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(The article featured
below is a selection from Hedge
Funds and Private Equity: Risk Management and Regulatory Update, which is
available to subscribers of that publication.)
SEC Has International Enforcement Abilities Regarding Sovereign Wealth Funds
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.
However, 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. 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.
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