The long arm of the regulators

In a recent decision of considerable importance to accountants and other
professionals, the Court of Appeal, in Financial Services Authority Vs Amro
International and Others, confirmed the long reach and potentially wide scope of
requests for assistance from foreign regulators. The end result will be greater
administrative costs for accountants.

In 2002, the US Securities and Exchange Commission commenced an investigation
that later led to proceedings being brought in the US against an employee of a
New York-based investment advisory company, for fraudulent and manipulative
trading in shares of a US company.

The SEC contacted the FSA with a request for assistance in obtaining
documents from Goodman Jones, a London-based accountancy firm that had acted for
Amro International and Creon – two FSA-regulated companies that had previously
been advised by the New York company. Under the Financial Services and Markets
Act 2000, the FSA is obliged to “take appropriate steps to co-operate with
overseas regulators.”

When Goodman Jones refused to comply with the FSA investigators’ formal
request for disclosure of documents, the UK regulator brought action against the
firm alongside Creon and Amro International in the High Court.

At issue was whether the SEC’s request was too broad and the fact that it
concerned documents relating to two entities which were not named as defendants
in the US proceedings. The High Court found that the FSA’s decision to appoint
investigators to comply with the SEC’s request went beyond what was necessary
and proportionate.
However, the Court of Appeal found that the FSA had made no error of law or

principle by complying with the SEC’s request. Significantly, the court
stated that it was not for the FSA to “second-guess a foreign regulator as to
its own laws and procedures, or as to the genuineness or validity of its
requirement for information or documents”, meaning that the FSA was not under an
obligation to assess the correctness of a request made by an overseas regulator
before complying with it.

The decision clearly raises concerns that the FSA will now be obliged to
compel disclosure in relation to even the most speculative of requests by
foreign regulators, leading to an increase in the administrative burden and
associated costs borne by accountants (and other advisory firms). In its
judgment, the court acknowledged the importance of not encumbering advisers with
unduly onerous requests but it placed greater emphasis on the need for
cooperation among financial regulators on an international basis.

As a consequence, accountants will face wider ranging requests, which will
place greater administrative and financial burdens upon them. In light of the
court’s decision, firms should review their internal policies regarding how to
respond to regulatory requests for information in order to be fully prepared.

Kevin Roberts is a litigation partner at Morrison & Foerster