Procedural versus Substantive Coordination in International Financial Market Oversight

Article excerpt

SEC staff really first became internationally engaged with global international "networks" in the 1980s. Global connections in the world's capital markets were expanding fast, and borders were becoming an enforcement concern for securities regulators. The early networks the SEC helped construct had this enforcement focus in mind, and, reflecting this, the SEC's Office of International Affairs was originally an arm of the Division of Enforcement.

In many jurisdictions in the late 1980s and early 1990s, activities like insider trading were not illegal; even where they were, many securities regulators had limited domestic enforcement powers, let alone the power to share enforcement information with their foreign counterparts. Formal legal assistance treaties existed, but were typically tools by which only criminal authorities collected evidence on each others' behalf--and, of course, the SEC is not a criminal authority. So "soft-law" networks and informal, legally nonbinding information-sharing arrangements--what we call MOUs or Memoranda of Understanding--arose as a tool to get around these constraints and strengthen domestic enforcement powers in other markets so that regulators could help each other.

These "informal," nonbinding arrangements have worked very well. The SEC currently has enforcement information-sharing arrangements with more than 80 other regulators. However, when we consider their successes, we also need to keep in mind exactly what these MOUs do. Enforcement information-sharing arrangements are fundamentally about regulators supporting each other in fulfilling their own domestic mandates. In other words, "you help me detect and deter violations of my securities laws, and I'll help you detect and deter violations of your securities laws." The underlying laws do not have to be the same.

IOSCO AND PROCEDURAL COORDINATION

This is not to say that efforts to forge these arrangements have not had a certain "regulatory convergence" component. The International Organization of Securities Commissions (IOSCO), for example, has a subcommittee that reviews the laws and enforcement powers of regulators who wish to sign IOSCO's Multilateral MOU on enforcement-sharing. Through this subcommittee, IOSCO has successfully encouraged dozens of countries to adopt laws that give their regulators both more investigatory powers and the ability to use these powers to collect enforcement information on another regulator's behalf.

But I believe this convergence component to these enforcement networks is probably best viewed as procedural rather than substantive. As just one example, IOSCO has long pursued the elimination of dual illegality and dual criminality provisions in domestic law, i.e., prohibitions on assisting a foreign authority unless the violation alleged in abroad would also be a violation at home. (1) I suggest this is "procedural" rather than substantive because such legal and regulatory convergence does not really touch on the substance of how a jurisdiction oversees its own market--it just tries to eliminate barriers that hinder regulators from helping each other in applying their own substantive rules domestically.

THE FINANCIAL CRISIS AND SUBSTANTIVE COORDINATION

Particularly since the start of the recent financial crisis, however, there has been a significant change in emphasis among these soft law networks, beyond procedural coordination and convergence, and toward more substantive regulatory coordination and convergence. The impetus for this change is essentially two-fold:

1. The concerns of market participants that operate globally; and,

2. Especially following the financial crisis, the concerns of regulators over regulatory arbitrage and regulatory competition.

Regulatory Competition

This first concern--the concern of market participants--is quite understandable. Facing multiple overlapping regulations, regulated entities will prefer a system where every jurisdiction's regulations are the same or where adhering to the regulations of one jurisdiction is recognized by other regulators as sufficient for operating in their own market. …