Closing Remarks at the SEC's 24th Annual International Institute for Market Development
Commissioner Daniel M. Gallagher
April 16, 2014
Thank you, Paul [Leder].
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I am delighted to join you today to close out this year’s International Institute for Market Development program. For almost a quarter of a century, the program has brought together capital markets regulators from around the world to engage in dialogue and the exchange of ideas. Thank you all for your participation, and thanks as well to the Office of International Affairs and to all of the dedicated people from both within and outside the SEC who served as faculty for this year’s program.
Although all of you came here to gain insight from our experiences, I believe that we at the SEC have a lot to learn from you and the markets you oversee. In particular, it is well worth our time to work to better understand market and regulatory practices in jurisdictions that did not suffer the brunt of the global financial crisis. For example, Asian markets largely avoided the impact of the crisis, perhaps in large part due to lessons learned by market participants and policymakers by crises in the late 1990s.
Since I became a Commissioner two and a half years ago, I have made a concerted effort to visit and understand capital markets around the world, especially those on the rise. I have visited with market participants, regulators and other policymakers in Hong Kong, Singapore, Australia, Brazil, Qatar, the United Arab Emirates, Turkey, Poland, and Russia. These visits have made it clear to me that the U.S. faces stiff international competition in the financial services area, and not just from the traditional European financial centers.
They have also confirmed for me that, rather than engaging in a regulatory “race to the bottom,” regulators and market participants alike around the world, and especially in emerging markets, want high-quality but smart regulation. Regulators often find – or, at least, often found in the past – that the best way to achieve that goal is to emulate existing regulations in the U.S. and the E.U.
But, importantly, some of the time, especially as legislators here and in Europe lay out an enormous thicket of post-financial crisis regulatory mandates, importing U.S. or E.U. rules will not make sense. This is especially true for rules that may not even make sense in our own domestic markets! The days when we could hold up U.S. and E.U. regulations as a “gold standard” and expect emerging market regulators to emulate them are past. Indeed, just as emerging markets are challenging traditional U.S. and European leadership, regulators in these dynamic jurisdictions are developing novel regulatory solutions to fit the needs of their evolving capital markets. We at the SEC would be wise to closely observe the regulatory solutions being developed in other jurisdictions, especially as we continue to slog through the long list of congressionally mandated rulemakings.
We would also be wise to explore ways to leverage our relationships with regulators throughout the world to avoid duplicative or contradictory regulations among different jurisdictions. This does not, however, mean engaging in the type of so-called “regulatory harmonization” that has come to mean a top-down, forcible imposition of one-size-fits-all regulatory standards on sovereign nations.
“Harmonization,” unfortunately, has become a euphemism for forcing nations to accept a unitary set of regulatory standards created by international bodies such as the Group of Twenty, the Financial Stability Board, and the International Organization of Securities Commissions. To be blunt, it is the height of regulatory hubris to assume that not only is there is a single regulatory solution to a problem, but that simply by banding together in international forums, we imperfect regulators can find that perfect solution.
These international organizations were born out of legitimate efforts to engage in constructive multilateral dialogues on matters of mutual interest, including financial regulation. However, following the financial crisis, they have taken on a new and more opaque character, and in some cases they have attempted to arrogate to themselves regulatory powers that properly reside with sovereign governments. One example is the recent joint FSB/IOSCO Consultative Document proposing methodologies for designating globally active systemically important investment funds, which, in the U.S., is being used to legitimize the notoriously flawed OFR asset manager report.
These international organizations serve the valuable purpose of facilitating cooperation amongst regulators from different jurisdictions. They should not be turned into instruments of coercion, impinging upon the regulatory independence of member jurisdictions.
And the alternative to this form of group coercion should not be coercion by individual regulatory agencies. It was regrettable that the U.S. Commodity Futures Trading Commission, which in the U.S. has jurisdiction over nearly 95% of the derivatives market, initially elected to take an all-encompassing approach to derivatives regulation. This has understandably led to substantial consternation, and I have been pleased over the past several months to see the CFTC working more closely with foreign regulators to address their concerns. We at the SEC have made a concerted effort to apply principles of equivalency and substituted compliance in drafting our own rules for the derivatives market.
This, I believe, is the correct alternative: mutual cooperation through the processes of regulatory equivalence and substituted compliance. We know that while many of our foreign counterparts have regulatory goals similar to our own, their experiences and circumstances have led them to develop different – but high quality – approaches to dealing with the same problems we do. There is usually more than one way to achieve any given regulatory objective, and it’s not always clear which way is “best.”
We need to have the regulatory humility to address this fact by permitting compliance with high quality foreign regulatory regimes to substitute for compliance with our own. In doing so, we can avoid complicated cross-border regulatory disputes and provide greater certainty and predictability to cross-border transactions. By avoiding layered, duplicative, and sometimes incompatible regulations, we can facilitate smoother and more efficient interactions between our respective capital markets.
As is the case with most of the work we do as regulators, all that is easier said than done. As regulators, we operate within the parameters set by legislation. When that legislation is flawed, our ability to draft and implement high quality rules can be severely impeded. The United States’ heavy-handed legislative response to the crisis, the Dodd-Frank Act, epitomizes this problem. Dodd-Frank was not a carefully crafted product of bipartisan compromise, but instead a grab bag of legislative wish-list items, many of which had nothing to do with the crisis.
With the European Commission issuing similarly burdensome directives, it’s increasingly difficult to imagine an easy, non-coercive path towards a comprehensive harmonization of our regulatory regimes. All the more reason, then, to take the opportunity to implement substituted compliance wherever possible. For example, after extensive consultation with SEC staff, the European Securities and Markets Authority eventually reported to the EC its conclusion that the U.S. regulatory regime for credit rating agencies was equivalent to the EU’s own system. Several months later, the EC formally rendered its equivalency determination for the U.S. credit rating agency regulatory regime. Although this equivalency process was not without its bumps and bruises, it shows that substituted compliance can work. It’s my hope that programs like the International Institute continue to foster the cooperation, trust, and mutual respect among regulators that are the underpinnings of regulatory equivalence and substituted compliance.
Thank you for participating in our program, and congratulations once again. We look forward to working with you in the months and years ahead.