SOPA, FATCA and the Volcker Rule: the border busters
(Business Law Currents) – The global nature of business has perhaps never been more evident than in the wake of the U.S. housing crisis, the natural disasters in Japan and the ongoing European sovereign debt ruckus. Industries and national economies do not exist in a vacuum, nor do the regulatory changes which nations seek to implement in order to address widespread concerns.
The most recent example of the “extraterritorial” impact of a nation’s laws is a rule being promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Released last October, the Volcker rule is a proposal to prohibit proprietary trading and hedge or private equity fund investments by banking entities.
While American bankers argue that the new trading restrictions imposed by Volcker will result in market volatility and impact the ability of companies to raise capital, supporters point to massive trading losses by domestic and foreign banks in recent years – and the resultant loss of stability for major players – as evidence of the need for such regulation.
However, some of the most vocal opponents to Volcker are foreign – banks, regulators and other players. Canada’s Minister of Finance, for example, wrote to the Department of the Treasury to express his “concerns” regarding the Volcker rule, which he believes “could have material adverse effects on Canadian financial institutions and markets.” In fact, in Canada alone, the Governor of the Bank of Canada, the Superintendent of Financial Institutions, the Investment Industry Association of Canada, the Canadian Bankers Association, and all of the major Canadian banks have commented on the draft rule.
U.K. legislators have raised similar issues, noting the possibility that the legislation could “dis-incentivise transactions with U.S. counterparties”, and seeking a “more active dialogue” on the Volcker rule and its implications for global financial markets.
In particular, it’s the “unprecedented extraterritorial reach” of the rule that Canada, the UK, Japan and other nations consider problematic. Indeed, the efforts by the U.S. government to regulate the foreign operations of foreign institutions – in some cases with rules more restrictive than those applying to domestic U.S. institutions – could have negative implications for American businesses.
As an example, the Volcker rule excludes U.S. government securities from restrictions on proprietary trading. At the very minimum, one would expect nations bearing the same or higher ratings to the U.S. to be accorded the same exclusion. Also, were the Volcker rule to apply to transactions between foreign banks that are simply facilitated by, for example, a U.S. clearing house, such banks could be forced to clear and settle transactions in other jurisdictions, or through foreign exchanges, rather than deal with a harsh compliance burden.
Reading between the lines of the Canadian submission vis-à-vis Volcker, a broader message can be detected – that Canada and other nations do not appreciate the unilateral expansion of U.S. jurisdiction beyond the country’s borders. After all, the financial industry in several nations came out of the financial crisis in much better shape than the U.S. industry, presumably as a result of domestic policy (e.g. “Canada’s own proven regulatory model”), local business practices and other circumstances. The implication of an initiative such as the Volcker rule is that American legislators know better – something which is not supported by the evidence to date.
At the individual issuer level, banks and other issuers have also begun noting the potential implications of Volcker and other extraterritorial rules. TD Bank is the sixth largest bank in North America, and notes that “certain extraterritorial aspects” of Dodd-Frank “may impact the Bank’s operations outside the United States”.
In its recent annual report, the Royal Bank of Canada addressed the uncertainty of Volcker directly. RBC, which is one of the largest banks in the world, notes that “many aspects of the Volcker Rule remain unclear” and, as a result, it is “unable to determine the extent to which our capital markets activities, including activities outside of the United States will be impacted by the Volcker Rule…”
Meanwhile, the Bank of Montreal points out that, as currently proposed, the rule will require the implementation of a comprehensive compliance program and monitoring of certain quantitative risk metrics by the middle of June.
Bank of Montreal’s exchange traded mutual funds (ETFs) must wrestle with another set of U.S. rules that are extra-territorial in nature, namely the Foreign Account Tax Compliance (FATCA) Rules. [Ed note – this is an acronym that is crying out for another T at the end] Under the FATCA rules, a 30% withholding tax will be imposed on U.S.-source payments made by U.S. entities and, in some cases, other payments made by non-U.S. entitiesbeginning in 2014 where the entity fails to provide information regarding certain of its investors to the U.S. Internal Revenue Service (IRS).
As BMO notes in the prospectus for its ETFs, it is difficult to accurately estimate the impact of this legislation because most of the expected guidance has not yet been issued. However, at a minimum, BMO anticipates the legislation would impact investment returns and administrative costs. BMO also notes that there may be privacy concerns, since rules governing privacy of personal and financial information vary widely by jurisdiction.
Beyond legislation such as Volcker and FATCA, recent efforts to clamp down on the piracy of copyrighted materials beyond U.S. borders, such as the Stop Online Piracy Act (SOPA), the Protect IP Act, and the FBI’s closure of file sharing outfit MegaUpload, have raised questions as to the reach of U.S. legislation. In the process, a bright light has shone on the U.S. legislative process.
Ironically, in their efforts to reduce financial risk and return some stability to the global economy, U.S. and other national regulators are now finding how difficult it is to balance national interests in an international environment.
(This article was first published by Thomson Reuters’ Business Law Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Business Law Currents online at http://currents.westlawbusiness.com. )