IOSCO Adopts Stick Over Carrot Approach Towards Non-Cooperative Regulators

On September 18, the International Organization of Securities Commissions (IOSCO) adopted policies to motivate procrastinating members to sign a decade-old Memorandum of Understanding (MoU) on information sharing.  IOSCO is comprised of securities and futures regulators from over 100 countries.  Its members include the US SEC and CFTC, UK FCA, Hong Kong SFC, and other influential agencies. 

Why is the MoU significant?

The MoU, introduced in 2002, enables regulators to obtain evidence from their foreign counterparts for use in investigations of securities fraud, market manipulation, and other financial misconduct.  The most recent signatory to the MoU, the State Securities Commission of Vietnam, brought the total to 97 out of 125 eligible members. 

What steps is IOSCO taking to increase cooperation?

As reported by the Financial News, IOSCO “named and shamed” the 28 remaining holdouts earlier this year.  The group published information about the laggards’ progress (or lack thereof) towards adopting the MoU.  

A source quoted in the Financial News said that while many of the holdouts want to sign the MoU, strict data privacy laws in their home countries have prevented them from doing so.  As Freshfields reported recently, rapidly evolving data privacy laws have become increasingly important in cross-border regulatory investigations, particularly in Asia and other high-growth markets.  

IOSCO’s September 18 announcement listed five measures to put additional pressure on the 28 holdouts.  The group will gradually impose more restrictive measures over the next year. 

The new sticks in IOSCO’s arsenal include:

- Restricting non-signatory members from nominating candidates for leadership positions in IOSCO after September 2013;- Asking all non-signatory members in leadership positions to step down after March 2014;- Prohibiting non-signatory members from participating in IOSCO policy committees after June 2014;- Suspending all voting rights of non-signatory members after September 2014; and- Encouraging signatory members to adopt policies restricting companies and investors from non-signatory countries from participating in financial markets.

With respect to the final measure, IOSCO cited policies of the Hong Kong SFC and the Securities and Exchange Board of India that limit market participation by companies and investors from non-signatory countries.

Who are the remaining holdouts?

The measures target several major emerging market economies, including:

- Russia;- Indonesia;- Argentina;- Chile;- Philippines- Mongolia;- Venezuela; and- Bangladesh

What does this all mean?

- In the short term, securities and futures regulators from non-signatory countries are likely to become more isolated from the global enforcement community.

- Also in the short term, companies and investors from non-signatory countries may face additional obstacles in attempting to participate in certain financial markets.

- In the long run, however, if the measures are successful, worldwide cooperation among securities and futures regulators will increase, likely leading to further information sharing and cross-border investigations involving multiple regulators.

- Finally, continuing a recent global trend, we are likely to see additional amendments to data privacy laws in non-signatory countries.