Cross-Border Coordination of Hedge Fund Regulation Could be Tangible Fruit of SEC-FSA Dialogue

By James Hamilton, J.D., LL.M., Principal Analyst, CCH Federal Securities Law Reporter; and CCH Derivatives Regulation Law Reporter.

The coordinated cross-border regulation of hedge funds could be one of the first tangible benefits of the recently announced joint commitment of the SEC and FSA to engage in cooperative global financial regulation. The two regulators agreed to identify a common, coherent set of data to collect from hedge fund advisers and managers to help them identify risks to their regulatory objectives and mandates. The FSA-SEC cooperation is designed to achieve coherent oversight of global actors and limit opportunities for regulatory arbitrage. SEC Chair Mary Schapiro said that, as the regulators of two of the world's major market centers, the SEC and the FSA have a strong interest in collaborating with respect to hedge funds and other market participants with cross-border operations.

A day after the FSA-SEC announcement, Sally Dewar, FSA Director of Wholesale Markets echoed the SEC Chair’s remarks, stating that, as regulators of the financial centers in which the vast majority of hedge fund assets are managed, the FSA and SEC will harmonize the collection and sharing of information and thus reduce the compliance burden on fund managers, while at the same time allowing the SEC and FSA to better identify risks to their regulatory objectives and mandates. The FSA official pledged to work with the SEC to identify a common, coherent set of data collected from the hedge funds advisers and managers located in their respective jurisdictions.

The commitment of the two authorities underlines their support for the proportionate and efficient regulation of the alternative investment fund management sector. Indeed, using the experience it acquired in working with the SEC, noted the Director, the FSA is activity engaging in the debate over the design of the framework for the collection and sharing of this type of information between regulators at a European level.

More broadly, it is axiomatic that the financial crisis has international dimensions. The SEC-FSA commitment is based on the recognition that the financial markets are inexorably globally integrated and financial stability must be cross-border in order to ameliorate systemic risk and prevent regulatory arbitrage.

The Obama Administration and the G-20 have endorsed the Financial Stability Board as the vehicle to monitor the cross-border consistency of financial regulation. The Financial Stability Board, with a strengthened mandate, is the successor to the Financial Stability Forum. The Board is charged with monitoring the cross-border consistency of the national financial regulatory reform legislation.