Thursday, April 24, 2008

SEC Has Int'l Enforcement Ability Regarding Sovereign Wealth Funds

By James Hamilton, J.D., LL.M.

Seeking to allay the fears of Senate Banking Chair Christopher Dodd, an SEC senior official outlined the Commission’s enforcement capabilities with regard to sovereign wealth funds. Ethiopis Tafara, Director of the International Affairs Office, told the committee that an effective enforcement mechanism takes on heightened importance when sovereign wealth funds are involved since, while cross-border enforcement assistance involving private actors is readily honored, help may not as forthcoming when the subject is the government itself.

But the SEC is not without tools, he assured, even when it comes to enforcement against a sovereign wealth fund. He emphasized that the SEC’s response would be firm if it was pursuing wrongdoing by a sovereign wealth fund and the jurisdiction in which it was based did not cooperate in the investigation. And even in the face of a lack of cooperation from the country in which the foreign actor is based, he continued, experience teaches that market manipulation, insider trading, and other illegal activities that take place in the market often leave sufficient evidence that the SEC can proceed with an enforcement action against the offender.

Moreover, being owned by a foreign government does not shield a sovereign wealth fund from liability under U.S. federal securities laws. It is a well-established principle that sovereign immunity does not extend to a state's commercial activities in another jurisdiction. While SEC enforcement cases involving a foreign entity are more complicated than those with no cross-border nexus, noted the director, the SEC staff has a strong track record of investigating such cases and working closely with its foreign counterparts in collecting evidence abroad. In 2007, the SEC sent more than 550 requests for assistance to foreign regulators, and received more than 450 in return. The SEC expects this number to grow as cross-border securities activity grows.

Importantly, he noted, cross-border regulator-to-regulator cooperation in enforcement investigations is now an international expectation. In 2002, IOSCO created a multilateral arrangement through which signatories to memorandums of understanding agree to share enforcement-related information. Currently, this arrangement has 47 signatories, with another 15 publicly committed to obtaining the legislation they need to provide this information. Further, in 2010, the ability to sign on to this MOU will become a criterion for continued IOSCO membership. Most of the governments that have sovereign wealth funds that invest in the United States are members of IOSCO, and many have already signed on to the MOU.

The director praised the international effort to develop best practices for sovereign wealth funds. He cited the IMF’s ongoing campaign to develop a set of voluntary best practices for sovereign wealth funds, as well as the European Commission’s proposed code of conduct for sovereign wealth funds. There is a growing consensus that sovereign wealth funds should disclose their investment positions and asset allocations and their governing home country regulations.