Thirty years ago, when I first started working on international enforcement and regulatory issues, a regular topic of speeches on markets was that they were becoming increasingly international in scope and that regulators needed to evolve their approaches, both to keep pace with and encourage greater cross-border business. At the U.S. Securities and Exchange Commission (SEC), where I started my career as a securities lawyer, there were two primary areas of focus:
1) encouraging foreign issuers, including companies being privatised, to list in the U.S.; and
(2) building cooperative relationships with foreign securities regulators, frequently in the form of memorandums of understanding (MOUs), so that it could investigate cross-border fraud, including insider trading.
It would be difficult, if not impossible, to say whether capital followed the roads laid by regulators, or regulators were simply keeping pace with the cross-border appetites of investors, financial services providers and exchanges to expand their opportunities, but is fair to say that today the opportunities available for all are truly global in scope. And, as evidenced by the work of multilateral groups like the International Organization of Securities Commission (IOSCO) and the Financial Stability Board (FSB), regulators now routinely work together to identify and address the risks of cross-border financial activities through meaningful regulatory oversight, effective enforcement and financial stability.
For example, in response to the Great Recession, IOSCO and the FSB looked closely at the activities of collective investment schemes, including public mutual funds and private hedge funds, and sought to understand whether the products themselves or their advisors posed risks to financial stability that might justify the development of international standards. As the work progressed, what started out with high-level concern about possible risks evolved into detailed discussions of historical data, product attributes and industry practices, and the publication of papers that provided national regulators with useful roadmaps on how to develop their own regulatory responses. The process was largely devoid of national politics, which is part why it was successful in being able to develop useful guidance.
The same collaborative and apolitical approach also gave birth to the comprehensive and surprisingly effective system of cross-border enforcement cooperation in place today among securities regulators. When I first became involved in negotiating enforcement MOUs for the SEC, the concept of one regulator using its powers to assist another was not just novel, but in many jurisdictions, it was not legal. What followed were years of bilateral discussions and in many countries, including the U.S., changes in legislation to expand the scope of regulatory powers to permit the collection of information in one jurisdiction for the sole purpose of providing that information to another.
A new approach to global cooperation
Over time, the value of this approach to regulators trying to keep pace with cross-border trading, listings and, unfortunately, misconduct, became widely recognised and IOSCO’s members crafted a Multilateral Memorandum of Understanding (MMOU), which was finalised in 2002. By virtue of the MMOU, regulators no longer needed to painstakingly negotiate bilateral MOUs with relevant counterparts but instead only had to meet the criteria for admission and then sign on to the MMOU. Today, 124 regulatory authorities have signed the MMOU, which means that in each of their jurisdictions they have been provided the power to gather and provide information so that other signatories can safeguard their own markets.
The extraordinary success of the MMOU, both as means for cooperation but also at setting a standard all regulators now strive to meet, provides regulators with confidence that they can investigate and, when needed, prosecute misconduct on their markets that may have carried out from another jurisdiction. Signatory authorities can now follow insider trading and market manipulation leads, for example, to where a tip was provided or a scheme was devised, thus enhancing market integrity and investor confidence. When I rejoined the SEC in 2014 as the Director of its Office of International Affairs, which is responsible for the SEC’s international regulatory and enforcement programmes, I saw first-hand how the SEC and its international counterparts were able to work seamlessly across borders. When a valid request was received, the focus was on assisting with a fraud investigation and not the identity of the requester.
Today, however, there is a disconnect, if not an outright conflict, among authorities regarding access to audit workpapers by audit oversight authorities, like the Public Company Accounting Oversight Board in the U.S. (PCAOB). At present, there is a wide-ranging discussion within the U.S. government to tie such access to the ability of foreign companies to wanting to list or stay listed on U.S. exchanges. The discussion of this issue targets China and could be viewed as an outgrowth of the broader disputes between the two countries, in which case it presents the risk of politics shifting the focus of regulators away from investor protection, maintaining fair, orderly and efficient markets and facilitating capital formation and toward politics.
As a securities lawyer working on cross-border enforcement and regulatory issues, and as a former securities regulator, I have no doubt of the importance of the PCAOB being able to carry out its oversight of auditors who conduct work for companies with U.S. listings. Therefore, it is wholly appropriate, if not mandatory, for the SEC, the exchanges and, if need be, Congress to find ways to encourage cooperation. At the same time, the introduction of politics into the process risks undermining the international consensus that gave rise to the MMOU and is foundational to the growth of cross-border markets.