Speech by SEC Commissioner:
Supervisory Cooperation: The Next Frontier for International Securities Regulation
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
International Institute on the Inspection and Oversight of Market Intermediaries
July 6, 2010
I am delighted to be here at the second annual International Institute on the Inspection and Oversight of Market Intermediaries. Today, we welcome 118 delegates from 47 countries across the world. We appreciate the time you have taken from your significant responsibilities at home to join us for this conference. The SEC is very excited to be hosting such a distinguished gathering of visitors and we expect some lively debate over the next few days. For example, will the Dutch finally capture the title that has eluded them for so many years? Will David Villa of Spain use one goal post or two in attempts to score against Germany? And, of course, there's the burning issue of whether vuvezelas lead to permanent hearing loss. Yes, we are well aware of our competition for your time and attention during the World Cup semi-finals. I imagine that the interaction during the coffee breaks may be the most lively we have seen yet at one of our international institutes! In the event that things get out of hand, however, I should warn you at the outset that Ethiopis has outfitted me with a set of penalty cards, and I am prepared to use them.
This would probably be a good time to note that the views I express today represent my own views and not necessarily the views of the Commission, the Commissioners, or the Commission staff.1 And this certainly applies to any views I might express on the World Cup.
This Institute takes place during a time of great change, both in the US financial markets and in global financial markets at large. We have extensively analyzed the factors that contributed to the crisis and have carefully considered the lessons learned. And, like many other jurisdictions around the world, in the US we are focused on addressing the deficiencies in our regulatory infrastructure that were identified during the crisis and are actively engaged in significant reform efforts.
However, national reform initiatives, while necessary, are not in-and-of-themselves enough to prevent future crises. We must take a broader, global view. Today, I would like to share my thoughts on what I believe is one of the important lessons we learned - perhaps I should say, re-learned - in the wake of the crisis with respect to the oversight and inspection of our market intermediaries. That lesson is that robust cooperation among regulators is vital to the effective oversight of cross-border entities and to the prevention of international securities fraud. And that cooperation cannot be limited to enforcement; it must extend to supervision. Of course, ensuring that regulators have access to the right types of information for risk monitoring purposes is also critical. The financial crisis clearly demonstrated that our financial markets are interconnected and that we as regulators must work together to address risks presented by cross-border firms before they escalate to a critical point. Accordingly, regulators must enhance our existing relationships with some counterparts and initiate outreach to others regarding issues of mutual importance, including the supervision of globally active firms.
Supervisory cooperation is not a new concept. The SEC has for many years cooperated informally on supervisory matters with several of our counterparts. In the immediate years before the financial crisis, we began to formalize some of those existing arrangements into written agreements. During the crisis, however, regulators realized that, in many instances, we had partial or inaccurate information about a firm whose operations extended beyond our borders. In looking back, we recognized that closer cooperation and greater information-sharing among regulatory counterparts might have provided a clearer picture of the risk profile of some of these cross-border entities and of the emerging systemic threats to our markets. As a result, the Commission is now seeking to formalize relationships with a larger number of partners and to enhance our existing engagement with our memorandum of understanding ("MOU") counterparts on supervisory matters.
Over the years, the SEC has conducted on-site inspections of many SEC-regulated firms that are located overseas, including firms in Asia, North America, South America, and Europe. The SEC currently has more than 250 investment advisers and 80 broker-dealers with headquarters located outside of the US. Foreign firms registered with the SEC generally must comply with the US securities laws and rules, including the obligation to maintain certain books and records and to submit to examinations conducted by SEC staff. The authority and capacity to conduct examinations and inspections, as you will no doubt see over the next week, is critical to a regulator's ability to monitor a market properly, not just for regulatory compliance and fraudulent activity, but also for nascent systemic risks of the type we have seen spread throughout the global marketplace.
Many of our overseas inspections of dually-regulated entities have been joint inspections with our foreign counterparts or involved close coordination with those counterparts. Similarly, in several instances, our foreign counterparts have invited SEC staff to participate in their examinations in the US of dually-regulated entities. During the preparation phase and the on-site portion of these examinations, the staffs of the SEC and our foreign counterparts have shared information about the entities at issue, including examination letters and inspection reports. This collaboration allows both staffs to gain tremendous insight into their counterpart's observations regarding the firm's operations. It also provides both regulators with the tools to obtain a greater sense of the firm's business and to better assess the risks presented by a regulated entity with global operations.
In addition to cooperating during on-site examinations, the SEC staff routinely has ad-hoc conversations with counterparts at foreign regulators regarding both dually-regulated entities and their affiliates, whose business and activities may impact the business model and capital structure of the regulated entity. In addition, we communicate regularly with our counterparts on regulatory trends or changes in one another's laws or regulations. I believe that this type of interaction significantly enhances our ability to oversee market participants by allowing us to monitor globally active firms on a continuous basis and timely identify the issues that impact a firm's compliance with its legal and regulatory requirements in the US and overseas.
In some instances, our cooperation with our foreign counterparts takes place pursuant to a supervisory MOU. The SEC's comprehensive supervisory MOUs create mechanisms designed to ensure that the SEC and its counterparts will have access to the information necessary to oversee global firms, including broker-dealers, investment advisers, stock exchanges, clearing firms, and, more recently, hedge fund investment advisers, and entities that clear derivatives transactions. These MOUs also provide procedures for cooperation in on-site inspections and establish important confidentiality and other safeguards to ascertain the appropriateness of sharing non-public information in each circumstance.
For example, the SEC has entered into comprehensive supervisory MOUs with the UK Financial Services Authority (March 2006), the German Bundesanstalt für Finanzdiestelesitunsaufsicht (BaFin) (April 2007), the Australian Securities and Investments Commission (August 2008), and, most recently, the Quebec Autorité des Marchés Financiers and the Ontario Securities Commission in Canada (June 2010). The SEC has also concluded more tailored arrangements with some of our counterparts, including an MOU with the College of Euronext Regulators relating to the oversight of NYSE Euronext (2007), and an MOU with the Hong Kong Securities and Futures Commission (1995) regarding investment advisor oversight. In addition, the SEC has a number of protocols with our European counterparts which provide for the sharing of issuer-specific information.
In the last few years, the SEC has engaged in ever-closer coordination and consultation pursuant to these MOUs and I believe that this interaction will grow exponentially with the continued globalization of the financial markets and the likely increase in regulatory authority over certain market participants that the Commission and our regulatory counterparts will have as a result of regulatory reform efforts.
The International Organization of Securities Commissions ("IOSCO") has supported efforts to enhance supervisory cooperation by creating a Supervisory Cooperation Task Force, which recently released a set of Principles on Cross Border Supervisory Cooperation and a sample supervisory MOU that regulators can consult in negotiating agreements governing the cooperation between regulators in the oversight of certain market participants. The Task Force report emphasizes the importance of regulators sharing day-to-day information and observations regarding dually-regulated firms and their affiliates to augment each agency's ability to obtain supervisory information relevant to achieving its regulatory mission.
In addition, the Task Force report notes that supervisory cooperation should extend beyond firm-specific information-sharing to the sharing of information about market-wide emerging risks. The Task Force co-chairs, my fellow Commissioner Kathleen Casey, who has worked tirelessly as Chair of the IOSCO Technical Committee, and Jean-Pierre Jouyet, Chairman of the French Autorité des Marchés Financiers, noted that this type of cooperation "can assist each regulator in recognizing potentially troublesome trends, help identify common concerns and improve the abilities of regulators to assess the risk profile that a globally-active regulated entity may present." Our goal as regulators should be to create a close network of communication that will operate as seamlessly as the cross-border activity we oversee.
Joint inspections build trust, avoid redundancies, and potentially will allow each regulator to leverage its resources to meet its supervisory goals; however, I believe that regulators must also maintain the ability to interact directly with their regulated entities. Access to the records and personnel of a regulated entity is absolutely critical to effective supervision of regulated entities and for the protection of investors. The SEC cannot accept a situation in which a regulated entity markets itself to investors as SEC-registered, thereby implying that it is subject to regular examinations by the SEC, when in reality the Commission staff may be unable to conduct the type of review necessary to fulfill its regulatory mandates. I imagine that many of you would agree that it brings unacceptable risks to investors, including the potential for regulatory arbitrage, and is unfair to regulated entities located in markets that do not restrict a regulatory authority's access to documents and information. Of course, in our efforts to fulfill our regulatory responsibilities, we recognize the import of national sovereignty and also seek to conduct overseas inspections in a cooperative fashion.
We believe that the way forward is for jurisdictions to reduce barriers to information-sharing and information-access, especially in light of the current interconnectedness of the capital markets. We should continue to build and reinforce the bridges of supervisory cooperation whereby regulators can work together effectively across national borders. The alternative is the Balkanization of our markets at precisely the time when cooperation could help to fuel an international financial recovery.
Developments in the international enforcement realm should serve as a template as we work to improve our information-sharing arrangements in the supervisory cooperation realm. Recently, in particular during the crisis, the IOSCO Multilateral Memorandum of Understanding (MMOU) has significantly aided regulators in combating cross-border fraud by allowing them to obtain information, including bank records, brokerage records, and testimony from overseas, needed to support their investigations. In many cases, IOSCO members have advocated for and won legislative changes at home that are needed to ensure their accession to the IOSCO MMOU. Through these efforts, local regulators have gained the authority necessary to provide assistance to their counterparts and to pursue securities law violations successfully in their own jurisdictions. Currently, more than 70 jurisdictions are signatories to the IOSCO MMOU and IOSCO has advised all its members to become signatories to the MMOU by 2013.
We, the international community of regulators, should be proud of the accomplishments we have achieved in international enforcement cooperation. I believe that we should learn from that experience and be similarly ambitious in the realm of supervisory cooperation. Our closer cooperation in the oversight of market intermediaries is critically important to effective supervision of market participants that operate in an increasingly global marketplace.
I hope that my remarks today encourage you to use this institute to form and strengthen your relationships with your foreign counterparts and to begin discussions about how we can work more cooperatively on the oversight of market intermediaries. Just as in the World Cup, although we may root for our home team's success, the bigger message is about what is possible when nations come together. Perhaps through this engagement, we can bring about much needed reforms - and I don't just mean FIFA's moving to instant replay!