A core focus of the activities of the International Organization of Securities Commissions (IOSCO) is to develop and work towards implementing consistent standards of securities regulation throughout the world. Another of its important goals is to enhance the enforcement capabilities of its members. To this end in 2002 IOSCO formulated its Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU). This MMoU simplifies the process by which securities regulators can obtain information from each other for enforcement purposes. IOSCO has 124 members comprising the securities regulators from countries representing almost all of the world’s capital markets and of these 106 members are now signatories to this MMoU while all of IOSCO’s other members, with the exception of Venezuela, have committed to becoming signatories in the future.

The number of signatories to the MMoU is an important achievement for IOSCO. The volume of information being exchanged is increasing at an exponential rate and regulators, such as the SEC, now have relatively easy access to information about the activity of individuals and entities from countries previously known for their secrecy laws. The MMoU is also significant for IOSCO in its work to achieve consistent global standards of securities regulation. The MMoU has contributed to this effort in that a member cannot sign the MMoU until they have undergone a screening process. This screening process ensures that a potential signatory has in place laws that comply with Principles 11-13 of IOSCO’s key framework for securities regulation, its Objectives and Principles of Securities Regulation. If the member lacks laws reflective of these principles and wishes to obtain access to the MMoU it has no option but to pressure its government for the required legislative change. Despite the skepticism of some many countries have amended their laws so that their securities regulator can sign the MMoU.

Going forward, IOSCO has said that it intends to continue to promote the use of the MMoU and to push for all of its members to become signatories. Having all members sign the MMoU is seen as necessary to ensure that there are no gaps in the ability of securities regulators to obtain all of the information they need to enforce their securities laws. To this end IOSCO has shown that it is willing to take robust action to pressure countries to sign the MMoU. It has restricted the ability of non-signatories to vote and serve in leadership positions. It has also called for its members to take precautions in dealing with entities or individuals linked to non-signatory jurisdictions. Some IOSCO members have already acted upon this latter recommendation and introduced restrictions on the ability of investors from non-signatory jurisdictions to access parts of their capital markets. If such restrictions become more widespread this has the potential to place substantial pressure on the regulators from non-signatory countries to sign the MMoU.

It is possible that as more countries use the MMoU this could give rise to increase tensions and challenges. One such conflict is that the SEC has not able to obtain, via the MMoU, audit papers from the China Securities Regulatory Commission in relation to allegations involving what have been called Chinese ‘concept stocks’ listed on US exchanges. The failure of some of these stocks, floated via reverse mergers of existing listed companies, resulted in significant losses for US investors. Nevertheless it is likely that such conflicts will be rare. This is because of the conflict resolution procedures contained within the MMoU. In addition the MMoU appears to be meeting an important need as it enables securities regulators to obtain information to take action against violations of their securities laws, the circumstances of which increasingly straddle more than one jurisdiction.

In terms of its other key goal, achieving harmonization of securities regulations, IOSCO has recently stepped up its work to assess member countries’ compliance with IOSCO’s Objectives and Principles. IOSCO views this assessment process as pivotal to achieving harmonization because it will identify deficiencies in the securities laws of individual jurisdictions. It is assumed that armed with this knowledge each country will then introduce the necessary legislative changes to become compliant.

Nevertheless despite this objective, this assessment process is unlikely to be sufficient, in itself, to persuade all members to harmonize their securities regulation to confirm to the IOSCO framework. However IOSCO has shown by the MMoU methodology that members seem to be willing to accept increased international convergence of domestic securities regulation to international standards if there is an incentive in place to change their laws. As such IOSCO should try to replicate this by developing other systems and make access to such systems contingent upon the adoption of global standards. For example, IOSCO could develop a multilateral mutual recognition regime for market intermediaries. This could include universal standards for the supervision of such market intermediaries by securities regulators and, similar to the MMoU, only allow countries access to this system if their securities laws reflect the relevant global standards for such supervision.[1]

IOSCO has the potential to develop other useful tools for securities regulators which in a way similar to the MMoU could be used as leverage to pressure for the adoption of global standards of securities regulation. If IOSCO proceeds along this path it could be argued that it is likely to strengthen its power and influence despite it being only a transnational network of securities regulators with no formal status in international law.

ENDNOTES

[1] A recent IOSCO task force raised the possibility of a multilateral MoU on supervisory cooperation for IOSCO members but did not make any specific recommendation to this effect, see IOSCO Task Force on Cross-Border Regulation Final Report, September 2015, http://www.iosco.org/library/pubdocs/pdf/IOSCOPD507.pdf

The preceding post comes to us from Janet Austin, Associate Professor at the University of New Brunswick. The post is based on her recent paper, which is entitled “The Power and Influence of IOSCO in Formulating and Enforcing Securities Regulations” and available here.