How the FCA Assists Sec Investigations

The special relationship between the United Kingdom and the United States is stronger than the sceptics would lead you to believe – at least in the case of the UK Financial Conduct Authority (‘FCA’) and the US Securities and Exchange Commission (‘SEC’).

Co-operation between financial regulators is essential to the increasingly globalised market for financial services. Much like the hurricane-inducing butterfly, pressing the enter key on a trade in one jurisdiction can affect markets halfway across the world.

Nowhere is this more relevant than in the world’s two largest financial centres, New York and London. Whilst the cities are some 3,500 miles apart with an ocean in between, in legal terms traders could not be closer if they were in adjoining rooms. It is therefore unsurprising to learn that the principal financial regulators on both sides of the Atlantic have a long and well-established history of co-operation.

This article explores the key methods the FCA uses to assist their US counterparts, the SEC, and questions the protections afforded to individuals interviewed under compulsion by the FCA at the SEC’s request.

The Framework

Way back in the mists of time, even before the birth of the FCA’s predecessor, the Financial Services Authority (‘FSA’), the SEC executed a Memorandum of Understanding (‘MoU’) with the UK Department of Trade and Industry which set out the means by which both agencies would cooperate on the regulation of securities and commodity futures.

In the subsequent years, the relationship between the two regulators and their successors has blossomed, each recognising that information sharing, and collaborative working is vital to ensure the strong and efficient governance of the global marketplace.

Most recently, in March 2019, the FCA and the SEC reaffirmed the importance of the united approach to supervision and enforcement by signing two revised MoUs intended to bolster the two agencies’ co-operation, oversight and information sharing practices. As SEC Chairman Jay Clayton commented at the time of signing: “The SEC and FCA have a long history of effective cooperation on supervisory and other matters. The amended MoUs we entered into today reaffirm this commitment and collaboration with respect to the oversight of our respective registrants for the benefit of each of our markets and investors.”

Whilst these latest MoUs continue to provide an important method of information sharing, both agencies also wield wide-ranging statutory powers that allow them to assist each other on a discretionary basis. The enabling statutes – the US Securities Exchange Act of 1934 and the UK Financial Services and Markets Act 2000 (‘FSMA’) for the FCA – permit the disclosure of confidential information to overseas regulators, provided the disclosure is for the purposes of enabling or assisting the recipient to discharge its functions. They also allow the agencies to conduct investigations and gather information on behalf of overseas regulators – including exercising the power to compel individuals to attend for interview (or to be subpoenaed) and to provide relevant documents, even if the compelled individual is not himself a regulated person.

In the UK, the relevant section of FSMA that gives the FCA authority to conduct an investigation or exercise its power on behalf of a foreign regulator is s169. This is supplemented by a published policy, which can be found in the FCA Handbook in Chapter 7 of the Decision Procedure and Penalties Manual (‘DEPP’).

The Process for Providing Assistance

The starting point for the FCA whenever it receives a request from an overseas authority will be to decide whether it should use its discretion to assist with the request.

This discretion is broad and relatively unrestricted. In short, if the FCA wants to assist, it can do so.

S169 (4) gives guidance to the FCA as to the factors it may take into account when deciding whether to assist an overseas authority. In respect of US agencies, such as the SEC, the s169 (4) suggests that the FCA “may take into account” the following:

whether in the country or territory of the overseas regulator concerned, corresponding assistance would be given to a United Kingdom regulatory authority;
whether the case concerns the breach of a law, or other requirement, which has no close parallel in the United Kingdom or involves the assertion of a jurisdiction not recognised by the United Kingdom;
the seriousness of the case and its importance to persons in the United Kingdom;
whether it is otherwise appropriate in the public interest to give the assistance sought.

Neither FSMA, nor the DEPP policy, requires the FCA to examine critically a request for assistance. Crucially, the FCA is not obliged to satisfy itself of the merits of the underlying investigation or the relevance of the information requested.

This approach was tested and approved by the UK courts in Financial Services Authority v Amro [2010] EWCA Civ 123. In that case the SEC had sought the (then) FSA’s assistance to use the FSA’s powers to obtain documents from a UK accountancy firm that the SEC believed had acted for a group of individuals who were subject to a civil action in the US. The FSA acquiesced in the SEC’s request by exercising its discretion and appointing investigators to require the accountants to produce the documents requested by the SEC. Both the FSA’s decision to appoint investigators, and the scope of the documents sought, was subject to challenge, first in the High Court and then in the Court of Appeal.

The Court of Appeal found that it was not for the FSA to analyse or make further enquiry of the request for assistance and observed that s169 FSMA sets out the four factors that the FSA may take into account when deciding whether to exercise its power. The court clearly stated that there was nothing in the statutory scheme to suggest that the FSA should “form a judgement as to the necessity or desirability, from the point of view of a foreign regulator, of its obtaining the information or documents it seeks.”

To appoint – or not to appoint?

Once the FCA has decided to exercise its discretion to assist an overseas authority, it must then decide how it will render the necessary assistance. The starting point, according to DEPP, is to consider whether the information or assistance can be obtained voluntarily. If it cannot, the FCA must decide which of its powers to use. If the information requested is relatively narrow and needs to be obtained from an authorised person (that is an FCA regulated entity), or a person “connected” to that authorised person (e.g. an employee of the regulated entity), the FCA should use its power under s165 FSMA. The s165 power is available to require information and documents from firms to support both the FCA’s supervisory and enforcement functions. If, however, s165 is not suitable, for example the information requested is wide ranging or is not held by a regulated entity, the FCA will need to use its s171 and 172 powers. These are extensive powers that compel ANY individual (including individuals who are not regulated) to provide documentation or attend an interview where they must answer questions. Only investigators appointed by the FCA can utilise these powers, so if they are necessary to assist an overseas regulator, the FCA will have to formally “appoint investigators” in order to exercise them.

SEC Involvement at Compelled Interviews

In cases where the FCA are conducting a compelled interview on behalf of the SEC, the SEC’s preference is usually for their investigators to attend the interview – either in person or by phone or video conferencing. Chapter 7 DEPP contains the FCA’s policy for addressing this situation. It provides that SEC investigators may assist in the preparation of the interview, for example by providing questions, and where appropriate they may attend and ask the interviewee questions. The policy also says that the FCA should have conduct of the interview and retain control of it throughout. In theory, therefore, it is the FCA’s decision whether to provide documents to the interviewee in advance of the interview, and what the date and timing of the interview will be. In practice, however, this firm’s experience is that the FCA will normally defer to the SEC on all matters, including by allowing the SEC to ask the majority of the questions, unless there are exceptional reasons not to do so.

If the FCA agrees to allow the SEC to participate, the decision and the reasons for doing so should be set out in a written direction. The interviewee should receive a copy of this direction in advance of the interview, unless the disclosure of the document is considered liable to frustrate the investigation itself. The interviewee should also be informed by the FCA, in advance of the interview, whether he or she is under investigation (and if so, the general nature of the matters under investigation) unless to do so would frustrate the investigation.

Compelled Interviews – a Circumvention of the Fifth Amendment?

Allowing the SEC to participate in a compelled interview, or to receive the transcript of a compelled interview, is not without its problems.

Under s177 FSMA, failure to comply with a requirement to attend and answer questions without reasonable excuse, or giving information which is false or misleading, either knowingly or recklessly, may lead to an individual being dealt with as though they were in contempt of court, and could result in a penalty of up to two years’ imprisonment and/or a fine.

As US readers may be aware, the protection against self-incrimination under UK law is less far reaching than that enshrined in the US Constitution’s Fifth Amendment. In the US, the right not to incriminate oneself is a cornerstone of both criminal and regulatory proceedings, whereas in the UK, the same right only exists in criminal proceedings. Therefore, under UK law, answers given in an FCA compelled interview are not generally admissible against the interviewee in criminal proceedings but are generally admissible against the interviewee in most types of non-criminal (including regulatory) proceedings. By making a request for assistance to the FCA, the SEC can therefore leverage the FCA’s power to compel a person to answer questions – a power the SEC would not have if the interview took place on US soil, where the interviewee could assert their Fifth Amendment rights.

Where agencies in the UK, including the FCA, are carrying out compelled interviews in a cross-border criminal context – such as proving assistance to the DoJ – they will normally ask for an undertaking that the interview transcripts will not be used as evidence against the interviewee in any US criminal proceedings. In any event, post Allen[1], the DoJ generally shies away from receiving compelled testimony in respect of any individuals it may prosecute.

However, the SEC is not a criminal prosecutor and cannot itself institute criminal proceedings, so the FCA are generally content to share the output of their compelled interviews with them, with no real safeguards as to how the answers can be used. This leads to the invidious position that the SEC is able to circumvent the privilege afforded domestically in the US by relying on compelled evidence obtained by the FCA in the UK – either directly against the interviewee or indirectly for investigative (derivative) purposes.

Conclusion

Cross-border requests by the SEC to the FCA to obtain oral testimony in regulatory proceedings risk eroding the protections of the Fifth Amendment. It is therefore important for both US and UK lawyers to ensure that their clients only answer questions in such an interview in light of the sanctions for refusing to do so (a potential contempt of court and prison sentence) and therefore that their clients’ testimony is stated to be involuntary, and does not constitute a waiver of their Fifth Amendment rights.

[1] United States v Allen No. 16-898 (2d Cir 2017)