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.