Multilateral Policy Initiatives

The SEC is involved in discussions on policy initiatives with other securities regulators and a number of multilateral organizations designed to strengthen investor protection globally, facilitate cross border capital formation, improve market efficiency, and promote financial stability. The SEC's Office of International Affairs, along with staff from other SEC offices and divisions, participates in these organizations, often taking a leadership role on various projects. The initiatives cover a range of international regulatory and enforcement issues.

The following provides a brief description of multilateral policy initiatives being carried forward by various international organizations, in which the SEC participates. A description of these international organizations can be accessed in the left side bar menu. Note that some of these organizations explore a wide variety of economic and financial market issues. The SEC participates in those initiatives relevant to the securities sector and to issuers, market participants and investors.

Topics:

• Information Sharing
   
• Issuers
   
• Accounting and Auditing
   
• Intermediaries
   
• Markets
   
• Collective Investment Schemes
   
• Gate Keepers
   
• Enforcement

Information Sharing

Regulatory Memorandum of Understanding

On March 14, 2006, the SEC and the United Kingdom Financial Services Authority entered into a Memorandum of Understanding Concerning Consultation, Cooperation and the Exchange of Information Related to the Supervision of Financial Services Firms and Market Oversight (MoU). This arrangement provides for the exchange of information with regard to two general categories of entities: (1) affiliates within a financial group subject to consolidated supervision by the SEC, such as consolidated supervised entities, or by the UK FSA; and (2) firms registered both with the SEC and the UK FSA, including asset management firms. The MoU also sets forth the terms and conditions for the use and confidentiality of that information.

See also Press Release No. 2006-36 (March 14, 2006).

Issuers

Corporate Governance

Task Force to Strengthen Markets Against Financial Fraud

In response to the high-profile corporate governance, auditing, and financial reporting failures of the past several years, the International Organization of Securities Commissions (IOSCO) has worked to identify and address the issues and trends underlying these failures, including those relating to corporate governance. In February 2004, an IOSCO Task Force of Chairmen published a report on the role of securities regulators in strengthening capital markets against financial fraud, including in the area of corporate governance. The report recommends a series of actions aimed at addressing potential regulatory weaknesses. One of the areas for action is corporate governance, and in particular issuer board independence from management and the need to protect minority shareholders. The IOSCO Technical Committee authorized a Task Force on Corporate Governance in spring of 2005 to work on these issues. There are three main foci for the Corporate Governance Task Force: (1) a descriptive, thematic analysis of the definition and role of independent directors in listed companies, essentially so that the Organization for Economic Cooperation and Development (OECD) and others will benefit from the input of securities regulators when it comes to any future implementation assessment project; (2) a description of additional protections that may be required in situations where issuers are controlled by a dominant shareholder; and (3) a fact-finding study of how corporate governance rules and principles are enforced.

Organization for Economic Cooperation and Development (OECD)

In 2004, the OECD revised the OECD Principles of Corporate Governance, which were developed in the wake of the Asian financial crises in the late 1990s. The revisions take into account recent developments and experiences in OECD member and non-member countries and focus on: ensuring the basis for an effective corporate governance framework (including effective regulatory and enforcement mechanisms); improving possibilities for the exercise of informed ownership by shareholders; strengthening board oversight of management; and increasing attention to conflicts of interest through enhanced disclosure and transparency. The OECD is currently developing an assessment methodology to assist governments, regulators, and international and domestic institutions in evaluating the implementation of these principles.

Disclosure and Reporting

Debt Securities and Disclosure

In 1998, IOSCO published the International Disclosure Standards for Cross-Border Offerings and Listings by Foreign Issuers, which contain detailed disclosure standards applicable to equity securities. As a follow-up project, in 2005, IOSCO developed the International Disclosure Principles for Cross-Border Offerings and Listings of Debt Securities by Foreign Issuers. This report sets forth substantive disclosure principles for documents used in public offerings and listings of “plain vanilla” corporate debt securities.

Accounting and Auditing

Convergence of Accounting Standards

The convergence of national accounting standards, including US Generally Accepted Accounting Principles (US GAAP), with International Financial Reporting Standards (IFRS) has been an area of increased focus in various international fora. This work highlights the recognition by many regulators and market participants that such convergence could improve capital market efficiency by improving the transparency and comparability of information for investors and lowering compliance costs for issuers.

Since October 2002, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), the standard setters for US GAAP and IFRS, respectively, have been engaged in a project to converge the two sets of standards. The SEC has been very supportive of this effort. See discussion of SEC staff’s “roadmap”

In addition, the staff has been working with foreign regulators through IOSCO to develop an effective mechanism to facilitate consistency in the use of IFRS around the world. To this end, in October 2005, IOSCO issued a statement announcing that it is establishing arrangements for regulators to consult and share information on decisions on the application of IFRS. IOSCO’s efforts will include the creation of a database for cataloguing decisions made by regulators concerning the application of IFRS, which can be found here. A report detailing IOSCO's arrangement on IFRS regulatory interpretation and enforcement, published in October 2005, and updated during May 2006 can be found here.

The staff has also entered into a work plan with the Committee of European Securities Regulators, the main focus of which is the application by internationally active companies of IFRS and GAAP in the United States and the European Union, respectively. The staff of the SEC and CESR-Fin, the expert group within CESR focused on financial reporting, will share information about areas of IFRS and US GAAP that raise questions in terms of high-quality and consistent application. In addition, where appropriate, the staff of the SEC and the staff of CESR Members will consult on issuer-specific matters regarding the application of US GAAP and IFRS in order to facilitate a solution that contributes to the consistent application of US GAAP or IFRS by companies that are both listed in the EU and registered with the SEC. The SEC-CESR work plan can be found here.

Auditor Oversight

In 2004, IOSCO published a survey report on regulation and oversight of auditors. The survey provides a description of the structures and processes in place for regulation and oversight of auditing around the world, to serve as baseline information for regulators and oversight bodies and other organizations that are working to enhance auditor oversight and international audit quality.

In September 2006, an International Forum of Independent Audit Regulators (IFIAR) was established to carry out the following activities:

i) To share knowledge of the audit market environment and practical experience of independent audit regulatory activity;

ii) To promote collaboration in regulatory activity; and

iii) To provide a focus for contacts with other international organizations that have an interest in audit quality.

The independent audit regulators of Australia, Austria, Brazil, Canada, Denmark, France, Germany, Ireland, Italy, Japan, Mexico, the Netherlands, Norway, Singapore, South Africa, Spain, Sweden, and the United Kingdom are members of IFIAR. The US Public Company Accounting Oversight Board participated in this September meeting as an observer.

International Standards of Audit

In February 2005, IOSCO, the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors, the World Bank and the Financial Stability Forum announced the formal establishment of the Public Interest Oversight Board (PIOB) to oversee the public interest activities of the International Federation of Accountants (IFAC). IFAC is a global organization of the accountancy profession responsible for the development of the International Standards on Auditing as well as standards relating to independence assurance review and ethics. The establishment of the PIOB is the result of a collaborative effort by the international financial regulatory community, working with IFAC, to encourage high quality auditing standards that are set in the public interest. The efforts of the PIOB and IFAC relating to International Standards of Audit are supported and overseen by the Monitoring Group, comprising representatives of IOSCO, the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors, the World Bank, the Financial Stability Forum, and the European Commission. The Monitoring Group also provides a forum for engaging in discussions on global audit quality with the auditing profession.

Intermediaries

IOSCO-Basel Committee Report on Trading Activities

The Basel Committee on Banking Supervision (BCBS) in June 2004 published the Revised Framework for International Convergence of Capital Measurement and Capital Standards (known as “Basel II” or the “Revised Framework”). The Revised Framework seeks to improve on the existing rules governing the capital adequacy of internationally active banks by aligning regulatory capital requirements more closely to the underlying risks that banks face. A joint BCBS-IOSCO working group was tasked with identifying issues and proposing solutions regarding ways of making the capital charges imposed under the Revised Framework on securities held in a bank's trading book reflective of the actual risks posed by these transactions. In July 2005, this working group published a paper that aims to address five issues related to double default and trading activities, including: (1) treatment of counterparty credit risk for certain transactions; (2) treatment of double-default effects for covered transactions; (3) short-term maturity adjustment in the internal ratings-based approach; (4) improvements to the current trading book regime; and (5) design of a specific capital treatment for unsettled and failed transactions.

Outsourcing

Financial service providers are increasingly outsourcing some functions to third-party service providers. Outsourcing provides financial firms with a number of potential benefits, including the ability to obtain necessary expertise at a lower cost and to focus on their core businesses. In February of 2005, IOSCO released a report which detailed a set of principles on outsourcing in financial services. The IOSCO report outlines the potential key issues and risks that outsourcing activities can pose to intermediaries in the securities sector. In February 2005, the Joint Forum, a group of technical experts working under the umbrella of IOSCO, Basel Committee on Banking Supervision, and the International Association of Insurance Supervisors, separately released its own report on outsourcing, setting forth principles designed for the banking, insurance and securities sectors.

Credit Risk Transfer

Credit risk (or the risk that an obligor will default) can be transferred to another party, for example, by the transfer of the underlying asset or the use of credit derivatives. Credit risk transfer activity has the potential to contribute to more efficient and liquid markets and has been growing at a rapid pace in recent years. In order to improve the risk management practices and understanding of credit risk transfer by market participants, the Financial Stability Forum, a group comprised of representatives of G-7 finance ministers, central banks, and financial regulatory and supervisory authorities, along with international financial institutions and international regulatory bodies, requested that the Joint Forum undertake a review of credit risk activity. The Joint Forum’s report, which was released in March 2005, focuses on the newest forms of credit risk transfer and contains a series of recommendations for market participants and supervisors in the areas of risk management, disclosure and supervisory approaches.

Compliance Function

In April 2005, IOSCO published for public comment a consultation report entitled Compliance Function at Market Intermediaries. The consultation report sets out a number of principles with measures for implementation to assist market intermediaries to increase the effectiveness of their compliance function. The paper discusses a range of issues associated with the responsibilities of market intermediaries to establish a compliance function that identifies, assesses, monitors and reports on its compliance with laws and rules.

Central Counterparties

Central counterparties interpose themselves between counterparties to financial transactions, becoming the buyer to the seller and the seller to the buyer. While reducing risk to market participants, central counterparties serve to concentrate risks and responsibilities for risk management. IOSCO and the Committee on Payment and Settlement Systems of the central banks of the G-10 jointly established a Task Force on Securities Settlement Systems to promote the safety of financial markets by creating international standards for central counterparty risk management. In November 2004, the Task Force on Securities Settlement Systems published a report setting out comprehensive recommendations for risk management of a central counterparty.

Anti-Money Laundering Efforts

In 2004, the Financial Action Task Force (FATF), an inter-governmental organization dedicated to reforming legislation and regulation around the world to strengthen the global anti-money laundering infrastructure, revised the FATF Forty Recommendations. These Recommendations cover the measures that jurisdictions should have in place within their criminal justice and regulatory systems to combat money laundering and terrorist financing, the preventive measures to be taken by financial institutions, and the importance of international cooperation. As a condition of membership, FATF member countries agree to submit to a mutual evaluation by FATF members. Each member country is examined, in part, through an on-site visit conducted by a team of experts in the legal, financial and law enforcement fields selected from among the other FATF member countries. The visit is an important part of the evaluation process, which results in a report describing the level and quality of implementation of the FATF Forty Recommendations and highlighting areas requiring further progress. In July 2006, FATF published its mutual evaluation of the United States, which can be viewed here.

In addition, in October 2005, IOSCO published a report on Anti-money Laundering Guidance for Collective Investment Schemes (CIS). The report offers guidance on how the FATF Forty Recommendations and IOSCO Client Identification and Beneficial Ownership Principles should be applied to CIS operations and advisors, as well as intermediaries involved in distributing shares of collective investment schemes.

Client Identification and Beneficial Ownership

In light of work undertaken by other international organizations (including the Financial Action Task Force), IOSCO established a Task Force on Client Identification and Beneficial Ownership to study existing securities regulatory regimes relating to the identification of clients and beneficial owners and to develop principles that address aspects of the client due diligence process. In May 2004, the IOSCO Task Force developed a set of principles to serve as guidance for securities regulators and firms on client identification and verification, beneficial ownership, due diligence, suitability, recordkeeping and information sharing, while recognizing that the manner in which the principles are implemented must be tailored to market and regulatory circumstances.

Risk Disclosure

In June 1999, a Multidisciplinary Working Group on Enhanced Disclosure (known as the Fisher II working group) was established to provide advice to its sponsoring organizations on steps that would advance the state of financial institutions’ disclosures of financial risks in order to enhance the role of market discipline. IOSCO, the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors formed, through the Joint Forum, a Working Group on Enhanced Disclosure (the Working Group) to follow up on recommendations contained in the Fisher II working group’s report. That report covered five risk areas: market risk in trading activity, firm-wide exposure to market risk, funding liquidity risk, credit risk, and insurance risk. In May 2004, the Working Group published a report entitled Financial Disclosure in the Banking, Insurance and Securities Sectors: Issues and Analysis, which presents its findings on the extent to which the Fisher II report recommendations were adopted.

Markets

Cross-border Exchange Mergers

In recent years, several exchanges around the world have made bids to purchase exchanges in other countries. The SEC and its staff have met with foreign securities regulators to discuss increasing collaboration to address regulatory issues associated with proposed and potential trans-national ownership of exchanges. Press releases containing additional information on these meetings and the implications of trans-national ownership of exchanges are available on the SEC's website.

Error Trade Policies

In October 2005, IOSCO published a report on Error Trade Policies. The report recognizes that error trade policies, including the process by which trades are cancelled, can affect market integrity and participants' confidence in the markets. In addition, the surveillance of erroneous trades and resolution is material to detecting and deterring market abuses. The report articulates several recommendations with respect to the design of error trade policies in order to provide guidance to exchanges and regulators, and allow exchanges to assess and develop their practices.

Collective Investment Schemes

Corporate Governance

In February 2005, IOSCO published for public comment a consultation paper examining the governance of collective investment schemes (CIS). The paper addresses principles of CIS governance for CIS that are marketed and sold to retail investors. In July 2006, IOSCO published a report on CIS in emerging markets.

Market Timing

In October 2005, IOSCO published a report entitled “Best Practice Standards on Anti Market Timing and Associated Issues for CIS.” This paper generally describes “market timing" and addresses the types of regulation and industry practices that can best address the concerns raised by this practice.

Hedge Funds

In March 2006, IOSCO published for public comment a consultation paper and survey regarding the regulatory environment for hedge funds. IOSCO's Committee on CIS is processing the results of the survey taken of the various regulatory approaches in member jurisdictions with respect to regulatory reforms in hedge fund regulation and approaches towards retail participation in hedge funds. In addition, IOSCO’s CIS Committee has launched a study focusing on the valuation of hedge funds.

Gate Keepers

Credit Rating Agencies

Credit rating agencies (CRAs) can play an important role in modern capital markets by helping market participants analyze the credit risks they face. Recognizing a perceived lack of transparency in credit rating agency decision-making, potential barriers to entry, and potential conflicts of interest between CRAs and their subscribers, in September 2003, IOSCO adopted a set of CRA principles. More recently, in December 2004, IOSCO released the Code of Conduct Fundamentals for CRAs designed to offer specific guidance on how the CRA principles can be implemented by CRAs, several of which operate on a global basis. The SEC staff has collaborated with the Committee of European Securities Regulators regarding implementation of the Code Fundamentals by the CRA industry.

See also SEC Rulemaking and Other Initiatives - Credit Rating Agencies

Enforcement

Cross-border Cooperation

In February 2005, IOSCO announced an initiative to raise the standards of cross-border cooperation among securities regulators. Specifically, IOSCO will work to identify jurisdictions that present the greatest risk and promote their compliance with IOSCO standards through dialogue designed to explore obstacles to cooperation and paths for their swift resolution. In some instances, this dialogue may be supported by the delivery of technical assistance. In October 2005, IOSCO published for public comment a consultation paper discussing international disclosure principles for cross-border offerings and listings of debt securities by foreign issuers.

See also the International Enforcement Cooperation website.

In March 2005, the Financial Stability Forum (FSF) established the Offshore Financial Center (OFC) Review Group to review reports by IOSCO, the International Monetary Fund, and others on their respective efforts and results in addressing issues concerning OFCs, most notably in the areas of cross-border cooperation, information exchange, and adequacy of supervisory resources. This work is ongoing.

Annual IOSCO Conference

Over 600 delegates from more than 100 countries represented the world's securities and futures regulators at the XXXI Annual Conference of IOSCO during June 5-8, 2006, in Hong Kong. The final communiqué of the conference, which has hosted by the Securities and Futures Commission of Hong Kong, can be found here.

Council of Securities Regulators of the Americas - Small to Medium Size Enterprise (SME) Forum

On May 15-16, 2006, the Council of Securities Regulators of the Americas (COSRA) held a forum to discuss barriers to capital experienced by SMEs in the Americas. Among the topics discussed were SME corporate governance, obstacles to SME audit services, and SME financing through stock exchanges. Links to presentations made at the conference are available here.

http://www.sec.gov/about/offices/oia/oia_multilateral.htm