Thursday, August 25, 2016

The Long Reach of the SEC

Globalization is Giving the SEC a Cross-border Focus

Author: David Schwartz J.D. CPA

In a June 28, 2016 address in London, Andrew J. Donohue, Chief of Staff at the U.S. Securities and Exchange Commission, gave his perspective on the expanding intersection between U.S. securities regulation and the global securities community. The past few decades have seen a significant increase in foreign entities subject to SEC regulations as well as increases in cross-border holdings, resulting in a need for greater cooperation among regulators of different countries. Given the SEC’s greater cooperation and coordination with its foreign counterparts, Mr. Donohue took the opportunity to discuss the the SEC’s global reach within the securities industry, the importance of international cooperation on the major issues facing in today’s markets, as well as providing an overview of the significant work the Commission and its staff have done to address the globalization of the securities markets.


While the SEC’s mandate to oversee the U.S. securities markets remains the same, the significant increase in cross-border activities of investment advisers, broker-dealers, investment companies, transfer agents, and foreign issuers means that the Commission’s reach has expanded beyond the U.S. as well.  



"The globalization of our securities markets touches on most facets of this work – from investment advisers and broker dealers, to cross-border holdings and foreign issuers, as well as our enforcement and examination efforts.


In the investment adviser space, for example, the number of investment advisers registered with the Commission that have their principal office and place of business outside the U.S. has increased nearly 150% over the last 13 years, while the amount of corresponding regulatory assets under management of those foreign advisers has more than quadrupled during that time to $8.7 trillion.  This growth necessitates broad international cooperation especially as U.S. domestic-registered investment advisers are also registered with over 50 different foreign financial regulatory authorities.


The amount of cross-border holdings also has grown exponentially.  In 1994, according to U.S. Treasury data, U.S. investors held $870 billion in foreign securities.  By the end of 2014, the latest data available, that number had risen to nearly $9.6 trillion.  During roughly that same period, foreign holdings of U.S. securities rose from $1.2 trillion to over $17.1 trillion.  In addition, there were over 900 foreign private issuers registered with the SEC at the end of 2015.


Although less dramatic compared to the investment adviser and investor communities, the Commission’s global reach can also be seen among broker-dealers registered with the Commission as 60 are headquartered abroad."


This increasingly international activity has necessitated an increasingly global financial regulatory system. As a result, the SEC has engaged more actively with its foreign counterparts either directly, or through international groups like IOSCO and the FSB, to harmonize regulations, "enhance investor protection, facilitate capital formation, and encourage fair, orderly and efficient markets."


"The benefits from international collaboration are broad and considerable.  Effective cooperation among regulators, for example, can foster the development of stronger standards and greater market efficiencies.  In 2012, IOSCO and the Committee on Payments and Market Infrastructures (CPMI) jointly published the Principles for Financial Market Infrastructures, or PFMI, intended “to enhance safety and efficiency in payment, clearing, settlement, and recording arrangements, and more broadly, to limit systemic risk and foster transparency and financial stability.”  SEC staff worked alongside U.S. regulators and our foreign counterparts on these robust standards.  Building on the framework set forth in the PFMI, in 2015 CPMI, IOSCO, the Basel Committee on Banking Supervision (BCBS), and the FSB launched an ambitious joint workplan aimed at enhancing the resilience, recovery planning, and resolvability of central counterparties (CCPs) that are systemically important in multiple jurisdictions.  The development of updated, targeted guidance in these critical areas is currently underway, and expected sometime next year."


This international engagement has enhanced the SEC’s ability to pursue enforcement actions as well, allowing the SEC to leverage information and resources of their counterparts. According to Mr. Donohue, this increased engagement has also allowed the Commission to cooperate with emerging threats like cybersecurity. 


After overviewing some of the SEC’s work with international reach in areas like money market fund regulation, asset management, and mutual fund leverage and use of derivatives, he discussed how the SEC is working with international bodies like the FSB and IOSCO as well as its regulatory counterparts on addressing market structure, facilitating capital formation, and strengthening the SEC’s enforcement and examination programs in an international context.  


With continued global engagement, Mr. Donohue said, the SEC should be able to address rising challenges, while at the same time keeping up with financial innovations, regardless of whether they arise in the U.S. or abroad.  


The full text of Mr. Donohue’s speech may be read at: