SEC and CFTC Release Joint Report on Harmonization of Regulation

The Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) (collectively, the “Commissions”) released a joint report on October 16, 2009 (the “Report”) reviewing the key elements of the Commissions’ regulatory schemes and providing recommendations for regulatory harmonization. The Report was produced in response to a request in Treasury’s White Paper on Financial Regulatory Reform.

The Report contains a number of recommendations to strengthen the agencies’ oversight and enforcement, enhance market efficiency and investor protection and improve inter-agency coordination and cooperation. Indicating a belief that these goals cannot be met completely under current law, a number of the recommendations ask for Congress to enact new legislation. No recommendations are provided in a number of areas explored by the Report, presumably due either to disagreements between the two Commissions or a belief that any differences in the regulatory schemes are warranted by the differences between securities and futures.

The Report suggests that Congress enact legislation to:

  • facilitate the ability of customers to hold futures products in securities portfolio margin accounts and securities derivatives in futures portfolio margin accounts, and clarify the insolvency schemes that would apply to each;
  • streamline new product approvals, including a suggested process in which each Commission: would notify the other of new product listings with elements of securities and futures; would notify the other of an intent to assert jurisdiction over the product; and could petition the United States Court of Appeals for expedited review in the event of a disagreement over jurisdiction;
  • give the CFTC more timing flexibility in regard to reviewing novel and complex rules and products and to modify the agency’s standard of review;
  • expand the CFTC’s authority to promulgate rules governing exchanges and clearinghouses that are within their jurisdiction and to bring enforcement actions against such entities;
  • allow the CFTC to require registration of foreign boards of trade seeking to directly access United States members or market participants, as has been discussed in connection with Treasury’s proposed Over-the-Counter Derivatives Market Act;
  • create a uniform fiduciary duty for commodity trading advisors, futures commission merchants, introducing brokers, broker-dealers and investment advisers, extending to the futures world concepts that have been discussed for broker-dealers and investment advisers in connection with Treasury’s proposed Investor Protection Act of 2009;
  • create a uniform five year record retention standard for all SEC and CFTC regulated entities; and
  • slightly broaden the insider trading prohibition in the Commodity Exchange Act to cover trading on the basis of material non-public information obtained from governmental authorities.

The Report also recommends that the Commissions:

  • determine whether rule changes or exemptive relief would help achieve greater benefits of risk-based portfolio margining;
  • study the utility of a “one-pot” portfolio margining model;
  • consider alignment of SEC and CFTC requirements applicable to private funds, including the use of performance track records; and
  • consider aligning the futures customer risk disclosure and the Options Disclosure Document.

The Report does not suggest that any particular regulatory actions by the Commissions are imminent. However, the Report signals the possibility that the SEC may soon revisit its regulation of cross-border securities transactions, including possibly revising Rule 15a-6.

Davis Polk is monitoring developments with respect to the Commissions’ regulatory harmonization efforts and will issue additional newsflashes from time to time.

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