In the field of securities regulation, there is something of a tradition for senior SEC officials to float major new initiatives in the pages of law reviews. The classic example is Milton Cohen’s “Truth in Securities” Revisited, which appeared in the Harvard Law Review in 1966 and laid the conceptual groundwork for the integration of disclosure standards under federal securities laws and eventually the now-familiar practice of incorporation by reference. Ethiopis Tafara and Robert Peterson’s Blueprint for Cross-Border Access to U.S. Investors may someday be seen as having a similar impact on the application of federal securities law to foreign entities.
The idea underlying their new framework is what they call a “system of substituted compliance,” which I amend in the title of this comment by inserting the crucial concept of selectivity. Despite its bland formulation, their proposal would constitute a major change in U.S. policy. Historically, the SEC has taken the position that when foreign entities intentionally enter U.S. markets (and sometimes even when the entrance is unintentional), federal securities laws apply in the same manner as our rules apply to U.S. domestic entities. While some small accommodations for some foreign entities have long been permitted—especially in the case of foreign private issuers—the overall SEC approach to its jurisdiction over foreign entities has been profoundly territorial. Enter our capital markets and you must comply with our rules.
Under the Tafara and Peterson Blueprint—at least with respect to foreign exchanges and broker-dealers—the SEC would for the first time exempt a broad group of foreign firms from Securities Exchange Act of 1934 registration requirements (but not anti-fraud rules), provided the Commission can satisfy itself that the applicants’ supervisory oversight in their home markets is substantially similar to the oversight the SEC imposes on U.S. domestic firms. The Blueprint outlines a variety of procedural mechanisms for ensuring comparability, but the heart of the proposal is the proposition that the SEC should accept at least some systems of foreign regulation and supervision as adequate substitutes for direct SEC supervision under the same legal regime applicable to domestic firms. And that idea is revolutionary.
At the outset, I should acknowledge that I recently co-authored an article analyzing the SEC’s treatment of foreign trading screens and recommended the Commission liberalize its rules governing the placement of these screens within U.S. borders. While our recommendations are fully consistent with the Blueprint’s proposal, the Tafara and Peterson Framework goes well beyond what we had suggested in our paper. Not only does their proposal take on broker-dealers in addition to exchanges, but it advances a conceptual framework that should arguably apply to all areas of SEC oversight and not just the Commission’s supervision of financial services providers. By temperament, academics like to think of themselves as being well in the forefront of government bureaucrats. But here I find myself in the uncomfortable posture of having to play catch-up with senior SEC staff who have advanced a far more ambitious program than my own.
My comments touch upon four points. First, I outline one of the most striking aspects of the Tafara and Peterson Framework: it focuses on the SEC’s oversight of secondary market linkages in global markets and not its more commonly discussed direct regulation of disclosures and accounting for foreign corporations seeking access to U.S. markets. I next offer my perspective on why the theoretical foundation of their proposal—and particularly its analysis of the needs of individual investors—constitutes a major shift in SEC thinking, likely to have important implications in other areas of the Commission’s jurisdiction. I then touch upon several pragmatic considerations that the SEC and its staff would need to address if they were to put the Blueprint into practice. Finally, I sketch out potential implications of the Tafara and Peterson proposal for other areas in which the SEC oversees foreign entities and suggest several lines of additional academic work that might assist the Commission in deciding how far to extend the logic that underlies the Tafara and Peterson proposal….
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