Article by Peter McMaster QC and Bryan Hunter Appleby

On 1st April the new UK “Twin Peaks” regulatory regime was launched. The much criticised FSA was replaced with the Financial Conduct Authority (“FCA”) and the Prudential Regulatory Authority (“PRA”). Martin Wheatley, the FCA’s chief executive has publicly criticised the approach of the former FSA as “robotic” and a more challenging UK regulatory climate is widely anticipated. Meanwhile in the US Mary Jo White was sworn in as the new SEC Chair on 10 April having promised the Senate Banking Committee that she would aggressively pursue wrongdoing. One of the reactions to the financial crisis in both major financial centres is more aggressive regulation. This has implications for the Cayman Islands whose own regulator, the Cayman Islands Monetary Authority (“CIMA”), has entered into wide ranging memoranda of understanding with the SEC, FCA and PRA under which CIMA undertakes to lend its own coercive powers to obtain information and testimony for the US and UK regulators when requested to do so.

CIMA’s Coercive Powers and International Regulatory Cooperaration

CIMA has a network of agreements with overseas regulators under which it has promised to provide assistance to its counterparts in other jurisdictions. The base agreement is a multilateral memorandum of understanding, which is supplemented in the case of certain jurisdictions (e.g. the UK and the US) by more specific bilateral memoranda of understanding. The legal foundation of for these agreements is Cayman statute law. This note provides a guide to the undertakings contained in the memoranda of understanding and an explanation of the legislative basis (and in certain cases the lack of legislative basis) for the promises in those memoranda.

Multilateral Memorandum of Understanding

International regulatory co-operation falls within the purview of the Cayman Islands Monetary Authority (CIMA). Since 2009 CIMA has been a full member of the International Organization of Securities Commissions (IOSCO). IOSCO is the principal global standard setting body for the regulation of securities markets. Its objectives encompass cooperation and information exchange, standard setting, surveillance, and mutual assistance. CIMA is a party to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation, Cooperation and the Exchange of Information (MMoU), which is the benchmark for international cooperation among securities regulators. There are 94 member agencies who are currently signatories to the MMoU among which figure the UK regulators, regulators of the other EU member states, the SEC and the CFTC.

The MMoU contains a promise by each signatory to provide the others with “the fullest assistance permissible to secure compliance with the respective Laws and Regulations of [each other]”. Assistance is to be provided on request by one authority to another.

The promise to provide assistance is spelled out at article 7(b) so that it includes:

providing information and documents held in CIMA’s files regarding the matters set forth in the request for assistance;

obtaining information and documents from third parties regarding the matters set forth in the request for assistance;

taking or compelling a statement from a person regarding matters set forth in the request for assistance, where permissible by testimony under oath.

Article 9(d) requires CIMA “where permissible” to allow the attendance of a representative of the overseas regulator to be present at the taking of statements and testimony and to provide specific questions to be asked of any witness.

Any request must be supported by information showing why the information is requested and why it will assist the overseas regulator. The request itself will have to be based in the need to secure compliance with the laws and regulations of the overseas regulator. Apart from this, there is no limit to the class of information and document that may be sought and (if sought) must be provided, specific instances of what may be sought set out in the MMoU include:

contemporaneous records sufficient to reconstruct all security and derivatives transactions, including records of all funds and assets transferred into and out of bank and brokerage accounts relating to these transactions;

records that identify: the beneficial owner and controller, and for each transaction, the account holder, the amount purchased or sold, the time of the transaction, the price of the transaction, and the individual and the bank or broker and brokerage house that handled the transaction;

information identifying persons who beneficially own or control non-natural persons organised in the jurisdiction of the Requested Authority.

The MMoU permits only three grounds for refusing a request by an overseas regulator that otherwise complies with the MMoU. They are: to comply with the request would mean CIMA violates domestic law; that there are already criminal proceedings on foot in the Cayman Islands based on the same facts against the same persons; or that to comply would be against the public interest or essential national interest.

Bilateral Agreements

The MMoU is supplemented by bilateral Memoranda of understanding. In the case of the US there are bilateral Memoranda with a number of bodies including the SEC. In the case of the UK there is a bilateral Memorandum with the newly created PRA and FCA (by succession to the FSA). Those bilateral Memoranda supplement and extend the already far reaching assistance for which the MMoU provides. So what more do these give?

In the case of the UK the main additional feature in the bilateral MoU is rights to participate in investigations. The MoA gives as an example of assistance that might be given, “conducting inspections or examinations of financial services providers or arranging for the same” and “permitting the representatives of the requesting Authority to participate in the conduct of enquiries made by or on behalf of the requested Authority”. These passages contemplate not merely CIMA making inquiries in response to requests from the UK, but the active participation of members of the UK regulators’ representatives in those enquiries. In the case of examinations or inspections of financial services providers, these passages appear to contemplate that CIMA will arrange for them to take place and then step aside.

Appendix 1 to the UK MoU makes clear that this is intended to encompass representatives of the overseas regulators being present at interviews and participating in questioning (paragraph 1(e)).

The SEC too has a bilateral MoU. How does it add to the MMoU? Article 4 of the SEC MoU is concerned with on-site visits in the territory of the other regulator and Article 4(d) provides that the regulators will “where desired conduct joint inspections”.

The key difference between the multilateral and bilateral agreements is therefore the depth of involvement of personal from overseas regulators. Both of the bilateral agreements considered above contemplate that the overseas regulator will participate alongside CIMA in investigations.

The MoUs do not have the force of law in the Cayman Islands – they are no more and no less than an understanding reached by a government department with an overseas regulator. The understandings they contain are only as good as CIMA’s ability to deliver the assistance they describe. So can CIMA in fact deliver the assistance described?

CIMA’s Powers

CIMA’s ability to deliver assistance stems from the Monetary Authority Law (MAL) Section 50(3) of MAL gives CIMA the power to:

disclose information necessary to enable [an] overseas regulatory authority to exercise regulatory functions; and

to consent to the subsequent use of the disclosed information for certain defined purposes.

CIMA only has power to disclose information provided to it. CIMA cannot compel a witness to submit to questioning by an overseas regulator or enable a representative of an overseas regulator to question a witness. It cannot conduct a joint investigation it can only investigate as requested by the overseas regulator and pass on the result of that investigation.

In other words the bilateral MoUs make promises that CIMA, as the law presently stands, cannot deliver on. CIMA cannot engage in joint inspections, arrange for others to conduct inspections of financial services providers or empower the SEC to conduct on site inspections.

Even so, CIMA has extensive coercive powers that it can deploy to obtain information on behalf of an overseas regulator. CIMA can require any regulated person, any connected person or any person reasonably believed to have relevant information:

to provide information to CIMA

to produce documents to CIMA

to give CIMA such assistance as CIMA may specify in writing

This is fundamentally different from what is contained in the bilateral MoUs because everything has to go through CIMA, information documents and other assistance are provided to CIMA not directly to an overseas regulator.

CIMA does not even have power itself to examine a witness under oath. Section 34(11) of MAL allows CIMA, if it considers that it is necessary to examine a person on oath, to apply to a court of summary jurisdiction to “have that person examined by the court and to have the result of that examination sent to the Authority”. CIMA therefore does not itself have power to compel a witness to answer questions under oath and it is not even clear that CIMA has the power to compel a witness to attend an interview to answer questions.

This state of affairs is, however, likely to prove relatively short lived. MAL is currently undergoing revision and those revisions include, among other things, provisions to address the assistance that CIMA may provide to overseas regulators.

Onward Disclosure by Overseas Regulator

Section 50(8) of MAL forbids CIMA to provide assistance to an overseas regulator unless certain conditions as to further disclosure by the overseas regulator are met. In particular the disclosure can only be given in the first place for:

The conduct of civil and administrative enforcement proceedings

assisting an SRO with surveillance or enforcement activities in relation to conduct supervised by the SRO

assisting a criminal investigation or prosecution of any charge applicable to the contravention of the provision specified in the request, but only where the charge pertains to laws and regulations administered by the requesting authority.

The disclosure may not be given at all unless an express undertaking to make no further disclosure is provided or unless CIMA is satisfied that the requesting authority is subject to adequate legal restrictions on further disclosure. There is no express undertaking not to make further onward disclosure in either of the bilateral MoUs mentioned above. Indeed each of them makes clear that further onward disclosure is likely to occur in certain cases. It is difficult to see how CIMA can take the view that the SEC or the UK regulators are subject to adequate legal restrictions on further disclosure. The MMoU restricts further disclosure so that information may only be used for the purposes set out in section 58 of MAL, the bilateral MoUs contain no such provision and, as the law presently stands, it is open to question whether CIMA should be providing information at all under those regimes.

Conclusions

CIMA has wide ranging powers to compel persons within the Cayman Islands to provide information and documents in connection with a request for assistance by overseas regulators. The current provisions of the statute under which this can be done are, however, quite clear that the request must go through CIMA and that overseas regulators have no rights to interview or question persons in the Cayman Islands except on a purely voluntary basis. Indications in Memoranda of Understanding that suggest otherwise are potentially misleading. Bilateral MoUs probably do not contain adequate protection against onward disclosure and there is an open question whether CIMA can lawfully provide information under the Bilateral MoUs. These issues are likely to be addressed in the near future by amending legislation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Specific Questions relating to this article should be addressed directly to the author.