.S. investors. And there would be no requirement to assess the regulatory scheme of foreign firms.

In September, when Ms. Schapiro headed the organization, the Financial Industry Regulatory Authority Inc. of New York and Washington blasted the proposed changes to the chaperon rule.

In a letter to the SEC, Finra general counsel for regulation Marc Menchel said that the proposed amendments “would not ensure any minimum standards of regulation by the foreign securities authority charged with overseeing a foreign broker-dealer.” In fact, he wrote, “the proposal seems to carry no assurances that the foreign securities authority’s regulations will even reach the conduct of its broker-dealers’ activities” in the United States.

E-mail Dan Jamieson at [email protected].