The International Organization of Securities Commissions published a consultation report discussing different theoretical approaches to cross-border regulation, evaluating such approaches, and ruminating regarding the challenges and opportunities for greater cross-border regulatory cooperation. Analysis in the report derived from an IOSCO member survey from October 2013 to April 2014.
IOSCO is an international body that brings together most of the world’s principal securities regulators. Currently, the organization estimates that its members regulate more than 95% of the world’s securities markets. Its members include over 120 securities regulators and 80 other securities market participants, including exchanges.
In the first instance, IOSCO identified three principal approaches to cross-border regulation: (1) national treatment—meaning the application of applicable rules generally the same to both domestic and foreign persons; (2) recognition—meaning that a domestic regulator relies on a foreign jurisdiction’s regulatory scheme because it assesses that it is “sufficiently comparable; and (3) passporting—meaning that a single jurisdiction’s authorization is satisfactory to permit activities in other jurisdictions.
According to IOSCO, jurisdictions using national treatment do so typically to maintain “a high level of investor protection, maintain market integrity and reduce systemic risks by ensuring that all entities and their activities within a particular market are subject to the direct oversight of the local regulator of that market.” Some survey respondents claimed that this method of regulation helps smaller jurisdictions compete with larger jurisdictions. This is because,
…national treatment does not require the host regulator to conduct an assessment of a regulatory regime that applies to a foreign entity in its home jurisdiction or to issue any type of determination with respect to that regime, there is less of a risk that participants from smaller markets would be excluded by virtue of the fact that authorities would target evaluations of foreign regulatory regimes toward larger and more sophisticated markets which, regardless of any lack of discriminatory intent, could have a discriminatory impact.
Survey respondents using the recognition approach, however, claimed they did so because it improved capital flows and domestic market access to oversee environments; attracted foreign investment to the domestic market; helped ensure adequate investor protection, maintain market integrity and reduce regulatory arbitrage where foreign services, products and market structures were accessible by domestic persons; and enhanced ties with foreign regulators.
The IOSCO survey provided insight into some practical obstacles inhibiting the recognition approach. These included limitations on “human or other resources” necessary to evaluate foreign regulatory regimes; insufficient knowledge and expertise to assess foreign regulatory regimes—particularly when there may be constant changes and language barriers; and regulatory gaps due to differences in basic frameworks and concepts.
Ultimately, claimed IOSCO, the decision on approach will depend on the type of activity and perceived risk; the “robustness and effectiveness” of the foreign regime; and an assessment of the costs and benefits to regulators and markets.
To help promote international cooperation, some survey participants recommended that IOSCO enhance international dialogue between policy makers and regulators in different jurisdictions; provide a “central hub” for information; develop guidelines for assessing different regulatory regimes; and increase the granularity of IOSCO’s own standards and principles, among other measures.
Comments to IOSCO’s consultative report will be accepted through February 23, 2015.