US Regulators Go Global

Published on: September 23, 2013

Filled Under: Blog, Finance & Economics, Worth Reading and Watching

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The London Whale isn’t the only non-US target for the good ol’ SEC these days.

In what appears to be a rapidly increasing trend, the Untited States government is using the new registration powers granted by Dodd Frank to activitely investigate, and increasingly to pursue enforcement actions, against foreign entities and individuals for violations of US securities law – something that would previously have been considered an extra-terratorial use of law enforcement authoritiy. In particular, scrutiny over the London alternatives market has risen dramatically over just the past year, forcing funds to create specialized US compliance teams, increasing costs and imposing a multi-tiered system of regulation on managers – a significant burden, especially for smaller funds.

Although this stepped-up oversight marks a critical development to watch on many levels (especially if you happen to be a European or Asian hedge fund manager), several changes seem especially salient. First, one of the original fears concerning increased regulation raised by critics of Dodd Frank in the United States was that the law would would risk driving US financial institutions abroad. Instead, the opposite may be happening as US firms generally already have extensive compliance systems in place, understand SEC rules and have no shortage of highly trained securities lawyers read to go into battle. On the other hand, a British firm that gets hit with a Wells Notice for the first time, may find itself in a significantly more challenging position. How and if this will shape the competitive ballance between Wall Street and The City remains to be seen, but clearly the status quo has been altared in ways few foresaw during Dodd Frank’s enactment.

Second, there is every chance one or more foreign governments will seek to protect homegrown financial interests by stepping up their own registration and enforcement requirements. If regulation becomes just more tool in a growing financial trade war, obviously nobody will benefit. And third, as in the United States, the SEC’s foreign investigators appear to be paying more attention to hedge funds than virtually any other sector. It will be interesting to see whether such investigations actually bear fruit or if they’re yet another example of a regulatory agency basing its decisions on stereotypes and negative press rather than addressing larger and (potentially) more damaging targets.

[“Wielding Broader Powers, S.E.C. Examines Hedge Funds In London,” New York Times Deal Book, 9/17/2013]

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