A US Perspective on Equivalence

Abstract

The EU and the US are more similar than they are different in their approach to equivalence. The world of derivatives is where the equivalence approach is most developed in the US, although in the US, equivalence is referred to as substituted compliance and is found only after a determination that the foreign regulatory regime is comparable to that in the US. US substituted compliance has been developed through the regulatory process, meaning that it is subject to continued development and could change over time at the whim of the regulators who are then in charge. In the case of credit institutions (EU) or commercial/retail banking (US), both the EU and the US largely follow an extra-territorial or territorial approach applying national law to a branch of a foreign entity doing business in the US (the extra-territorial approach) or requiring that a US subsidiary or intermediate holding company be established that is fully subject to US law (the territorial approach). In the provision of investment services, equivalence may theoretically be used to determine whether a third-country firm may offer investment services without a branch throughout the EU. As a practical matter, the only way to access the EU internal market is through a subsidiary established in a Member State (the territorial approach). A few broker-dealer activities may be conducted by foreign firms in the US without registering with the US Securities and Exchange Commission (SEC), but otherwise foreign firms must register with the SEC and become a member of the Financial Industry Regulatory Authority (FINRA) self-regulatory organization to engage in underwriting, private placement, and mergers and acquisitions advisory services.