Remarks To The 2024 AIMA APAC Annual Forum, SEC Commissioner Mark T. Uyeda, Hong Kong, Oct. 24, 2024

Thank you for the kind introduction.[1] I am pleased to be at the AIMA APAC Annual Forum, which is one of the largest gatherings of regulators, hedge fund and alternative investment managers, and institutional investors in the region. Asia-Pacific, or more broadly, the Indo-Pacific area, has emerged as the center of global opportunities in the 21st Century. As former U.S. Ambassador to Japan and now U.S. Senator Bill Hagerty has observed, this region represents roughly half of the world’s population and 60% of its GDP.[2]

America’s economy is tied closely to the region and it is important that the United States remain actively engaged with its partners in the Indo-Pacific area. Working together, all of our countries can benefit from more economic growth, increased standards of living, and enhanced regional stability. My remarks today will focus on the Indo-Pacific region and its important role in the global financial markets.

Deeper economic integration among our respective countries can encourage greater investment that will be mutually beneficial, particularly for jurisdictions that promote high standards and free markets. Ensuring a conducive business environment that promotes fair and reciprocal trade, protects intellectual property rights, and seeks a level playing field will not only contribute to economic prosperity, but will also foster trust and confidence among nations. Therefore, the exchange of ideas and views from countries in the region on financial regulation and innovation form an important part of the international financial regulatory dialogue.

Today, I will discuss three topics: the regulation of private funds in the United States; developments in crypto and digital asset innovation; and the need for regulators in the Indo-Pacific region to actively engage in international regulatory forums. Before turning to those topics, however, I wanted to make some observations about alternative investments and the opportunities in those asset classes for investors. I am increasingly concerned with the criticisms being leveled by prudential regulators about the role of alternative investments in our capital markets and allegations that alternative investments are engaged in “shadow banking” activities that threaten financial stability.

The shift of such activity to the non-banking sector should come as no surprise. In the aftermath of the 2008 global financial crisis, countries across the world placed significant restrictions on banking activities. These restrictions might be appropriate for banking entities that are backstopped by the government. However, that is not the case with alternative investments such as private equity, private credit, real assets, crypto, and others, which contribute significantly to our global economies. Bank finance often cannot provide the risk capital needed by venture-stage businesses to help them innovate and grow. Without a wide range of alternative investments that help provide nontraditional funding to companies, we might not have innovations in technology, healthcare, and other areas that can lead to new products and services and improve standards of living. From the investor perspective, traditional investments such as listed equities, exchange-traded funds (“ETFs”), and bonds may not provide the desired diversification for sophisticated investors like pension plans for workers, university endowments, sovereign wealth funds, and family offices.

Private fund adviser rulemaking

The skepticism about alternative investment vehicles and their managers transitions to my first topic: the regulation of private funds. Over more than a decade, we have seen tremendous growth in private funds in the United States, as there has been significant interest by institutional investors in these offerings.[3] One reason for their success has been that the U.S. Congress has enacted laws that impose a far less prescriptive regulatory scheme as compared to the regulations imposed on mutual funds and ETFs available to the general public.

Despite the intent of Congress to provide a separate regulatory environment for private funds, the Commission moved forward in 2023 with a highly prescriptive rule that imposed numerous requirements on private fund advisers, including mandatory annual financial statement audits, quarterly statements, restrictions on certain fee and expense allocation arrangements, limitations on adviser-led secondary transactions, restrictions on tailored redemption rights and portfolio holdings disclosures for investors, and limitations on the use of side letters.[4]

I opposed this rule.[5] First, it exceeded our statutory authority. Second, it swept aside the longstanding view that sophisticated institutional investors did not need the same protections provided to retail mutual fund and ETF investors. Instead, sophisticated investors can bargain for different rights, fees, and disclosures and in turn, invest in asset classes and strategies that are generally unavailable to retail investors.

In the United States, the actions of the government are subject to review by the judiciary. Market participants and the public can hold the SEC accountable in court if we have overstepped the scope of our authority or failed to comply with the requirements on how agency rulemaking should be conducted and that is exactly what happened.[6]

On June 5, 2024, a U.S. court of appeals unanimously vacated the SEC’s rulemaking on private funds.[7] The rulemaking had been challenged by AIMA and others. The period for any further reconsideration or appeal, including to the U.S. Supreme Court, has since expired.[8] I hope that the SEC will take the opportunity to learn from this experience and be more mindful of the appropriate limits on our authority in the future.

Notwithstanding the court’s ruling, keep in mind that the SEC’s rulemaking agenda has proposals that would continue to affect private fund managers. For example, the SEC has announced that it will re-propose its custody rule for SEC-registered investment advisers[9] and the cybersecurity proposal remains pending.[10] The SEC’s Enforcement Division remains focused on private fund issues, including lack of compliance with the custody rule and its requirement of prompt delivery of audited financial statements to investors,[11] failure to comply with a private fund’s limited partnership agreement and marketing materials,[12] and unretained off-channel communications involving text messages on personal devices of employees.[13]

Crypto and FinTech Innovation

As the SEC considers the implications of recent court decisions on its rulemaking agenda, I hope that we take a hard look at whether we are acting consistently with our three-part mission to protect investors, to maintain fair, orderly, and efficient capital markets, and to facilitate capital formation when it comes to crypto and fintech. Financial innovation has always been a fundamental part of our capital markets. Without innovation, markets can stagnate and fail to live up to their potential for providing capital to those needing it. Many securities regulators around the world have similar missions. I believe there is much to learn from market regulators in the Indo-Pacific region on how to promote these values and objectives.

During my time as Commissioner, I have had numerous conversations regarding the regulation of crypto and digital assets in other countries. My impression is that Hong Kong, Singapore, Japan, and Australia, among others, have shown leadership in how to facilitate crypto and fintech capital formation and innovation while promoting investor protection. For example, the Hong Kong Monetary Authority has proposed a stablecoin licensing regime,[14] Singapore has committed up to $150M to promote fintech innovation, including by assisting corporate venture capital entities,[15] Japan has developed guidelines for the supervision of crypto-asset exchange service providers,[16] and Australia has published guidance on many fintech topics and has its own regulatory sandbox.[17]

By comparison to the Indo-Pacific region, the SEC’s current regulatory approach to crypto and related technology is less advanced. One concern expressed by market participants has been that the SEC has not provided sufficient guidance on key issues, such as when does a particular crypto offering need to be regulated as a security offering. If the crypto offering is determined to be a security, then several key decision points follow: should the offering be public or nonpublic? Should the offering be registered or exempt? If registered, what should the disclosures look like? Should the offering be listed on an exchange? What listing standards should apply? What are the financial reporting requirements? What are the obligations of those who wish to sell the security to others? These are only a few of the questions and decisions that apply to a security offering in the United States.

My view is that the SEC could do much more in addressing the key gating question of whether a crypto asset is a security. Market participants have been forced to struggle with this analysis and decipher SEC views from various settled enforcement actions and litigation in the courts.

Even if a market participant wishes to register a crypto offering as a security for sale to the public, it faces challenges as our existing rules and forms do not contemplate crypto or any risks or features applicable to crypto. For example, securities offerings are generally registered with the SEC using a specific form. We do not have a specific form for crypto and thus issuers would seek to register their crypto offerings on Form S-1.[18] Form S-1 is a form of general applicability. As such, it may require information that is not relevant or applicable to crypto, while at the same time, it may not require information that would be material to crypto investors. This approach neither protects investors nor facilitates capital formation.

With respect to the alternative investments industry, although the registration of crypto offerings may be not as relevant, there are other issues that may be impactful, such as whether and how a private fund manager can custody crypto. For example, in the United States, key issues for managers are whether the crypto asset constitute funds or securities that need to be maintained with a custodian — and would that custodian be a “qualified” custodian under our rule — and whether those assets can be audited.[19]

In addition, the SEC should engage with participants in a more transparent way. I understand that many other securities regulators around the world have taken this approach, such as hosting regular fintech events, providing regulatory sandboxes, or otherwise publicly engaging with the industry and investors. There can be benefits from this approach and I think we should learn from our fellow regulators’ experiences.

We cannot bury our heads in the sand about the growing benefits and risks of crypto and financial technology. Other regulators around the world are leading on these issues. I hope the United States takes note of this leadership and uses this experience to jumpstart our own regulatory framework as we work to facilitate innovation, capital formation, and investor protection.

International engagement

On a related note, I would like to discuss the importance of international engagement among securities regulators and firms. I have learned much from my own engagements with securities and banking regulators, including meetings with representatives in their home countries and at the SEC, and participation at international gatherings and events like this conference.

International engagement by securities regulators and capital markets participants is increasingly important to counter the false narrative of “shadow banking.” I strongly disagree with the notion that market-based financial activity outside of the banking system is potentially harmful and should be regulated in a prudential manner. In fact, shadow banking — or as more appropriately described, market-based finance — helps bring liquidity to the markets and provide needed funding to smaller businesses.

Without market-based finance, economic growth would likely stagnate. Nonbank market participants are needed to allocate risks and grow our markets. To the extent that there are activities that raise substantial risks to the global financial system, prudential and markets regulators should seek to understand and thoughtfully mitigate these risks. However, outdated rhetoric about the purported risks of “shadow banking” is unhelpful and not productive. As such, prudential and markets regulators should work together constructively in overseeing global financial stability, recognizing that the banking system and the capital markets serve two fundamentally different purposes.

Two significant organizations that bring together regulators around the world are the International Organization of Securities Commissions, or IOSCO, and the Financial Stability Board, or FSB. Many of you may be familiar with the work of these two organizations. IOSCO has over 200 members from 130 jurisdictions, which includes about 95% of the global securities markets. IOSCO has several regional committees and standard and policy setting committees.[20]

The FSB was formed after the global financial crisis of 2008 and focuses on identifying and framing global systemic risk in the financial sector and overseeing the implementation of response to address those risks. The FSB membership is primarily composed of prudential regulators, such as from ministries of finance, central banks, and supervisory and regulatory authorities from the G20 countries, as well as Hong Kong, Singapore, Spain, and Switzerland. It also includes the European Central Bank and the European Commission.[21]

Each of these organizations performs important work in the international financial regulatory community. However, in my view, both organizations suffer from the same problem: these organizations are dominated by European regulators and have a viewpoint that is overly influenced by that region and its particular regulatory and prudential frameworks. To that end, there is often a higher level of engagement by European and American firms on public consultations from those organizations, with less participation from other regions like the Indo-Pacific.

While the perspectives of the European Union and European firms are important, if IOSCO and the FSB are to be truly global organizations, then they must take affirmative steps to further incorporate views from non-European jurisdictions and firms. This includes increased representation from the Indo-Pacific region, which in my view is underrepresented and has valuable insights to offer. My further concern is that these organizations are overrepresented by prudential regulators, who are primarily concerned with financial stability and the tamping down of risk. This approach could restrict the growth of our capital markets and the vital role that these markets play in the real economy. Capital markets, after all, are one of the most efficient methods of allocating risk.

Both IOSCO and the FSB are focusing on issues that impact alternative investments, including private fund leverage, crypto, and derivatives regulation. These topics could have significant ramifications on the alternative investments sector. For example, the FSB has warned about hedge funds’ use of leverage possibly having global financial stability implications and has indicated it may have policy recommendations to address these perceived risks.[22] I appreciate the work of AIMA and others in commenting on these issues and I encourage individual firm participation as well.

Thank you for your attention. It was a pleasure to speak to you.