Now that you’ve seen what ACA Insight has to offer, don’t be without it. Subscribe now!

The weekly news source for investment management legal and compliance professionals

Current subscribers - please log in to the website in the upper right-hand corner

News August 6, 2018 Issue

International Memorandums of Understanding: How the SEC Uses Them

It will come as no surprise to many advisory firms to learn that the SEC has written agreements of cooperation, known as memorandums of understanding (MOUs), with dozens of other countries. But what may be less understood is just what those MOUs permit the agency to do, and how the SEC works with foreign countries under the agreements.

A MOU is basically a written agreement to cooperate on an ongoing basis. MOUs between the United States and other countries date back at least 30 years (Canada and the U.S. signed one in 1988), and are used both in an enforcement context, i.e., to gather evidence or interview witnesses in other countries; and in a regulatory supervision context, as in the sharing of regulatory information or cooperation when a firm is registered both in the U.S. and in another country. The SEC’s Office of Compliance Inspections and Examinations also cooperates under MOUs with other countries, and falls in this category.

There were 1,272 Division of Enforcement requests to the agency Office for International Affairs for international assistance in fiscal year 2017, according to the agency’s FY 2017 Annual Performance Report. The report estimated that there would be 1,389 such requests in FY 2018 and 1,506 in FY 2019. As for SEC responses to foreign requests for SEC enforcement assistance, the report said that there were less than half of what the SEC requested from foreign regulators in each fiscal year: 599 in FY 2017, 627 estimated in FY 2018, and 655 expected in FY 2019.

In addition to the bilateral MOUs between individual countries, there is also a multilateral MOU (MMOU)?formed under the auspices of the International Organization of Securities Commissions (IOSCO) in May 2002. Currently, 118 countries are signatories of that agreement, said Debevoise partner and former SEC Foreign Corrupt Practices Unit chief Kara Brockmeyer.

An MOU, while a legal document, is more of a "protocol of cooperation," said ACA Compliance Group senior principal consultant Andrew Petillon.

"One of the benefits of an MOU is that once it is in force, it stays in force," Brockmeyer said. "You do not need to re-do it every time you need to obtain information."

The agency uses these multilateral and bilateral information sharing arrangements to "facilitate consultation and cooperation with its foreign counterparts," the SEC says. "MOUs establish clear mechanisms for the exchange of information, including setting forth the terms and conditions for sharing and protecting the confidentiality of non-public information."

Following is a summary guide to just how these MOUs work and how the SEC uses them, whether for enforcement, examinations or in a regulatory supervision context.

IOSCO and MOUs

The two types of agreements – the IOSCO MMOU and bilateral MOUs – are complementary, Brockmeyer said. While the IOSCO MMOU is used frequently because of the number of countries that are signatories, "it is relatively limited in terms of what you get out of it." The bilateral MOUs negotiated directly between two government regulatory agencies (i.e., the SEC and the United Kingdom’s Financial Control Administration) may provide more comprehensive cooperation.

"Bilateral MOUs have proven crucial to investigations undertaken by the Commission’s enforcement staff, and, as such, the SEC considers these bilateral arrangements to be an excellent supplement to the information sharing mechanism of the IOSCO MMOU," the SEC states. Given the existence of the IOSCO agreement, the agency staff now "strongly recommends the negotiation of bilateral MOUs only if a foreign securities authority is empowered to provide assistance beyond that required by the IOSCO MMOU, such as the ability to compel testimony or the gathering of Internet service provider, phone and other records other than bank, broker, and beneficial owner information on behalf of the requesting authority."

Cooperation under the IOSCO MMOU, on the other hand, is limited to providing information and documents that the other country’s regulator may have, obtaining specific information and documents regarding the matter under investigation, and compelling a person’s statement and possible testimony, according to Section 7 of the IOSCO MMOU.

Of course, that bilateral MOU will only be useful in that regard if the agreement with the foreign regulator allows whatever type of cooperation the SEC is seeking, said ACA Compliance Group managing director Kenneth Clowers. For instance, he said, in conducting examinations of firms in other countries, "some countries may allow the SEC to conduct the exam, while others may conduct the exam themselves, depending on the wording of their MOUs."

The process

As for applying for and executing an MOU or an MMOU, here’s how it works:

"Typically, when the SEC wants information from a foreign counterpart, it makes the request through the IOSCO MMOU and also under a bilateral MOU, if there is one, assuming that the foreign regulator is a signatory of both," said Brockmeyer.

For enforcement matters, a Division of Enforcement staff member will make a request by letter, typically drafted by a Division attorney and reviewed by the staff member’s supervisor, through the SEC’s Office of International Affairs, to the regulator in the desired country.

That letter, she said, will need to include:

  • The potential violation being investigated,
  • An overview and summary of relevant facts in regard to the case, and
  • The specific information the SEC is seeking.

The letter’s review by the Enforcement Division’s supervisor is enough to get the process rolling, Brockmeyer said. There typically is no need for the Division director or another senior Division executive to sign off on it. "At this point, the investigation is already well underway," she said. "By the time you are requesting a MOU, the Division is well aware of the investigation."

MOUs, then, are not for fishing expeditions. "They are not exploratory. Seeking one is not a kicking the tires kind of exercise," Brockmeyer said.

As for the response from the foreign regulator, she said that varies tremendously based on a number of factors, including who the request is going to and the type of documents or other permission being sought. "It could be 24 hours or it could be months."

Examination cooperation

When the request concerns a non-enforcement matter, such as the need to conduct an exam of a firm based on foreign soil, the process is not that different.

OCIE will first ensure that the budget exists to send an examiner to a different country, then official lines of communication would be opened up through the Office of International Affairs to the foreign regulator, Clowers said. Once permission is granted under the MOU, "appropriate introductions and arrangement to conduct the exam will be made."

Just how the exam will be conducted and whether the SEC or the foreign regulator will conduct it will also depend on a number of factors, said Petillon. These factors might include whether the target company is registered with the SEC, whether the target company is registered with the foreign regulator, and the provisions of the MOU, which might allow both regulators to supervise the exam.

Potential hiccups

None of this is to say that all this cooperation goes as smooth as silk. Even with the closest of countries, such as the U.S. and the U.K., problems might occur.

"For one, there are different sensitivities about issues like confidentiality, more so in Europe than in the U.S.," said Petillon. "The SEC can look through emails and personal communications. I’m not sure if this is an outright ban in Europe, but there is an understanding there that this is done less often than the SEC does it."

Aside from that, there are the normal delays involving bureaucracy that occur in any country, he said.