Proposed Change in Global Trading Rule Raises Risks

Ethiopis Tafara, director of the SEC's Office of International Affairs, said the United States won't be giving up its jurisdiction over investment fraud. If overseas brokers were allowed to solicit retail investors, it would happen through a U.S.-registered broker.

The SEC might also limit what stocks could be sold -- for example, only those of larger companies. Those firms might have assets or offices in the United States, which would make enforcement easier.

Theoretically, a U.S. regulator could get a default judgment in the United States against a brokerage firm selling bad products from another country. But without a U.S. connection, the odds of it being enforced abroad are poor to zero.

Experience so far, with trillions of dollars in cross-border trading, shows few problems with deception and fraud. However, the investors have primarily been institutions, doing business through well-known brokerage firms. Sailing wouldn't be as smooth if smaller investors were involved.

The next step in globalization will be something called "mutual recognition." The SEC would make a deal with another country to let its brokers solicit customers in the United States. The brokers would operate under their home-country rules, not SEC rules, with similar privileges for U.S. brokers there.

Overseas exchanges would place their trading screens in the United States so their brokers could solicit customers. Participating countries will have laws similar to those in the United States, Tafara said. Australia will probably be the first.

For institutions, global blending is no problem. But individuals need full access to the protection of U.S. securities laws. If you want, you can already buy foreign stocks through many U.S. brokerage firms, including E-Trade Financial. And you don't have to suffer through cold calls from distant brokers insinuating that they have the inside track on their home markets.

Financial planner Harold Evensky, of Evensky & Katz in Coral Gables, Fla., said his wealthy clients aren't clamoring for direct foreign investments anyway. International mutual funds and exchange-traded funds do the job and with less risk.

Jane Bryant Quinn, author of "Smart and Simple Financial Strategies for Busy People," is a Bloomberg News columnist. Alexis Leondis in New York contributed to this column.