Securities Regulation in the Interconnected, Global Marketplace

It is my pleasure to participate in this year’s International Bar Association Annual Conference at the request of your president, David Rivkin, whom I first came to highly admire from our days as very young lawyers. He is a tremendous lawyer and leader. In reviewing your conference program, I was struck by the significant overlap with issues currently on the SEC’s agenda.

As the regulator of the world’s largest securities markets, and thousands of globally-active firms, the SEC is naturally very engaged in many issues that extend beyond the U.S. border. Indeed, the first speech I gave as Chair—after only three weeks on the job—was about the SEC as an international regulator, having spent a surprising amount of time on international meetings and issues. The centrality of international issues to financial regulation and the SEC has not changed during these last three and a half years.

The world’s capital markets are indisputably global and interconnected. A couple of quick metrics make the point: as of 2015, U.S. investors held nearly $9.6 trillion in foreign securities, and foreign holdings of U.S. securities were over $17.1 trillion. Consider as well single-name CDS activity—a truly global market where over $7 trillion dollars in notional value was outstanding at the end of 2015: only 12 percent of global transaction volume was between two counterparties located in the U.S., while 48 percent was between one counterparty located in the U.S. and the other located abroad. Witness also the financial crisis when the collapse of the markets for certain products cascaded throughout the global financial system, gravely impacting many interconnected financial institutions, and then all of the ensuing efforts to take measures, both domestically and internationally, to prevent a recurrence.

Today, all securities regulators need to be very cognizant of our global, as well as domestic, responsibilities, whether we are implementing standards for the global over-the-counter derivatives markets; detecting and protecting against new systemic risks in our financial systems; helping each other enforce our respective laws by gathering evidence from across the globe; examining our registrants, wherever they may be located, to ensure that they are abiding by the rules; or raising the bar on world-wide enforcement efforts to combat corrupt corporate payments, through our Foreign Corrupt Practices Act (FCPA) or similar regimes in other jurisdictions.

All securities regulators, around the world, share the overarching obligation to protect investors—the end-users of the products and services that we regulate. Fulfilling this all-important function is not possible if we stop our work at country borders or fail in our efforts to achieve robust international cooperation. Neither the SEC, nor other regulators, can go it alone, and we have many avenues to facilitate working together.

The SEC communicates frequently with market regulators, central banks, finance ministries and law enforcement authorities in other jurisdictions, directly and through our participation in international organizations—most notably, the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB). The SEC also works bilaterally and multi-laterally with foreign authorities, both on policy issues with a cross-border dimension and on supervisory and enforcement issues. Indeed, the SEC has over seventy-five formal cooperative arrangements with foreign regulators and law enforcement agencies and is a signatory to the IOSCO Multilateral Memorandum of Understanding (MMOU) on enforcement cooperation, to which there are now over 100 signatories. All of these arrangements facilitate sharing critical enforcement and supervisory information. And the SEC and other countries make extensive use of them.

While international cooperation and coordination have increased significantly in recent years, we still face significant challenges from laws and practices that can impede strong regulation, supervision, and enforcement. And it is incumbent upon the SEC and our international counterparts to work through these issues in a way that provides maximum cooperation and coordination and avoids regulatory arbitrage. We must do this while recognizing that we do not operate in a one-size-fits-all world and that there are, for good reason, significant differences in our domestic markets, as well as our regulatory regimes. I will not attempt grand solutions today [Sept. 21, 2016]. But, I will focus you on a few priority areas that illustrate the dimensions of the SEC’s international role and some of the challenges we face in maximizing the effectiveness of national regulatory regimes in a global market.

There is no shortage of issues to choose from. I have settled on three topics for today—one regulatory, one supervisory, and one from the enforcement space. The first topic is the SEC’s current work to modernize our regulation of the asset management industry, which has been one of the SEC’s core responsibilities since the 1940s under the Investment Company Act and the Investment Advisers Act, and which is of particular interest to other domestic and international authorities assessing potential systemic risks to financial stability. Next, I will raise an area of significant supervisory challenge for us in 2016—the ability to examine our non-U.S. based registrants for compliance with SEC laws and regulations. Finally, because of its importance and its interest to this audience, I will briefly report on the SEC’s FCPA enforcement program, which is so dependent on international cooperation for its success.

Regulating the Asset Management Industry

During my tenure as Chair, the SEC, as the primary regulator of the vast majority of the asset management industry, has undertaken an ambitious agenda to modernize and enhance our regulatory regime. On the international front, the FSB and IOSCO have also been focusing on this critical sector of the global markets.

The globalization of our securities markets comes during a time of exponential increase in the assets under management by SEC-registered investment advisers—from approximately $21.5 trillion in 2001 to approximately $67 trillion as of this month. And the asset management is increasingly a world-wide industry: investment advisers registered with the Commission with their principal office outside the U.S. have increased nearly 150 percent over the last 13 years. Of the more than $37 trillion in worldwide assets invested in regulated open-end funds, an estimated 34 percent of those are regulated in Europe, 13 percent in Africa and the Asia Pacific, and 5 percent in the Americas outside the U.S. As the industry has grown and expanded globally, it has also become increasingly complex in the range of strategies and types of funds offered, which presents their own set of regulatory challenges.

To address the challenges and risks to investors and funds arising from this evolution, the SEC has proposed several transformative rulemakings to modernize our regulatory tools, as I publicly outlined in December 2014. These proposals include: enhancing effective liquidity risk management by mutual funds and exchange traded funds (ETFs); limiting the amount of leverage that funds are permitted to obtain through the use of derivatives; modernizing funds’ disclosure and reporting of information; and requiring investment adviser business continuity and transition planning. Recently, the Commission adopted the final rules to enhance the reporting and disclosure of information provided by investment advisers, including, importantly, new required reporting about separately managed accounts and their use of derivatives and borrowing. We expect the other proposed reforms to be finalized in the near-term as well.

Throughout these initiatives, the SEC staff have analyzed a range of options on how best to reduce potential risks, including those that may have systemic impact, in the asset management industry, while first and foremost protecting investors and still facilitating capital formation. Our regulatory initiatives have reflected an activities-based approach focused particularly on registered funds’ liquidity management and use of derivatives to obtain leverage.

Internationally, the FSB and IOSCO are pursuing a similar activities-based approach, as evidenced by the FSB’s recent request for comment on asset management activities and potential systemic risk. Likewise, IOSCO recently stated that a current priority is to address data gaps on separately managed accounts generally and in relation to those accounts’ leverage and derivatives exposures. In the U.S., the Financial Stability Oversight Council (FSOC) has also been engaged in a review of the potential systemic impacts of asset management products and activities. We have been heavily engaged across all these efforts, contributing the SEC’s extensive knowledge and the rationale of our recent reforms.

In short, regulating the asset management industry is a core pillar of the SEC’s day job, and its potential impact on the global financial system also has the attention of the SEC and authorities worldwide. The SEC will continue to share its long-standing expertise with other regulators as we pursue our comprehensive approach to asset management regulation and shared objective and responsibility to the interconnected, global marketplace.

Supervising Financial Firms in a Global Marketplace: Data Protection and the Regulators’ Need for Access to Data

Another internationally important topic affecting the SEC is foreign privacy and other data protective laws that impact cross-border data transfers for supervisory purposes. A large and varied set of foreign firms have chosen to register with the SEC, including brokers, investment advisers, and other intermediaries, such as clearinghouses and platforms that facilitate trading, disseminate information to the public, and serve a variety of other critical functions in the securities markets. They also manage assets in growing amounts—advisers registered with the SEC with principal offices outside the U.S. now account for $8.7 trillion of assets under management—an amount that has quadrupled since 2003. As a result, the SEC is confronted with the challenge to supervise these registrants, wherever in the world they maintain operations, personnel, and records.

Various countries’ laws, including blocking statutes, privacy, bank secrecy, and state secrecy laws, are designed to achieve important national objectives. But they also frequently create obstacles to cross-border flows of information between regulators and foreign-domiciled registrants, thus complicating, and in some instances impeding, the regulators’ ability to carry out their supervisory responsibilities. Some of these laws, for example, can prohibit foreign-domiciled SEC registrants from providing the SEC with information about clients and employees, including names and account information. Other laws can prevent foreign-domiciled registrants in certain jurisdictions from responding directly to SEC requests for information without authorization by the foreign government. Finally, certain laws can prevent the SEC from being able to conduct any type of examinations of registrants, either onsite or by correspondence.

These legal barriers obviously raise significant issues for the SEC and our international counterparts. Effective oversight of globally-active firms requires that financial regulators have a robust supervision program. I cannot emphasize strongly enough how critical the records we seek and the examinations we conduct are to the SEC’s ability to assess firms’ compliance with U.S. law and to protect investors and the markets. Examinations can help identify weaknesses or deficiencies in a firm’s compliance program that, if addressed, can help prevent violations of law and harm to investors. Many SEC examinations, both risk-based examinations and those initiated for cause, also identify violations that already have occurred and that need to be addressed to avoid further harm.

Under U.S. law, all firms registered with the SEC are required to maintain certain records relating to their operations and provide these records to the SEC staff upon request. The records document how the firm and its employees conduct their business in practice and provide critical insight into the firm’s risk profile, the strength of a firm’s internal controls, and whether the firm is complying with applicable securities laws. The SEC staff most frequently requests these basic business operations records from registrants, both domestic and foreign, in connection with a non-public supervisory examination, which typically focus on a firm’s compliance with its legal obligations and its adherence to its own policies and procedures.

During examinations, SEC staff may also request information on a firm’s clients or its employees, when they are essential to the SEC’s evaluation of a registrant’s compliance program. Such information is needed to allow us to assess a registrant’s compliance and to ensure that their investors are protected, but may raise privacy concerns in some jurisdictions.

In addition to having direct access to registrant books and records, a responsible regulator must also be able to interface directly with the firms it regulates. During an examination, SEC staff expects registrants to make representatives from both management and staff available to enable examiners to learn more about the registrant’s operations and the records examiners have reviewed, as well as to prevent misunderstandings about the firm’s business. This is a core component of SEC staff’s evaluation of a firm’s approach to compliance and adherence to law.

Having direct relationships with the firms we oversee also helps to establish open and frank lines of communication with our regulated community. Ongoing discussions with SEC registrants also generally foster compliance within a firm and encourage a firm’s support of its compliance professionals. These discussions can also facilitate self-reporting by a firm that has identified misconduct by its employees.

Let me be clear, I fully support supervisory cooperation among regulators in fulfilling our respective oversight activities of globally active firms and I am not suggesting that the SEC or any regulator should operate in isolation. Indeed, the SEC generally carries out its examinations and other ongoing monitoring of internationally regulated entities in close consultation with our foreign regulatory counterparts, who, through their own interactions with the firm, have invaluable insights about a firm’s compliance culture and practices and have developed their own risk assessment of the firms we both regulate.

In addition to exchanging views on a firm’s risk profile and disciplinary history, the SEC and our international counterparts share previous examination results and refer supervisory issues to each other, which assists our respective staffs in directing their supervisory resources to aspects of the firms’ business that present the greatest risk. Supervisory cooperation has been an excellent complement to the SEC’s own oversight activities of our registered firms.

More than ever before, it is critical that jurisdictions break down their information-sharing walls. Regulators must be able to directly supervise the entities registered with them to ensure compliance with the laws in their jurisdiction. One of the important lessons of the 2008 financial crisis was that regulators need a complete and accurate picture of the financial firms they regulate, regardless of where these regulated entities are located or where their regulated activities occur. As regulators, we cannot afford to have a blind or even cloudy spot.

Strong Enforcement Against Foreign Corrupt Payments

Now let me say a few words about the FCPA, both about its importance and our current enforcement program. As a securities regulator, the SEC oversees and enforces a robust disclosure regime, one of the fundamental premises of which is that public companies must accurately disclose the drivers of their business successes (and failures) and the associated risks to the company’s future performance.

A company’s use of illicit payments—specifically, the payment of bribes and other things of value to obtain or retain business—masks the reality that a company is not competing on its merits. Instead, the company has relied on bribes to succeed. Making illicit payments also exposes a company to potential legal liability in multiple jurisdictions, hurts a company’s reputation, and jeopardizes the company’s future. Above all, corrupt payments undermine the integrity of our financial markets and have a corrosive impact on many institutions and businesses around the world. For these and other reasons, the U.S. enacted the FCPA in 1977, making it illegal, both civilly and criminally, for U.S. companies and individuals acting on their behalf to pay bribes to foreign officials. Vigorous enforcement of the FCPA is a high priority for both the SEC and the Department of Justice (DOJ).

The SEC’s record enforcing the FCPA is very strong and 2016 is no exception. This fiscal year, the SEC has already filed 17 actions against entities and individuals for FCPA violations, a nearly 30 percent increase from last year, and obtained more than $290 million in monetary remedies. As part of our proactive FCPA program, the SEC also makes occasional use of deferred prosecution and non-prosecution agreements in order to promote self-reporting, cooperation, and remediation.

To effectively combat bribes paid by global companies that benefit from access to our capital markets by listing their stock on U.S. exchanges, the SEC is often dependent on our international counterparts to provide vital cooperation and assistance. And I am very pleased that the SEC has received assistance from an expanding list of countries in FCPA cases filed this fiscal year. Let me illustrate with just one impressive example.

Earlier this year, the SEC, DOJ, and Dutch regulators entered into a global settlement with a telecommunications provider based in the Netherlands, where the company agreed to pay $795 million to resolve its violations of the FCPA in Uzbekistan. The SEC charged that the Dutch company offered and paid bribes to an Uzbek government official, who was related to the President of Uzbekistan, as the company sought licenses, frequencies, channels, and number blocks in the country’s regulated industry. We received significant cooperation from numerous countries during this complex investigation, including the civil and criminal authorities from Bermuda, the British Virgin Islands, the Cayman Islands, Estonia, Gibraltar, Ireland, Latvia, the Marshall Islands, Netherlands, Norway, Spain, Sweden, Switzerland, and the United Arab Emirates—truly, an exceptional global effort in a very important case.

In addition to actions against companies, we prioritize charging individuals involved in bribery schemes where we have the necessary evidence and jurisdiction over the offender. Holding individuals accountable for their misconduct remains one of the most powerful deterrents in any enforcement area.

Not surprisingly, FCPA cases involving individuals requires significant and multi-faceted cooperation from our international partners. And we are getting it. This year alone, our FCPA cases against individuals included a CFO who helped falsify the company’s books and records, an engineer who bribed foreign officials and enriched himself, and a CEO who used sham consulting agreements to authorize improper payments to officials to settle a labor dispute. In these cases, the SEC received meaningful and substantial assistance from our international counterparts, including civil and criminal authorities from Austria, the British Virgin Islands, Canada, the Cayman Islands, Cyprus, Denmark, Estonia, Finland, Latvia, and Liechtenstein.

The fight against bribery and corruption is obviously a global effort and not limited to offending U.S. companies or their employees operating abroad. We all recognize its importance, as evidenced by the renewed commitment and focus on what more the entire international regulatory community can do to be more effective and better coordinated in dealing with corruption issues worldwide. As a first step, this requires countries to pass strong comprehensive laws targeting bribery and many jurisdictions have taken this crucial step. For example, according to a 2015 report by the Organisation for Economic Co-operation and Development (OECD), bribery is now a crime in all 41 countries that are parties to the OECD Convention. This is very significant because these countries—combined—cover 64 percent of global outbound foreign direct investments and more than 50 percent of the world’s exports. These countries are also home to 95 of the largest 100 non-financial—and all of the top 50 financial—multinational enterprises in the world.

A quick look at the most recent statistics compiled by the Working Group on Bribery of the OECD are also encouraging. For example:

• Between 1999 and 2014, parties to the OECD Convention brought criminal prosecutions against 361 individuals and 126 entities for foreign bribery;
• At least 95 of the individuals were sent to prison for foreign bribery; and
• In addition, at least 110 individuals and 200 entities were sanctioned in civil, administrative, and criminal actions relating to foreign bribery, including accounting-related violations.

The same OECD report also indicates that Germany, Hungary, South Korea, and the United Kingdom, in particular, have had impressive results in holding both individuals and entities accountable in criminal foreign bribery cases.

These regulatory actions are important achievements, as foreign bribery must be a global regulatory priority. Cost alone mandates that. Another OECD report shows that the cost of corruption equals more than 5 percent of global gross domestic product, or $2.6 trillion, with over $1 trillion of bribes paid each year.

The SEC will continue to do its part with our own vigorous FCPA program and by assisting international efforts of countries committed to doing their part to combat this particular corrosive conduct that undermines the integrity of our markets. And we will continue to strongly support the important efforts of the OECD’s Working Group on Bribery to expand and strengthen anti-bribery laws and enforcement throughout the world.

Conclusion

Let me stop there. While the SEC’s engagement internationally includes many other areas, including the ongoing work to enhance the resiliency of central counterparties, over-the-counter derivatives regulation, and emerging areas such as fintech, I hope I have provided at least a flavor of our very robust and wide-ranging work as a regulator in and of today’s global markets. Thank you.

* * *

The complete publication, including footnotes, is available here.