Thank you for the introduction, Jillien [Flores]. It is a privilege to start off the first Global Summit for the Managed Funds Association (“MFA”) in the European Union. The sub-header describes the Summit as “The Intersection of Capital Markets and Global Policy,” which is quite appropriate and timely. From my perspective in Washington, D.C., the U.S. Securities and Exchange Commission (“SEC”) is possibly charting a new course in how foreign financial regulatory regimes are treated. Should the SEC continue on this course, foreign entities may no longer receive deference or recognition in the United States for their home country regulatory regimes. Hence, query whether such a change in approach, moving away from concepts of equivalence and convergence, will ultimately help, or hurt, global investors. This morning, I would like to share remarks that reflect my views as an individual Commissioner of the SEC and do not necessarily reflect the views of the full Commission or my fellow Commissioners.
U.S. Investments in Foreign Issuers
Let’s start with the idea that a diversified portfolio is fundamental to a long-term investment strategy. One aspect is the allocation of investments across multiple issuers and asset classes. Another aspect is the diversification among various countries and global regions. Markets outside of the United States represent nearly 60% of global equity market capitalization. Given these opportunities, U.S. investors have sought exposure to foreign investments. One article estimates that U.S. investors increased their average international holdings from 5% in the 1990s to nearly 15% by 2017.
To achieve this, U.S. investors have choices, including: (1) investing in U.S. mutual funds and exchange-traded funds (“ETFs”) that hold foreign securities, (2) purchasing American depositary receipts (ADRs) of foreign stocks, including some that may also be U.S.-listed, and (3) trading stocks directly on foreign markets. Investors may turn to either U.S.-based investment advisers or advisers located abroad. The SEC has differing levels of jurisdiction over foreign entities. For example, while the Investment Advisers Act of 1940 (“Advisers Act”) generally requires a foreign investment adviser to register with the SEC if it provides advice to U.S. clients, the statute exempts foreign advisers that have minimal contacts with U.S. investors.
Given the increase in U.S. interest in international investments, the SEC should be respectful of the differing regulatory regimes developed by foreign jurisdictions. The mere fact that U.S. investors seek opportunities across the globe does not mean that the SEC should impose its regulations and enforcement authority around the world. Since U.S. investors benefit from investing in – or receiving investment advice and financial services from – foreign entities, any effort to extend U.S. laws and regulations to these entities must be appropriately calibrated. Otherwise, foreigners and foreign firms may be tempted to exclude or prohibit U.S. investors, so as to avoid any entanglements with U.S. jurisdiction.
With this in mind, my remarks today will focus on three key areas: (1) the SEC’s historical approach to foreign entities, (2) recent deviations from this historical approach, and (3) the consequences of continuing down this path.
The SEC’S Historical Approach to the Regulation of Foreign Entities
In 1988, then-Commissioner Charles Cox – not to be confused with former Chairman Christopher Cox – delivered remarks to the Conference on Internationalization in Seoul, South Korea. Commissioner Cox, who may have been the first Ph.D. economist to serve as Commissioner, recognized the benefits of a system in which capital can move freely between and among markets. He identified the “securities regulators’ challenge…to ensure that artificial and inefficient impediments to the flow of capital, the lifeblood of growth and development, are eradicated.” Importantly, the “[SEC] recognizes the different goals and policies of different nations or markets and understands that our disclosure, accounting and legal standards may not be appropriate in all, or even most, cases.”
In Commissioner Cox’s view, the harmonization of various regulatory approaches – rather than the forced imposition of the SEC’s own standards – best serves the goal of efficient capital formation. Harmonization means “the ability of distinct structures to work well together” rather than forcing all structures into a single framework.
Nearly thirty years later – in 2016 – then-Chair Mary Jo White delivered a speech to the International Bar Association Annual Conference. Chair White spoke on the importance of global cooperation and coordination but recognized that “we do not operate in a one-size-fits-all world and…there are, for good reason, significant differences in our domestic markets, as well as our regulatory regimes.”
Thus, the SEC historically has been careful not to apply its rules to foreign entities that have minimal contact with U.S. markets. For example, SEC rules permit “foreign private issuers” to largely satisfy certain reporting obligations set forth in the Securities Exchange Act of 1934 (the “Exchange Act”) by following the disclosure standards of their home jurisdictions. Additionally, SEC rules exempt “foreign private advisers” from registering under the Advisers Act. These exemptions recognize that – absent significant contacts with U.S. investors – the costs of imposing duplicate and sometimes conflicting regulatory regimes on foreign entities outweigh the potential benefits.
In considering rules, the SEC has previously avoided rules based on mere theoretical concerns. One illustrative example can be found in the 1998 amendments to Regulation S, which provides a safe harbor from the registration requirements of the Securities Act of 1933 (“Securities Act”) for the offer and sale of securities outside of the United States.
After adopting Regulation S in 1990, the SEC identified certain abuses by U.S. issuers. The SEC observed that Regulation S was being used purportedly for distributing securities offshore, but instead those securities were being funneled back into the U.S. markets. Thus, the SEC proposed amendments to place additional restrictions on Regulation S offerings. Although the SEC had only observed abusive practices by U.S. issuers using Regulation S, the proposal sought to extend these additional restrictions to offerings made by non-U.S. issuers if the principal market for those securities was within the United States.
One proposed restriction would have made it so that securities issued in Regulation S offerings were deemed restricted securities. Commenters noted that if non-U.S. issuers were scoped into the amendments, these issuers would be forced to apply many of the standard practices used in U.S. private placements to offshore offerings. Accordingly, the restriction “could create a strong disincentive for foreign companies to list their securities on U.S. markets.” When the SEC ultimately adopted amendments to Regulation S in 1998, it determined that “absent a showing of abuse, imposing significant new restrictions on the offshore offering practices of foreign companies is not warranted.” In modifying the proposal to exclude additional restrictions on foreign issuers, the SEC sought to “avoid undue interference with offshore offering practices of foreign companies.”
The Regulation S amendments are emblematic of the SEC’s historical approach, which avoids needlessly imposing U.S. regulations abroad. This approach is consistent with the principles expressed by Commissioner Cox and Chair White, which has allowed the SEC to carry out its investor protection mandate without chilling cross-border investment opportunities that benefit U.S. companies and investors alike. Since that time, foreign regulators have made significant revisions of their regimes to provide even better investor protection today.
Recent Shifts in Regulatory Approach
However, recent SEC actions affecting foreign entities have made one thing clear: times are changing. The SEC’s deference to foreign regulatory regimes is slowly being replaced with an approach that favors the primacy of U.S. regulations. This apparent shift has not been carried out through public debate and consideration. Instead, the change is subtly embedded in rulemaking and enforcement actions.
Most recently, the SEC adopted amendments to the disclosure requirements for share repurchases. These amendments will apply to foreign private issuers and domestic issuers alike. For the first time, foreign private issuers will be mandated to make quarterly filings with the SEC. The imposition of mandatory quarterly reporting by foreign private issuers fundamentally upends the Commission’s long-standing deference to home-country reporting requirements. The approach does not even offer a convincing rationale, especially since daily share repurchase information may be useful only if accompanied by other types of disclosures. For example, an issuer’s quarterly financial results currently are not required to be reported by foreign private issuers. Is this the start of changes designed to bring the reporting requirements of foreign private issuers in line with those of domestic issuers? The costs are obvious: foreign entities could be required to comply with the technical provisions of two similar – but not identical – regimes.
In addition, the SEC has proposed a rule to impose prescriptive requirements on private fund advisers. The proposal would prohibit private fund advisers from engaging in certain sales practices, conflicts of interest, and compensation arrangements. The proposal also would require private fund advisers to obtain annual financial statement audits. Remarkably, the rules would apply to foreign private advisers. A “foreign private adviser” is any investment adviser who: (1) has no place of business in the United States, (2) has fewer than fifteen total U.S. clients and investors in its private funds, (3) has aggregate assets under management attributable to these U.S. investors of less than $25 million, and (4) does not hold itself out to the U.S. public as an investment adviser.
Congress exempted these foreign private advisers from registering with the SEC, with a restrictive condition of having less than $25 million in assets under management attributable to U.S. investors. Yet the current SEC proposal would circumvent this Congressional intent by imposing prescriptive requirements on foreign private advisers. They would be treated indistinguishably from domestic private fund advisers for purposes of applying the highly-prescriptive and costly burdens imposed by the proposed rules. And to what end? Foreign private advisers are exempted from the provisions of the Advisers Act for a reason: they have minimal contacts with U.S. investors. Faced with the choice between upending their businesses to comply with these new rules and simply exiting the U.S. market, it is not hard to imagine that foreign private advisers might choose the latter, thus denying U.S. investors access to investment advisers with expertise in particular countries or regions.
Beyond rulemaking, the SEC has used its enforcement authority in a manner that could make foreign companies liable under the U.S. federal securities laws for conduct that is more properly regulated by home jurisdictions. For example, in April 2022, the SEC charged a Brazilian mining company for violations of the U.S. federal securities laws after one of its dams collapsed and killed 270 people. The collapse of the dam and the resulting deaths were tragic and devastating. For this reason, Brazilian authorities charged 16 people – including the company’s CEO – with murder. Brazilian federal and state authorities also brought a multi-billion dollar civil action against the company. Instead of satisfying itself that Brazilian authorities were appropriately taking the company and its executives to task, the SEC touted its initiative to “identify material gaps or misstatements in issuers’ ESG disclosures, like the false and misleading claims made by [the company.]” The company ultimately agreed to settle the SEC’s charges for $55.9 million.
The SEC has antifraud authority to take actions against companies and persons abroad for making materially false and misleading statements if there is conduct outside of the United States that has a foreseeable substantial effect within the United States. The SEC’s press release regarding this particular action suggests that – when a foreign company makes statements under a home-country ESG disclosure framework – those same violations could also impose liability under the U.S. federal securities laws, even if never filed with the SEC. I am concerned that the SEC may attempt to be the global police and exercise its authority in a manner that enforces other country’s ESG frameworks, whether or not those frameworks relate to financial materiality and without regard to civil and criminal enforcement for the same misconduct by the other country.
Consequences of the SEC Extending its Authority to Foreign Entities
The trend is clear – both through rulemaking and enforcement – that foreign entities are top of mind for the SEC. The historical approach that largely respected foreign regulatory regimes appears to be yielding to an approach that asserts the primacy of U.S. regulation. If this shift in policy had been carefully considered and subject to public comment, I might have fewer concerns. However, much like the SEC’s current rulemaking agenda, the charge into the unknown is happening in a rushed and piecemeal fashion with little acknowledgment or consideration of what the overall end result might be.
One possibility is that foreign entities that find themselves increasingly subject to U.S. jurisdiction retreat from the U.S. market entirely. Or even worse, foreign entities may ban U.S. investors from investing at all. This would be a bad result because U.S. investors rely on access to foreign investment opportunities to construct diversified portfolios. In my view, the SEC should not, under the guise of investor protection, take steps that might cause foreign entities not to list their shares on U.S. exchanges or foreign advisers to limit or restrict services to U.S. investors. A change that restricts these opportunities should – at the very least – be accompanied by a clear articulation as to what problem the SEC is trying to solve.
Another potential result is that foreign jurisdictions choose to reciprocate by subjecting U.S. entities to foreign regulations to a greater extent. This also would be unfortunate. Any additional burdens imposed on U.S. companies that seek to raise capital abroad – or U.S. investment advisers that seek to provide investment advice to foreign investors – will reduce that flow of foreign capital into the United States. In this way, not only could U.S. citizens lose investment opportunities abroad, but U.S. operating companies could lose access to foreign capital.
The exemptions from the U.S. federal securities laws that foreign entities rely on are premised on the understanding that there is a threshold below which the U.S. should defer to foreign regulators under the notions of equivalence and convergence. Unlike the legislative debates or notice and comment rulemakings that led to these exemptions, the SEC’s recent actions do not sufficiently consider the impacts of this change in posture. Even worse, the SEC has barely acknowledged that a change is underway.
Access to capital formation and investment opportunity are important for the U.S. and foreign jurisdictions alike. I hope that – before we continue down the current course – we pause to reflect on what we are doing and where it will lead.
 See 15 U.S.C. 80b–3(m) and 17 CFR 275.203(m)-1 (private fund adviser exemption); 15 U.S.C. 80b–3(b)(3) (foreign private adviser exemption).
 See, e.g., Adoption of Rules Relating to Foreign Securities, Release No. 34-8066 (Apr. 28, 1967).
 See 15 U.S.C. 80b–3(b)(3) (foreign private adviser exemption).
 See Offshore Offers and Sales, supra note 13.
 See Offshore Offers and Sales, supra note 13.
 See Share Repurchase Modernization Disclosure, Release No. 34-97424 (May 3, 2023), available at https://www.sec.gov/rules/final/2023/34-97424.pdf.
 See Mark T. Uyeda, Statement on the Final Rule: Share Repurchase Disclosure Modernization (May 3, 2023), available at https://www.sec.gov/news/statement/uyeda-statement-share-repurchase-disclosure-modernization-050323.
 See Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Release No. IA-5955 (Feb 9, 2022) [86 FR 16886 (Mar. 24, 2022), available at https://www.sec.gov/rules/proposed/2022/ia-5955.pdf.
 See 15 U.S.C. 80b–3(b)(3) (foreign private adviser definition).
 See SEC vs. Vale S.A., Case No. 1:22-cv-02405 (E.D.N.Y Apr. 28, 2022), available at https://www.sec.gov/litigation/complaints/2022/comp-pr2022-72.pdf.
 See SEC Charges Brazilian Mining Company with Misleading Investors about Safety Prior to Deadly Dam Collapse, Press Release No. 2022-72 (Apr. 28, 2022), available at https://www.sec.gov/news/press-release/2022-72.
 See Brazilian Mining Company to Pay $55.9 Million to Settle Charges Related to Misleading Disclosures Prior to Deadly Dam Collapse, Press Release No. 2023-63 (Mar. 28, 2023), available at https://www.sec.gov/news/press-release/2023-63.
 See 15 U.S.C. 77v(c)(2) (Securities Act), 78aa(b)(2) (Exchange Act).
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