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“Trading Globally”
Summary of Remarks by
Erik Sirri
Director, Division of Market Regulation
Securities & Exchange Commission
March 8, 2007
Dr. Erik Sirri discussed how mergers of U.S. and foreign exchanges, and the desire of overseas brokers to do business in the United States, pose challenges for the U.S. regulatory regime. He discussed his approach to developing a regulatory regime consistent with investor protection and accommodation of these new entrants.
Dr. Sirri began his talk with some background on the SEC. Unique among other regulators of the U.S. economy, the SEC is an agency where law, rather than economics, has primacy. The SEC is more and more focused on how the law is being integrated into financial markets. However, economic issues related to these developments may also be important.
Dr. Sirri went on to discuss how the SEC has modified its functions over the years. Initially, the SEC was primarily charged with investor protection and securities markets regulation. Over the years, the agency has also dealt with competition, efficiency in markets, and capital formation. During the mid-1990s, the SEC investigated a collusion scandal at NASDAQ relating to order-handling rules. This investigation led to the current system of electronic trading that we have today.
At the beginning of the last century, the U.S. had over 80 exchanges; today there are only 10 national exchanges. There are 30 side electronic systems and 40 places to clear securities. This contrasts with the European Union, where there is only one major exchange in each country. The central efficiency question is whether it is better to have multiple markets, or one giant market. The goal of the recently implemented National Market System (NMS) is to foster greater competition among major stock exchanges and to modernize the regulatory structure of the U.S. equity markets.
The current trend toward cross-border mergers of stock exchanges is an example of how exchanges are trying to compete in the global marketplace. The New York Stock Exchange merged with Euronext. The NASDAQ tried to acquire the London Stock Exchange. The London Stock Exchange and the Tokyo Stock Exchange signed a cooperation pact to encourage access to each others’ markets.
Dr. Sirri then spoke about the SEC’s role in regulating issuers, exchanges, and broker-dealers. Issuers must register their shares if they want to list them on exchanges. They must file paperwork with the SEC, produce interim reports, provide updates on their business, and file their financial statements under Generally Accepted Accounting Standards (GAAP). Companies must tell the truth, or they face enforcement action by the SEC. Issuers are regulated not only by the SEC, but also by the states, which have the power to decide if the issuer’s business is legitimate.
There are currently 10 exchanges in the United States. Exchanges must register with the SEC, and must also join a Self-Regulatory Organization (SRO), such as the NYSE or the NASD. SROs are closer to the market than either Congress or the SEC, so they are better able to maintain a close eye on the exchanges. Some firms provide a marketplace for securities but avoid being classified as exchanges by developing alternate trading systems that comply with Regulation ATS.
Since customers themselves cannot join an exchange, broker-dealers are necessary to act as intermediaries between customers and securities. Brokers also must register and file paperwork with the SEC. They must join the Securities Investor Protection Corporation (SIPC), a nonprofit, member organization that protects the assets of customers of a failed brokerage firm. The SEC monitors the sales practices of brokers and oversees suitability concerns. Foreign broker-dealers must be chaperoned by a U.S. broker-dealer.
In closing, Dr. Sirri discussed his ideas on the modernization of the SEC’s regulatory practices relating to foreign exchanges, foreign issuers, and foreign broker-dealers. In the new regime, foreign trading screens will be allowed to be placed in the U.S., but will only be allowed to show foreign securities. U.S. brokers will be allowed to join foreign securities exchanges. The SEC will still provide protection to investors, but it will recognize all jurisdictions. Foreign brokers will be allowed to deal directly with U.S. customers, but these customers shall be limited to institutional investors, not retail investors. Broker-dealers will still be required to act in the interest of their customers and provide investors with protection. Safeguards and financial protection will remain, even under the new regulatory regime.
Dr. Sirri has a PhD in Finance from UCLA and an MBA from UC Irvine, and has served as a professor of finance at Babson College and Harvard University. He has served as a Governor of the Boston Stock Exchange and a member of the regulatory board of the Boston Options Exchange. His undergraduate degree in Astronomy from California Institute of Technology led to work at NASA before his turn to Finance.
Rapporteur: Carlos Stagliano
