SEC and Finra Clash on Mutual Recognition
Critics call initiative a radical departure
December 15, 2008
A divide has opened up between the Securities and Exchange Commission and the Financial Industry Regulatory Authority (Finra) over an initiative that would significantly loosen restrictions on overseas exchanges and broker-dealers that do business in the U.S.
In August, the SEC announced an agreement with Australian regulators that extends mutual recognition to both countries' trading venues and financial firms. Beginning next year, select Australian institutions, under the supervision of their home regulators, will be able to sell securities to qualified U.S. investors without registering as a brokerage firm in the U.S. When asked about the wisdom of the arrangement at a Dec. 5 Consumer Federation of America (CFA) conference, Marc Menchel, EVP and general counsel for regulation at Finra, responded, "The question is, at what cost?"
Similar deals are in the works with other countries, including Canada, according to SEC spokesperson John Nestor.
CFA director of investor protection Barbara Roper, who moderated the panel on which Menchel spoke, said the comment was made during a discussion with Erik Sirri, director of the SEC's division of trading and markets. "Erik was making the pro-mutual recognition argument, and Marc was raising objections," she explained. Menchel disagreed with the commission's approach on the grounds that it had not exhausted other avenues that would have preserved U.S. investor protections, including those provided by Finra.
Under the agreement between the SEC, the Australian government and the Australian Securities and Investments Commission, approved venues and brokers will be able to offer their services to U.S. investors without being subject to SEC rules--other than antifraud provisions--or registering with self-regulatory organization Finra. Reciprocal treatment will be extended to certain U.S. exchanges and brokers (Securities Industry News, Breaking News, Aug. 26).
In an interview with SIN, Menchel stressed that U.S. investor protections are not enhanced by the agreement. "Investors may be giving up important, very detailed rules that apply in this country when they trade with an Australian broker-dealer," he said. "You give up U.S. protections that I don't think are equaled anywhere in the world." Furthermore, he said, in order for U.S. investors to enforce their rights under the agreement, they would have to go to Australia, which could be costly.
No Suitability Rule
As an example of the insufficient regulatory comparability between the two countries, Menchel cited Australia's lack of a suitability rule, which in the U.S. requires brokers to perform due diligence to ascertain that an investment is appropriate for a particular client. "The devil is the details," said Menchel. "We have a particularized investment scheme at Finra--there is a whole panoply of rules that give protections regarding things like suitability and best execution. There is also considerable interaction between brokers and customers. I don't think [Australia's] rules are as detailed."
"There is another way," he added. "You can let these people come in" and register with Finra.
The CFA's Roper said the mutual recognition initiative went largely unnoticed because the press was distracted by the credit crisis. "This is a radical departure in policy that has been done with less debate than anything I can remember for a very long time," she said. "The SEC should be looking to strengthen investor protections. There was no transparency about clear standards for what constitutes comparable investor protection, there was no concept release, and there has been no public comment. This ought to be stopped."
