The Securities and Exchange Commission has forged an agreement with securities regulators in Europe and the Cayman Islands as part of a long-term strategy to improve the oversight of regulated entities that operate across national borders.

Under the two memoranda of understanding (MOUs) reached this month, leaders of the SEC, the European Securities and Markets Authority (ESMA) and the Cayman Islands Monetary Authority (CIMA) have agreed to work more closely in their ability to share information about such regulated entities as investment advisers, investment fund managers, broker-dealers, and credit rating agencies.

ESMA is a pan-European Union agency that regulates credit rating agencies and fosters regulatory convergence among European Union securities regulators. The Cayman Islands is a major offshore financial center and home to large numbers of hedge funds, investment advisers and investment managers that frequently access the U.S. market.

“Supervisory cooperation arrangements help the SEC build closer relationships with its counterparts to cooperate and consult on each other's oversight activities in ways that may help prevent fraud in the long term or lessen the chances of future financial crises,” said Ethiopis Tafara, Director of the SEC's Office of International Affairs.

The MOUs follow on a similar supervisory arrangement that the SEC concluded with the Quebec Autorité des marchés financiers and the Ontario Securities Commission in June 2010, which expanded to include the Alberta Securities Commission and the British Columbia Securities Commission in September 2011.

The SEC's approach to supervisory cooperation with its overseas counterparts follows on more than two decades of experience with cross-border cooperation, starting in the late 1980s with MOUs facilitating the sharing of information between the SEC and other securities regulators in securities enforcement matters.

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The SEC's enforcement cooperation arrangements detail procedures and mechanisms by which the SEC and its counterparts can collect and share investigatory information where there are suspicions of a violation of either jurisdiction's securities laws, and after a potential problem has arisen.

In contrast to enforcement cooperation arrangements, the SEC's supervisory cooperation arrangements generally establish mechanisms for continuous and ongoing consultation, cooperation, and the exchange of supervisory information related to the oversight of globally active firms and markets. Such information may include routine supervisory information as well as the types of information regulators need to monitor risk concentrations, identify emerging systemic risks, and better understand a globally-active regulated entity's compliance culture. These MOUs also facilitate the ability of the SEC and its counterparts to conduct on-site examinations of registered entities located abroad.

Although designed to achieve different things, enforcement and supervisory cooperation arrangements are complementary tools, the SEC explained. Supervisory cooperation involves ongoing sharing of information regarding day-to-day oversight of regulated entities. Enforcement cooperation MOUs, by contrast, help the SEC collect information abroad that is necessary to help ensure that the SEC's enforcement program deters violations of the federal securities laws, while also helping to compensate victims of securities fraud when possible.

The SEC entered into its first supervisory cooperation MOU in March 2006 with the United Kingdom's Financial Services Authority. Following the recent financial crisis, the Commission has expanded its emphasis on this form of continuous supervisory cooperation in an effort to better identify emerging risks to U.S. capital markets and the international financial system.

As part of this effort, SEC commissioners and staff co-chaired an international task force in 2010 to develop principles for cross-border supervisory cooperation. These principles have since proven to be a useful guideline for structuring MOUs around the type of information to be shared, the mechanisms which regulators can use to share information, and the degree of confidentiality this information should be accorded.