In the past several years, as domestic investment in foreign markets through mutual funds or CIS have increased, regulatory authorities have faced greater challenges to conducting effective oversight with limited resources. Consequently, they have sought to develop ways of enhancing their compliance programs with regard to investment advisers and investment funds that provide services to domestic investors from abroad. Regulatory authorities have assisted each other on an ad hoc basis, primarily through exchanging information and providing access to regulated entities located in their jurisdictions. To address this growing demand for an available avenue to obtain information about relevant cross-border activity, the Working Group has prepared a model Declaration on Co-operation and Supervision of Cross-Border Investment Management Activity (the "Declaration"). The Declaration, a copy of which is attached, provides a framework to make such information and access available on a regular basis.

The format for the Declaration is that of a model to be used as a starting point for negotiation. The model provides for a broad range of regulatory co-operation and assistance in the investment management context, primarily through making information available to the foreign regulatory authority. By obtaining a ready source of access to information, regulatory authorities will be in a better position to carry out their oversight functions. In addition, by agreeing to assist each other in conducting on site inspections, the regulatory authorities can facilitate the cross-border business of investment advisers and funds in their jurisdictions to the extent permitted under their laws. In this way, the Declaration takes an approach consistent with that taken by many IOSCO members in the enforcement context through Memoranda of Understanding (MOUs) or other bilateral arrangements for sharing information. Indeed, it may be useful to incorporate by reference into the Declaration certain provisions from such MOUs, particularly those relating to confidentiality and permissible uses.

By tailoring the model to their individual needs, IOSCO members can maximise their oversight capabilities within the parameters of their respective legal regimes and thereby increase protection for domestic investors. Depending on the applicable statutory and regulatory requirements, the exchange of information could facilitate the following regulatory functions:

Section by Section Analysis:

The introductory paragraph set the context for the Declaration. They note the extraordinary growth of cross-border investment management activity that has occurred and clarify that the purpose of the Declaration is to establish a framework for obtaining information and co-operation in order to oversee investment advisers and investment companies that are active in more than one regulator's jurisdiction.

The Definitions section sets the framework for the Declaration. The Declaration includes a definition of (i) investment advisers and funds that are registered with one of the Regulatory Authorities; and (ii) investment advisers and funds that are registered in both jurisdictions, or "Dual Registrants".

The Declaration is drafted to provide for exchange of information and assistance relating to both investment advisers and companies. These definitions can, however, be modified to be more or less inclusive, depending on the needs of the signatories. For example, in those jurisdictions where investment advisers are not required to be registered, the definition of "investment management person" could also include investment advisers "subject to supervision". Similarly, the provisions of the Declaration could be applied more narrowly to Dual Registrants only.

Individuals and institutions frequently invest in foreign markets by purchasing domestic funds which themselves invest in foreign markets, or by purchasing foreign-based funds. IOSCO members recognise the need to address the increasing cross-border activity in collective investment schemes and related services and, from experience, know that the exchange of information and other means for co-operation are critical components for the effective oversight of an expanding cross-border market. The Declaration is designed as a framework for providing the maximum amount of assistance that is permissible under the signatories' respective laws and regulations.

The scope of the Declaration is therefore stated broadly. In this section, the signatories declare their intention to provide to each other the fullest possible co-operation and assistance in supervising and enforcing the statutory and regulatory requirements of their respective jurisdictions. Assistance is to be given principally through the exchange of information and, where permissible, access to on-site inspections. Paragraph 4 clarifies that the Declaration itself does not change in any way the existing scope of the signatory's respective regulatory authority.

These are the core provisions of the Declaration. By establishing a regular route for obtaining information that is not available from a Dual Registrant, the Declaration will enable the signatories to better supervise their markets. For example, paragraph 9 provides for a routine exchange of inspection reports relating to Dual Registrants. Inspection reports and other information about registrants could also be provided in response to a regulatory authority's request under paragraph 10 or on an ad hoc basis pursuant to paragraph 13 on unsolicited assistance. These reports could furnish the signatories with an additional source of information about their perspective registrants without requiring an on-site inspection.

This section of the Declaration allows authorities to identify the scope of information that will be exchanged in accordance with their respective statutory and regulatory regimes. The regulatory authorities can specify that they will assist each other in obtaining the information set forth in paragraphs 10 and 11, which includes, among other things, information on investment management persons, the books and records of investment management persons, and inspection reports. The Declaration thus provides a vehicle for the regular exchange of information on routine matters, such as information relating to the qualifications of investment management persons. It also provides a channel which may function as an early warning system, pursuant to which the authorities would notify each other if they obtained information suggesting that an investment adviser or an investment fund were in violation of the laws or regulations of the foreign supervisory authority.

Paragraph 11 of the Declaration is addressed to authorities in those jurisdictions which permit the domestic marketing of collective investment schemes. In such cases, the particular information that would be pertinent should be specified by the signatories.

Inspections are an important means of determining whether regulated entities are properly maintaining required books and records and whether their operations are in compliance with the applicable statutory and regulatory requirements. These inspections are ideally conducted at the site where the books and records are maintained. Therefore, on-site inspections can become more difficult when the entity that possesses those documents is located overseas. While it is possible to require investment advisers and funds to send their books and records to the relevant regulatory authority for inspection, on-site reviews may be more meaningful because the regulated entity's procedures can be examined in the normal course of its day-to-day operations. Further, on-site reviews generally cause less disruption and expense to the entity being inspected. The Declaration thus is drafted to provide for assistance in conducting on-site inspections of "investment management persons" (ie., advisers or funds) located in the jurisdiction of the other authority.

Furthermore, by entering into a cooperative regulatory arrangement that includes express provisions for on-site inspections that are consistent with domestic laws and regulations, authorities can effectively deal with issues relating to conducting an inspection in a foreign country. Similarly, in the enforcement context, the Principles for Memoranda of Understanding, issued by IOSCO in 1991, recommend, to the extent permitted by the laws and policies of a requested authority, direct participation by a requesting authority in the execution of a request for assistance. Indeed, the provisions of this section can be tailored to take into account particular statutory and regulatory limitations faced by the signatories, including sovereignty-based restrictions. For example, the authorities can agree that assistance in conducting on-site inspections can be provided based upon prior consent and in regard to inspections of Dual Registrants only. Another alternative is to provide that the foreign regulatory authority will serve as technical adviser to the host authority conducting the inspection.

Supervisory authorities should provide in the Declaration for the confidential treatment of information provided, to the extent permitted by the laws of their respective jurisdictions. To the extent that the relevant authorities have already negotiated for the confidentiality of information obtained pursuant to an MOU or other bilateral enforcement understanding, such provisions could be made applicable to information obtained under this Declaration.

Authorities should also provide for maximum flexibility in using the information obtained under the Declaration. Without a comprehensive use section, an authority that obtains information could find itself prevented from taking action against a regulated entity that was in violation of the applicable laws or rules. Thus, information obtained from another authority in the context of regulatory co-operation should be available for use in an enforcement context. As drafted, the Declaration allows for the full range of possible uses of information.

The Declaration provides for co-operation and assistance to maximise the ability of regulatory authorities to carry out their supervisory mandates. It is not intended to supersede any existing Memorandum of Understanding or other bilateral arrangement that the signatories may have on the co-operation and the exchange of information in the enforcement context. Indeed, many MOUs expressly provide for co-operation and assistance in conducting inspections of investment management persons. The Declaration can complement such MOUs by providing greater detail on how to implement such provisions.

The provisions in an MOU or other such understanding can be incorporated by reference into the Declaration and serve to simplify it. For example, information provided under the Declaration could be made subject to the confidentiality provisions already negotiated by the parties in the enforcement context. Similarly, provisions concerning the use of information provided under an MOU could also be made applicable to information provided under the Declaration.

The __________________________, and the ___________________________,

Sharing the goal of promoting investor protection;

Observing the growth of global securities markets and cross-border financial activity, including, in particular, the dramatic increase in cross-border investment management activity and the continuous development and innovation in financial products and activities in the investment management arena; and

Considering the importance of ensuring compliance with and the enforcement of the applicable laws and regulations of __________ and __________ through enhancement of market oversight;

Desiring to establish the fullest mutual assistance in order to facilitate the performance of their respective duties;

Hereby make the following Declaration:

DEFINITIONS

[The following definitions can be tailored by the Authorities as appropriate for their respective legal regimes, with a view toward providing a foundation for the provision of assistance in as broad a range of situations as possible, including in particular, with regard to both investment companies and investment advisers.]

1. For the purposes of this Declaration:

SCOPE OF SUPERVISORY CO-OPERATION

2. The Authorities intend to provide to each other the fullest possible co-operation in assisting in the implementation of their respective laws and regulatory requirements governing Investment Management Persons. It is anticipated that such co-operation will include assistance in the oversight of Investment Management Persons located in the jurisdiction of a Host Authority and subject to the regulatory oversight of the other Authority.

3. Assistance under this Declaration may include:

(a) exchanging information concerning Investment Management Persons, including assistance in obtaining information from the officers and directors, and other personnel subject to the supervision of the Host Authority, of Investment Management Persons; and

 

(b) conducting On-Site Inspections of Investment Management Persons.

 

4. The Authorities intend to keep each other advised of significant changes in the laws and regulatory requirements relevant to their co-operation under this Declaration.

5. This Declaration is a statement of the intent of the Authorities and does not create any binding international obligations. Nothing in this Declaration limits, expands or affects the respective jurisdictions of the Authorities.

6. To facilitate co-operation under this Declaration, the Authorities hereby designate contact persons as set forth in Attachment A.

EXCHANGE OF INFORMATION

[Authorities should identify, with as much specificity as possible, the topics on which information may be exchanged. Following is a sample set of items, that can be expanded or modified as appropriate depending on the Authorities' respective needs and legal requirements. For example, the Authorities may decide to exchange information only in response to a specific request, rather than on a routine basis.]

7. The Authorities intend to provide each other and update on a regular basis a list identifying the names of Dual Registrants.

8. Each Authority intends to notify the other of the commencement of an inspection of a Dual Registrant identified on the list referred to in Paragraph 7 above.

9. The Authorities intend to provide to each other, on a routine basis and without advance request, copies of Inspection Reports of Dual Registrants.

10. Each Authority intends to provide the other, upon request and consistent with the laws and regulatory requirements which govern it, assistance in obtaining access to public and non-public Books and Records relating to Investment Management Persons. Such assistance may include, without limitation:

(a) providing information relating to the qualifications of Investment Management Persons;

 

(b) co-operation and consultation in reviewing, interpreting and analysing such Books and Records and Inspection Reports; and

 

(c) providing information from the officers and directors, and other personnel subject to the supervision of the Host Authority, of Investment Management Persons.

 

11. [Authorities in jurisdiction in which the domestic marketing of foreign collective investment schemes is authorised should specify the information to be exchanged in this respect. Following are possible topics on which information could be exchanged, among others.]

(a) compliance with the laws of the Home Country Authority;

 

(b) the current status of disclosure documents;

 

(c) imposition by competent authorities of any business restriction due to the Investment Management Person being in, or approaching, financial or operational difficulties;

 

(d) notification of a change of auditors, any intention of the auditors to qualify their report or any other adverse opinion contained in the auditors report;

 

(e) any failure of an Investment Management Person that may have a material effect on the protection of investors.

 

12. Each Authority intends, upon request and consistent with the laws and regulatory requirements which govern it, to provide other information located in its jurisdiction that may be relevant to the other Authority's inspection of Investment Management Persons.

UNSOLICITED ASSISTANCE

13. If either Authority obtains information that it recognises as clearly giving rise to a suspicion of a breach of any legal rule or requirement of the other Authority, then it will, to the extent permitted by law, offer to provide such information to such Authority for the purposes and under the conditions provided in the declaration.

INSPECTIONS

[In recognition of the differences among legal and regulatory systems, the model includes three possible alternatives for conducting inspections of registrants located in the Host Authority's jurisdiction:

The three alternatives are given as examples reflecting limitations imposed on inspections by different legal structures.

By entering into the Declaration, signatories can address directly issues relating to such On-Site Inspections, and can tailor these provisions as appropriate in accordance with the laws and policies of their respective jurisdictions.]

14-Alt.1 Each Authority intends to conduct On-Site Inspections of Investment Management Persons located in the jurisdiction of the other Authority, using the following procedures for an On-Site Inspection: The Home Country Authority will notify the Host Authority of its intent to perform an On-site Inspection in the jurisdiction of the Host Authority by providing a copy of the notice or request for Books and Records that it issues to the Investment Management Person prior to the time that such notice or request is issued. In routine inspection, the Home Country Authority will provide notice to the Host Authority one week prior to the Home Country Authority's notification of the Investment Management Person. In routine inspections, two weeks prior notice will be given to the Investment Management Person of the On-Site Inspection. In other cases, the Authorities may agree to vary these notice periods.

14-Alt.2 In its discretion, the Host Authority may accompany the Home Country Authority during the On-Site Inspection and, to the extent permitted by law, assist in all aspects of the On-Site Inspection. Such assistance may include, without limitation:

(a) obtaining access to the premises and facilities of Investment Management Persons;

 

(b) compiling, reviewing, interpreting and analysing Books and Records;

 

(c) interpreting and explaining the internal controls and other procedures of the Investment Management Person; and

 

(d) obtaining such other information as may be relevant to the On-Site Inspection.

 

14-Alt.3 At the request of the Home Country Authority, the Host Authority may perform an On-Site Inspection of an Investment Management Person located in its jurisdiction where a Home Country Authority has a clearly identifiable interest. In its discretion, and to the extent permitted by law, the Host Authority may request the Home Country Authority to accompany it during the On-Site Inspection and to assist it in preparing, conducting and evaluating the results of the On-Site Inspection.

CONFIDENTIALITY AND USE OF INFORMATION

15. If not covered by an existing Memorandum of Understanding (MOU), Authorities should provide for confidential treatment of information provided under the Declaration to the extent permitted by domestic law, while specifying the full range of possible uses. Following is sample language:

To the extent permitted by law, the Authorities will keep confidential information received under this Declaration; provided, however, that the Authorities may use the information in connection with ensuring compliance with or enforcement of the laws and regulations of its jurisdiction, including conducting civil or administrative enforcement proceeding; assisting in a self-regulatory enforcement proceeding or a criminal prosecution, or conducting any investigation related thereto.

 

16. This Declaration is being made within the framework of the Memorandum of Understanding, dated ___/___/___, and nothing contained herein modifies or amends the MOU.

17. Materials and information provided hereunder are to be kept confidential and governed by the provisions of Part __ of the MOU.

18. The Authorities intend to engage in regular consultations regarding investment management activity in their markets, and to review this Declaration periodically for the purpose of assessing its operation.

19. If not covered by an existing MOU, Authorities should provide for a termination clause. Following is sample language:

SIGNED THIS _______ DAY OF _________ 1995

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