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December 19, 2019 Articles

SEC Enforcement Actions Brought in Support of Foreign Securities Authorities

Tips for counseling clients in this unique and growing arena of SEC enforcement actions.

By Ronald S. Betman

Securities markets today are global, transcending the borders of any individual country. Cross-border securities transactions are common, and investment facilitators (such as investment banks, private equity firms, and hedge funds), investment vehicles (such as single-purpose entities), and investors frequently cross borders for money-making opportunities. In many cases, investment vehicles organized under the laws of one country conduct business and investment activity in another. Under these circumstances, securities regulators, such as the U.S. Securities and Exchange Commission (SEC) and similar organizations in other countries charged with enforcing securities laws, often need to gather testimony and documents in foreign countries and from foreign nationals over which they have no jurisdiction. International collaboration and cooperation among securities regulators are necessary to accomplish these goals.

Beginning in the late 1980s and accelerating to today, the SEC has entered into various types of cooperative arrangements with foreign securities authorities, including bilateral cooperative arrangements, which have afforded the SEC the ability to use foreign securities authorities to gather testimony and documents in other countries to support an enforcement action brought in the United States. In return, the SEC has supplied reciprocal assistance to foreign securities authorities in the United States. These include, for example, the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMOU), which 122 countries, including the United States, have signed. In 2018, the United States made over 1,200 requests pursuant to the MMOU. (Remarks of Jay Clayton, SEC chairman, Apr. 1, 2019). These arrangements mean that your clients may be subpoenaed by the SEC for documents or testimony in support of an investigation undertaken by foreign regulators in a foreign country. The specifics of this type of enforcement action raise certain questions and concerns distinct from those raised with regard to an SEC investigation or private enforcement action initiated by the SEC. This article identifies and answers those questions and concerns.


SEC Cooperative Arrangements with Foreign Securities Authorities

The SEC has executed bilateral enforcement cooperation agreements with 21 countries, including Canada, France, Germany, Hong Kong, Israel, Italy, Japan, Mexico, Spain, Switzerland, and the United Kingdom. These cooperation agreements generally take the form of a memorandum of understanding. While there are myriad differences among the agreements, the general takeaway is that the SEC has agreed, with reciprocal cooperation abroad, to open a private enforcement action in the United States to assist the foreign securities authority in investigating suspected securities laws violations in the foreign country. This assistance includes taking the testimony of witnesses and obtaining documents and information from persons in the United States. Because the SEC authorizes the action through a formal order of investigation, the agency has the ability to seek information voluntarily or to issue and enforce subpoenas for testimony and documents.

Section 21(a)(2) of the Securities Exchange Act supplies the statutory authority for participating in these cooperative agreements:

On request from a foreign securities authority, the Commission may provide assistance in accordance with this paragraph if the requesting authority states that the requesting authority is conducting an investigation which it deems necessary to determine whether any person has violated, is violating, or is about to violate any laws or rules relating to securities matters that the requesting authority administers or enforces. The Commission may, in its discretion, conduct such investigation as the Commission deems necessary to collect information and evidence pertinent to the request for assistance. Such assistance may be provided without regard to whether the facts stated in the request would also constitute a violation of the laws of the United States. In deciding whether to provide such assistance, the Commission shall consider whether
(A) the requesting authority has agreed to provide reciprocal assistance in securities matters to the Commission; and
(B) compliance with the request would prejudice the public interest of the United States.

SEC Assistance to Foreign Regulators in the United States

The SEC’s Enforcement Division works in conjunction with the SEC’s Office of International Affairs (OIA) in effectuating cooperation with foreign regulators. The OIA, in part, “promotes investor protection and cross-border securities transactions by advancing international regulatory and enforcement cooperation. . . .” Once a foreign securities authority requests the cooperation of the SEC’s OIA, and if the request meets the standards set forth in both the relevant cooperation agreement and section 21(a)(2), the SEC issues a formal order of investigation. The issuance of the formal order to commence an SEC investigation arms the agency with the requisite subpoena power to compel the production of documents and to compel the taking of testimony. That formal order will generally identify the foreign regulator, recite that the cooperation request was made, identify the SEC staff who have authority to conduct the investigation, and identify the staff of the foreign regulator who have authority to assist in the investigation, including being present and assisting in the taking of testimony. OIA staff work closely with the staff of the foreign regulator in issuing subpoenas for documents and for testimony. The Division of Enforcement’s Rules of Practice with regard to subpoenas for documents and testimony—including the SEC’s Form 1662, Supplemental Information for Persons Requested to Supply Information Voluntarily or Directed to Supply Information Pursuant to a Commission Subpoena—apply to these proceedings. Thus, witnesses are granted the same rights and protections as witnesses in traditional SEC proceedings.

When it comes to taking testimony, typically SEC and foreign regulator staff are present. The latter will likely prepare question areas for the testimony. At times, the staff of the foreign regulator may directly pose questions of a witness. The testimony will be transcribed, and per the SEC’s Rules of Practice, a witness may make a written request for a copy of the transcript, but copies of testimonial exhibits will not be provided.

The SEC’s reliance on international collaboration in helping to regulate and enforce the U.S. securities markets has been growing over time. The same is true for the reciprocal assistance sought by the international community from the SEC. Indeed, in fiscal year 2018, the SEC staff responded to more than 650 requests for assistance from the international community. Such global efforts by securities regulators in various countries around the globe are expected to further increase over time. Judicial attacks on the SEC’s authority to engage in these investigative activities on behalf of foreign regulators have proved unsuccessful. SEC v. Waymack, 358 F. Supp. 3d 52 (D.D.C. 2019).

Practice Pointers

While testimony in SEC enforcement actions initiated to assist a foreign regulatory investigation generally proceeds in a manner similar to testimony given in other enforcement actions, there are important differences that should be well understood prior to representing your client in these proceedings:

  1. Requesting a copy of the formal order of investigation. This is permitted under the SEC Rules of Practice.

    Practice Pointer:
    This request should always be made, even if the SEC staff appears to have provided the necessary background behind the issued subpoena.
  2. Asking SEC staff for an overview of the investigation and types of information expected from your client.

    Practice Pointer:
    While this is a good first step, and the SEC staff is usually cooperative, additional facts and information regarding your client’s relationship with the respondent and the transaction at issue should be fully understood prior to presenting your client for testimony. This is especially true in light of the legal questions raised in the next section of this article. This additional background work will also help ensure that there are no surprises during the testimony of your client.
  3. Consenting to the presence of foreign regulatory staff. The cooperation agreement in question likely will require the witness to consent to the foreign regulator being present for testimony. If consent is denied, the staff of the foreign regulator may still submit specific questions to the SEC staff to be asked.

    Practice Pointer:
    There is no material upside in withholding consent. Indeed, doing so will draw more attention to the witness and raise more questions about the transaction at issue.
  4. Permitting staff of the foreign regulator to appear for testimony by Skype or telephone.

    Practice Pointer:
    Once again, withholding consent has no material upside.
  5. Permitting the foreign regulator to tape or otherwise record testimony in addition to the SEC’s stenographic record.

    Practice Pointer:
    This request should be denied. As counsel, you need to limit the testimony to the SEC’s written stenographic record, which you can request from the SEC. Having uncontrolled “versions” of your client’s testimony is unwise.

Legal Questions to Consider

Although your client may appear to have little to no risk of liability from producing documents or providing testimony in support of an investigation taking place on foreign soil, your client’s involvement is not totally risk free. There are two avenues of potential risk.

First, there is always the possibility that documents or testimony disclosed to the SEC in this proceeding uncovers information that can later be used by the SEC to open a new investigation into your client or to refer the conduct to other government agencies. SEC Form 1662 identifies this very risk to every recipient of an SEC subpoena. The SEC is authorized to share documents and testimony from this proceeding within the SEC and with other federal, state, and local authorities. (Id. at section H, Routine Uses of Information). Moreover, “facts developed may . . . constitute violations of other laws or rules.” (Id. at section G). Consider the following scenario: Your client produces accounting documents to the SEC that are not the focal point of the current investigation. If the SEC staff believes that the accounting treatment used in the transaction was potentially illegal, improper, or misleading, the SEC may investigate your client’s conduct in other similar transactions.

Second, the 2010 Dodd Frank Amendments extended the reach of the antifraud provisions of the securities laws to situations where significant steps are taken in the United States in furtherance of a securities violation, “even if the securities transaction occurs outside the United States and involves only foreign investors.” Given that expansive language, there is the theoretical possibility that the SEC, in an extreme case, could seek to bring an enforcement action for either primary liability or aiding and abetting liability for your client’s actions discovered in connection with an SEC action brought in support of a foreign securities authority. A complicating factor in that analysis is that the conduct being pursued by the foreign regulator may not constitute a primary violation of the securities laws of the United States.


As in other areas of the law, being well versed in the unique area of SEC enforcement actions brought to assist foreign securities authorities will enable you to more efficiently engage with the SEC staff and to better advise your client.

Ronald S. Betman is a partner at Ulmer & Berne LLP in Chicago, Illinois.

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