01 February 2017 - Post by:Kurt Wolfe
This blog post was co-authored by Matt Bower, a litigation and regulatory investigations partner based in Hong Kong.
The U.S. Securities and Exchange Commission (SEC) and the Hong Kong Securities and Futures Commission (SFC) recently entered into a Memorandum of Understanding (MOU) regarding the supervision and oversight of regulated entities that operate in the United States and Hong Kong (the 2017 Supervisory Cooperation MOU). The 2017 Supervisory Cooperation MOU enhances the agencies’ authority to share information relating to investment advisers, broker-dealers, securities exchanges, market infrastructure providers, credit rating agencies, and other regulated entities that operate on a cross-border basis in the U.S. and Hong Kong.
The 2017 Supervisory Cooperation MOU builds on previous agreements between the SEC and SFC, including a 1995 MOU Concerning Consultation and Cooperation in the Administration and Enforcement of Securities Law (the 1995 Enforcement Cooperation MOU), a 1995 Declaration on Cooperation and Supervision of Cross-Border Investment Management Activity, and the 2002 IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (the IOSCO MOU).
The 2017 Supervisory Cooperation MOU calls for regular consultations between the SEC and SFC, provides a process for one agency to request documents or information from the other, and details a procedure for an agency to conduct on-site examinations of a regulated entity in the other agency’s territory. In addition, the 2017 Supervisory Cooperation MOU authorizes each agency to disclose unsolicited information on a ‘voluntary basis’ if the information ‘will assist or enable the other [agency] in the performance of its supervisory functions’. The MOU also directs the agencies to give one another advance notice, whenever possible, of regulatory or rules changes and enforcement or regulatory actions.
At a high-level, from an SEC perspective, the MOU allows the SEC to conduct examinations of, or obtain information from, regulated entities that operate cross-border in the U.S. and Hong Kong; much like the SEC’s Office of Compliance Inspections and Examinations (OCIE) does domestically through the SEC’s National Examination Program.
In the U.S., OCIE examinations regularly turn up compliance deficiencies—and occasionally securities laws violations—that are referred to the Division of Enforcement for further action. Indeed, the number of enforcement referrals from the OCIE exam staff has increased markedly in recent years. And there remain open lines of communication between the Enforcement and OCIE teams.
Given that the 2017 Supervisory Cooperation Agreement is designed to facilitate a flow of information to the SEC that is similar to information the SEC regularly gleans from OCIE examinations, we would anticipate that information gathered under the MOU, too, could result in referrals to the SEC’s Division of Enforcement. Under the terms of the MOU, however, it is unclear how seamlessly that information may flow to the enforcement staff.
The 2017 Supervisory Cooperation MOU expressly provides that ‘information is not to be gathered under the auspices of the 2017 Supervisory Cooperation MOU for enforcement purposes’. Rather, an agency that wishes to use information obtained through the MOU for enforcement purposes, ‘including in conducting investigations or bringing administrative, civil or criminal proceedings,’ must obtain prior consent under the terms of either the 1995 Enforcement Cooperation MOU or the IOSCO MOU. An agency that wishes to obtain new information for enforcement purposes (e.g., testimony or witness statements that are not covered in the 2017 Supervisory Cooperation MOU) must make a request pursuant to either the 1995 Enforcement Cooperation MOU or the IOSCO MOU.
The guiding principle of the 1995 Enforcement Cooperation MOU is that the SEC and SFC should assist one another to the fullest extent possible in order to ‘enforce or secure compliance with the laws, regulations or rules of their respective jurisdictions’. To that end, the 1995 Enforcement Cooperation MOU established a permissive standard for the exchange of information in furtherance of an enforcement action, and under the MOU a request should be denied in only limited circumstances.
That the SEC and SFC regularly collaborate is, of course, no secret. For example, in a recent SFC enforcement action against Andrew Left’s Citron Research, the SFC publicly acknowledged the assistance it had received from the SEC. Similarly, the SEC has acknowledged assistance from the SFC in numerous enforcement actions over the years; most recently, in a December 2016 action that barred several market participants from participating in the penny stock industry due to their roles in sham offerings of microcap stocks.
The 2017 Supervisory Cooperation MOU between the U.S. and Hong Kong is significant because it demonstrates the regulators’ continued commitment to cooperate in the supervision and oversight of regulated entities that operate in those jurisdictions. It also provides a potential new flow of information for enforcement referrals.
Investment advisers, broker-dealers, securities exchanges, market infrastructure providers, credit rating agencies, and other regulated entities that operate cross-border in the U.S. and Hong Kong should note this development. As Paul Leder, the SEC’s Director of the Office of International Affairs, observed, ‘By creating a formal channel for exchanging supervisory information with the SFC, this new arrangement will enhance the SEC’s ability to supervise firms on a cross-border basis’.