Should US retail investors be able to invest in foreign companies?

Floyd Norris, today, devotes his column to a recent paper from a senior SEC executive, Ethiopis Tafara. He's so unimpressed, indeed, that he doesn't either link to it or give us its name. Well, I'm here to help: it's called "A Blueprint for Cross-Border Access to U.S. Investors: A New International Framework", the abstract is here, and the paper itself is here.

Here's Norris summarizing the paper:

The idea, proposed in an article in The Harvard International Law Journal by Ethiopis Tafara, the director of the commission’s office of international affairs, and Robert J. Peterson, a lawyer in that office, is that the commission would reach deals with other regulators to recognize each other’s regulation, and to cooperate in providing information.
Once that was done, stock exchanges in the affected countries, and brokers from those countries, could sell securities directly to all American investors without having to conform to American rules.

Norris isn't impressed:

At worst, such a move could expose American investors to added risk and less protection, while leaving American stock markets at a new competitive disadvantage...
technology has progressed, and the S.E.C. and other regulators are going to have to design an international regulatory regime to deal with the new realities. How well they succeed may determine whether future investors have adequate protection, or whether an international regulatory race to the bottom ends up making it easy for crooks in jurisdictions with little effective regulation to prey on people the world over.

There are three things which rub me the wrong way here. The first is the implicit idea that the SEC, at present, has the best regulatory structure in the world, and that if the US system moves towards, say, the UK system, then that would be a move in the wrong direction, away from investor protection and towards corporate impunity. No one, to my knowledge, has come close to demonstrating such a thing.

The second is that a "regulatory race to the bottom" is really something which anybody needs to worry about. Again, is there any evidence that regulators in developed countries have competed with each other to have the most market-friendly and consumer-unfriendly regulations?

And third is the zero-sum assumption: that anything which is good for consumers is bad for companies, and vice versa. Not at all. Here's Tafara:

Investors now search beyond their own borders for investment opportunities and, unlike the past, many of these investors are not large companies, financial firms, or extremely wealthy individuals. A good number are “typical” retail investors—individuals with normal jobs and average incomes—who save for retirement and their children’s education, and who may be well-educated, but nonetheless are not “sophisticated investors” in the legal sense. Investors (whether retail or professional) and large firms pursue international opportunities for the same reasons: higher investment returns and the reduction in risk offered by portfolio diversification.

In other words, there's a very real cost to preventing retail investors from being able to participate in the same markets that more sophisticated investors play in. And I'm not talking about structured products here: I'm talking about foreign stock markets, which are all completely open to retail investors in their respective countries. There are many more stocks in the world than those listed in New York, and anything which increases the number of stocks available to US investors might well help them reduce their investment risks, through diversification, rather than increase them, through decreased regulation.

Posted by Felix at 10:25 EST

Comments

But Felix, are we talking about the same retail investors who buy high and sell low, don't know that bond yields and prices are inversely related, and never studied accounting because it's too boring?

Posted by: HVH at 14:41 EST, February 09, 2007