Buying Foreign Stocks Is About to Get a Lot Easier

Small investors hungry for overseas stocks will soon have more options to choose from.

By Matthew Mogul, Associate Editor, The Kiplinger Letter

March 30, 2007

Foreign brokers are coming your way, courtesy of the Securities and Exchange Commission. The agency is writing a new rule allowing some foreign brokers to sell securities directly to U.S. investors. While big institutional investors with vast global networks already have plenty of ways to buy overseas securities, small investors searching for stocks, bonds and funds that trade exclusively abroad have to go through a domestic broker who then turns to overseas affiliate. That’s unwieldy, time consuming and costly for investors.

This is the first time since the Wall Street crash of 1929 that the SEC will entrust some oversight to foreign regulators. When the rule takes effect several months from now, it effectively exempts many overseas brokerages from registering with the SEC if they wish to sell directly in the U.S. market. The move is part of a broader effort to harmonize markets worldwide, such as common ownership among stock exchanges, mutual recognition of listing standards and a push to accept a variety of accounting methods.

Transaction costs will gradually decline as existing barriers to trade are eliminated and brokers are forced to compete to service U.S. investors.

European brokers are expected to be first in line to receive the exemption. That’s because investor protections in Europe, particularly Great Britain, are similar to U.S. standards. Brokers from Asia and other parts of the globe are likely to be granted similar exemptions as their regulatory regimes strengthen.

The new rule will stoke already-heightened investor interest in foreign assets. Last year, U.S. investors bought a record $246 billion in foreign securities, including mutual funds that invest overseas, as a way to tap global growth and diversify their portfolios. While there are already ways to own overseas firms -- by buying either American Depository Receipts or mutual funds -- this upcoming direct access to stocks abroad will broaden the investment horizon for small investors.

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