SEC Commissioner Gallagher Delivers Remarks on Regulatory Deference in Global Markets (with Lofchie Comment)

SEC Commissioner Daniel Gallagher recently spoke at the Gulf Cooperation Council Regulators' Summit in Qatar. Gallagher focused his remarks on the globalization of financial markets and the resulting regulatory challenges. Specifically, the speech acknowledged that requiring market participants to comply with the regulatory requirements of multiple jurisdictions can be costly, confusing, and cumbersome. Gallagher asserted that any attempt at cross-border regulatory "harmonization" would be futile and impractical; he favors instead an approach of voluntary regulatory deference.

Under this favored approach, each country would defer to others' regulatory schemes for the regulation of certain products, services or transactions. In support of this approach, Gallagher cited a November 2012 joint statement issued by twelve international regulators (linked below) agreeing to explore approaches in which each would recognize the sufficiency of another jurisdiction's regulation of cross-border over-the-counter derivatives traders and transactions. While noting that regulatory deference policies would require consensus and compromise, Gallagher stated that such policies were necessary to reduce regulatory burdens and foster efficient markets.

Lofchie Comment: There is a very wide gap between the SEC's approach to international regulation (which has put greater emphasis on cooperation) and the CFTC's approach (which has put greater emphasis on expanding U.S. jurisdiction). It is hard to see how the two commissions will be able to justify in the long term maintaining their opposing approaches, given the fact that the products that they regulate are so closely entangled. Ultimately, the SEC approach will have to be one which the U.S. regulators adopt. The rest of the world is unlikely to submit to the CFTC's approach. The CFTC’s expansive approach seems more likely to result in retaliation by non-U.S. regulators against U.S. financial institutions. See, e.g.,European Commissioner Barnier on U.S.-EU Cooperation [or the Lack Thereof] (with Lofchie Comment)

Click here to view speech in full (links externally to SEC website).See also: Joint Press Statement of Leaders on Operating Principles and Areas of Exploration in the Regulation of the Cross-Border OTC Derivatives Market (cited in the Gallagher speech).