SEC’s Global Views

The SEC made two important announcements this week concerning its current interest in promoting global capitalism. Both were somewhat surprising. One, concerning accounting standards, is surprising for its cautiousness; the other, concerning mutual recognition of foreign regulatory systems, is surprising for a potential lack of caution.

The surprising cautiousness appeared in the SEC’s announcement yesterday concerning its interest in switching the US from traditional US accounting standards to new international standards. Earlier Commissioner speeches and Commission releases suggested strong interest in a rapid short-term switch to the new standards. But the SEC now says it will soon release a discussion document contemplating the possibility of such a switch in 2014. Formal SEC consideration would occur in 2011, assuming designated milestones are reached by then.

The costs, uncertainties, and complexities associated with the imagined switch from US to international standards justify this long lead time. Stakeholders will eagerly await the SEC’s discussion document. One hopes for a thoughtful, analytical framework to evaluate such a revolutionary move, analysis that the SEC has to date not supplied.

The surprising potential lack of cautiousness appeared in the SEC’s announcement on Monday of a mutual recognition agreement with its Australian counterparts. Short term, this agreement contemplates allowing brokers regulated in one country to offer services to investors in the other without the broker being subject to the other’s laws, supervision or enforcement mechanisms.


The Australian agreement also contemplates expanding such mutual recognition to include other subjects within securities regulation. It is a first step along a more ambitious road that envisions similar agreements with more countries or blocs. For instance, the SEC has previously announced that it is pursuing similar discussions with the EU and with Canada.

The SEC states several justifications for pursuing such mutual recognition programs generally. Goals include increasing global capital market efficiency and liquidity; facilitating access by US investors to global markets; expanding information about foreign investment opportunities to US investors; promoting diversification of securities portfolios; reducing costs; and increasing regulatory coordination.

Earlier this year, the SEC said that achieving these goals would involve the following steps towards establishing a process leading to mutual recognition programs: (1) an initial agreement with foreign counterparts based on mutual comparability assessments; (2) a formal process to pursue substantive discussions with qualifying countries; and (3) a framework to define the scope of discussions for possible agreement.

The initial agreement with Australia is presumably based on such a comparability assessment that the SEC mentions. But it does not appear that the SEC has published the framework it uses to assess comparability or how any such framework applied to Australia. It may be more prudent to publish such a framework first before entering into agreements based on it.

Among vital purposes of such a framework, it would specify what comparability means and how it should be assessed. As extreme examples, comparability can focus on shared general principles (such as an emphasis on investor interests and disclosure supported by active oversight and enforcement by non-bribable authorities) or existence of specific kinds of laws (such as those protecting customer funds in brokerage accounts or restricting insider trading or short-selling).

In addition, the integrity of any mutual recognition program should consider the difference between the comparability of foreign regulation on the one hand and the domestic regulator’s capacity to inspect and enforce those regulations on the other. For example, suppose Australian brokers now may operate in the US without local registration because they are supervised by Australian authorities. How can the SEC know whether particular brokers satisfy requirements?

For US brokers, the SEC has power and authority to make direct inquiries and require satisfactory responses. The SEC has no such power over foreign firms, relying instead on assurances or cooperation by its counterpart. It may be difficult to imagine any mutual recognition program that enables the SEC to provide investor protection prevalent in the US. In the Australian agreement, the SEC addresses the investor protection point by requiring that Australian brokers disclose to US investors that US investor protection laws do not apply.

The SEC may not be unwise to enter into this particular agreement with Australian regulators. But it may be incautious to do so without publishing a thought out framework for further efforts, with Australia or other countries. It may be particularly important to do so in order to address the wide range of participants other than brokers and subjects other than brokerage services. Other participants include accountants, clearing agents, dealers, exchanges, investment advisors, lawyers and settlement operations; other subjects range from issuer disclosure to corporate governance requirements and to timing and other standards applicable to clearing and settlement organizations.

The SEC’s cautiousness revealed yesterday concerning international accounting standards appears attributable to criticism asking the SEC to publicize a more complete analysis of the subject and to proceed more thoughtfully. [My own detailed analysis appears here.] Similar expressions may lead the SEC to publish a thoughtful framework for mutual recognition and to use a more measured pace in pursuing these arrangements.

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