SEC takes steps to protect U.S. investors in foreign markets

THE BALTIMORE SUN

WASHINGTON -- As investors increasingly send their dollars overseas, the Securities and Exchange Commission is stepping up efforts to curb abuses such as insider trading and make it safer for Americans to buy foreign stocks and bonds.

Huge profits can often be made abroad, but experts say the Wild West-like atmosphere of some emerging markets heightens the risk of price manipulation, insider buying and selling, and other .. scams that can burn even experienced players.

In the past few years, both money managers and individual savers have poured billions into foreign stocks and bonds, with a sizable chunk of that cash going into distant and volatile exchanges, from Bangkok to Buenos Aires.

Americans' total investments in overseas securities reached $518.5 billion in 1993, according to the latest figures available from the Commerce Department. What's more, last year, for the first time, the New York Stock Exchange listed securities from countries such as Indonesia, Columbia and Peru. That brought the number of foreign companies on the NYSE to 204, up from 115 just two years earlier.

"International markets have become the place to be, but I'm not sure investors understand the risks," SEC Chairman Arthur Levitt Jr. said in an interview last week. "We are well aware of the risks in international trading and are taking steps to deal with that."

In recent months, Americans and others have learned the hard way about the pitfalls of markets in Mexico, Argentina and Asia.

Last week, for example, exchanges in Singapore and other Asian countries were jolted by the collapse of a 233-year-old British bank, Barings PLC, after a trader's huge unauthorized bets on the direction of Asian markets went sour.

In this topsy-turvy climate, the SEC has been working quietly with foreign officials to improve investment safeguards abroad and to make it easier for American investigators to gather information.

Meanwhile, the agency has doubled the size of its international office in the past two years and said it expects to conduct more overseas inquiries.

Mr. Levitt was in South Africa Thursday for the signing of an agreement that calls for closer cooperation between U.S. and South African regulators.

"Investigations tend to follow where the market activity is," said Tom Newkirk, the SEC's associate director of enforcement. "We've got several international investigations going on, and we're going to be looking overseas more and more."

Just ask Michael Steinhardt. A well-known figure on Wall Street, Mr. Steinhardt manages a private "hedge" fund that borrows heavily to multiply returns on currencies, equities and other securities. The SEC is looking into trading in U.S.-backed Venezuelan bonds by his company, Steinhardt Management, as well as by Merrill Lynch & Co. and other firms.

Although SEC officials declined to comment, people familiar with the case said the agency is looking into whether powerful players manipulated prices in the small and volatile market for those securities.

The investigation is the first to be conducted into the $140 billion market for Brady bonds, which are dollar-denominated debts from developing countries that are backed by U.S. Treasury bonds.

Trading in popular but risky international instruments like Brady bonds and derivatives -- securities whose value is linked to another, underlying asset, like the Mexican peso or Japan's Nikkei stock index -- is likely to draw greater scrutiny from federal regulators.

At the same time, staff members of the House Commerce Committee have begun gathering information on international trading, and hearings on the issue could be held later this year.

"The potential for fraud is growing," warned David S. Ruder, who was chairman of the SEC in the late 1980s and is now a professor of law at Northwestern University. "The more assets there are, the greater the temptation will be."

The SEC's jurisdiction does not extend to foreign exchanges. It cannot, for example, punish traders in Asia for playing the freewheeling Jakarta exchange in a way that would constitute insider trading in America.

Instead, the agency protects investors from fraudulent trading practices in the United States. With the rising globalization of capital, the SEC wants to ensure that foreign companies whose securities trade in the United States comply with different, sometimes stricter American accounting standards.

SEC agents also are monitoring attempts to manipulate the prices of foreign stocks -- which tend to be more volatile because they are often thinly traded -- in the United States. With stocks that sell on more than one exchange, there is added opportunity

for insider trading and other kinds of abuses.

Cross-border trading

"We've paid enormous attention to cross-border trading," said Michael Mann, director of the SEC's office of international affairs. "There is enormous potential to take advantage of the fact that you have stocks in two markets trading in different time zones."

Fostering greater international cooperation is at the core of the SEC's strategy to manage the perils of the emerging markets. The South African meeting last week follows accords with government officials in China and Chile. The SEC's efforts abroad extend to both more mature venues like Japan and Britain, as well as to developing markets in Southeast Asia and Latin America.

"My view is that international commitments will increase fairly dramatically," Mr. Levitt said. He predicted that new agreements with securities regulators in Israel and the Far East would be forged soon.

The agreements expand SEC access to foreign bank documents, audits, telephone records and other information.

With greater international cooperation, officials said, the SEC will find it easier to verify disclosure statements -- to crack down, for example, on companies whose assets exist only on paper.

Today, even some seemingly mild-mannered funds, like those that manage pension money, are betting billions on Asia and Latin America in a search for juicy gains. At the same time, many mom and pop investors are risking savings earmarked for college tuition or retirement in foreign companies.

In the past two years, assets of mutual funds that buy overseas stocks have grown from $22.9 billion to $101.7 billion. Countries that many Americans can't find on a map -- like Sri Lanka and Botswana -- have been touted by portfolio managers as the next hot markets.

Many state pension funds have become international players. Wisconsin's fund for state workers and teachers puts about 20 percent of its $30 billion overseas. In Maryland, the State Retirement and Pension System has about 15 percent of its $16.3 billion fund overseas.

With the right mix of domestic and international holdings, however, experts say buyers can soften the bumps of buying securities abroad.

"Prudent investing dictates that you diversify and put your eggs in several baskets, not just one basket," said Peter Vaughn, the Maryland pension system's executive director. "International baskets of stocks and bonds are important diversification tools."

He noted, though, that "international trading isn't as lTC sophisticated as it is in the good old USA. It's not an easy situation to regulate, and I'm sure the SEC has its hands full."

No matter how many staffers it hires and agreements it signs, the SEC says it can't micromanage the natural hazards and rewards of global investment.

"We can't create a riskless market," Mr. Levitt added. "Ultimately, the investor must protect himself."

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