SEC Chairman Walter Speech on Global Regulation (with Lofchie Comment)

SEC Chairman Elisse Walter delivered a speech (via video) to the Australian Securities and Investments Commission ("ASIC"), in which she focused on the obligation of financial regulators to work together, and to consider the burdens that inconsistent or conflicting regulation can put on market participants. The topic of her remarks which was likely of immediate interest to market participants was the implementation of Dodd-Frank.As a starting point, Chairman Walter stated the SEC took the view that consideration of the international implications of swap regulation was so important that the SEC would not implement domestic requirements until it had determined how these requirements would affect cross-border transactions.

In terms of the actual application of U.S. rules to non-U.S. firms, Chairman Walter indicated that the SEC would rely on "substituted compliance to the maximum extent possible"; i.e., that the SEC would rely on the rules of non-U.S. regulators. For example, she indicated that where the SEC had five general areas of regulatory requirements, and another country had comparable requirements in four of those areas, the SEC would rely on the other country's requirements as to those four areas and impose its own requirements only as to the one area not regulated by the other jurisdiction.

Lofchie Comment: The difference in the regulatory approaches taken by the SEC and the CFTC continues to be fairly remarkable, with the SEC taking the view that a complete set of rules should be in place before requiring compliance, and the CFTC taking the view that each rule should be adopted and go effective as quickly as possible. Whichever Commission's approach one favors, the fact that the United States has two principal regulators taking absolutely divergent approaches to the regulation of very similar transactions under near-identical statutory provisions is a demonstration that the structure of financial regulation which we have implemented in the United States imposes very material costs on U.S. market participants (not only on regulated entities, but also on customers) who must comply with two different sets of rules governing similar activities.Likewise, the regulators have taken different approaches to their relationships with offshore regulators, with the SEC taking a more cooperative approach and the CFTC tending toward the view that all firms must comply with the full panoply of U.S. regulations. The SEC’s approach as set forth in Chairman Walter’s remarks: that the United States must defer to non-U.S. regulators with respect to the regulation of non-U.S. financial institutions to the maximum extent possible is simply the most practical approach. The opposite approach, as attempted by the CFTC, was to try to impose the full burden of U.S. regulation on non-U.S. firms. This met with very material resistance from non-US regulators (to say nothing of non-U.S. financial institutions) and so seemed unworkable, with the result that the CFTC has been forced to retreat, at least for now, from its original very expansive global reach. In short, it is very likely that both the SEC and the CFTC will end up accepting substituted compliance as to non-U.S. firms. Unfortunately, even substituted compliance will itself present some very significant difficulties. First, it will require the SEC and the CFTC each to review the rules of potentially numerous non-U.S. jurisdictions against its own rules, a challenging task in itself (even leaving aside the difficulties of translation). Second, that the burdens of U.S. regulation imposed by Dodd-Frank on U.S. firms are impractical and not well considered. Thus, in a world of substituted compliance, any non-US firm that is subject to a well-designed scheme of swaps regulation is going to have a very material advantage in competition against a U.S. firm subject to Dodd-Frank. The end result is that business will move overseas. &

Click here to view speech (links externally to SEC website).For a comprehensive listing of recent news items on the extraterritorial application of Dodd-Frank, link toCurrent Topics - Extraterritorial.