Regulators Outline SEC, CFTC Harmonization Plans
Proposals Would Create Joint Enforcement, Advisory and Training Efforts
October 26, 2009
Following up on President Obama's mandate for change, regulators at the Securities and Exchange Commission and the Commodity Futures Trading Commission recently crafted a report that details their plans to harmonize the regulation of futures and securities.
The "Joint Report of the SEC and the CFTC on Harmonization of Regulation" offers specific recommendations to improve the cooperation and coordination between the two agencies, strengthen the agencies' oversight and enforcement, and enhance market efficiency and investor protection.
The creation of a joint agency enforcement task force could improve market oversight, enhance enforcement, reduce duplicative regulatory requirements and expand the sharing of market surveillance data, the report said, and the creation of a joint advisory committee could explore solutions that affect both securities and futures, such as allowing securities portfolio margin accounts to hold futures products and allowing futures portfolio margin accounts to hold securities futures and options.
The report also recommends imposing a uniform fiduciary duty on intermediaries who provide similar investment advisory services regarding futures or securities. These intermediaries include commodity trading advisors, futures commission merchants, brokers, broker/dealers, and investment advisors who provide advisory services.
Another proposal is the creation of a cross-agency training program for staff that would allow some of the staff to rotate between the SEC and CFTC. The two agencies said such a training program could lead to greater coordination and collaboration between them.
"This report is another step forward in our effort to reform the regulatory landscape and ensure greater harmonization between our agencies," said SEC Chairman Mary Schapiro. "I believe these recommendations will help to fill regulatory gaps, eliminate inconsistent oversight and promote greater collaboration."
Securities and futures have been subject to separate regulatory regimes since the 1930s, the report said, and harmonizing their oversight won't be easy. Both the SEC and CFTC seek to promote market integrity and transparency, but securities markets are concerned with capital formation, while futures markets seek to facilitate the management and transfer of risk.
"Any effort to harmonize the two regulatory regimes must take into account the particular characteristics of the two markets and products that they offer," the joint report said. "Regulations must be tailored for the purposes and objectives of the specific market in question."
The SEC and CFTC also have fundamentally different approaches to the way each agency reviews and approves new products. For example, an issuer who seeks to list on an exchange must satisfy the exchange's listing standards. The SEC is charged with making sure the listing standards follow the Securities Exchange Act of 1934.
The CFTC does not have the authority to review a product for approval prior to introduction and does not have the authority to disapprove of a product listing unless it finds that a product would violate the Commodity Exchange Act. As a result, it is generally much easier and faster to register a new product with the CFTC than the SEC.
The SEC and CFTC also have different requirements for how their books and records must be made, how long they are kept and the manner in which they are stored. According to the report, the CFTC requires most records to be kept for five years and be readily accessible for the first two years. The SEC requires most records to be kept for three years, with the first two in an easily accessible manner, but some records are required to be kept for six years.
A harmonization of standards would be beneficial to financial products that are required to file under both agencies, such as derivatives, but the exploding popularity and complexity of these financial instruments in the past few years has also blurred jurisdictional boundaries.
"Some financial products have attributes that make it difficult to determine which agency has jurisdiction over them," the report said. "This uncertainty at times has caused lengthy delays in bringing new products to market. The lack of legal certainty can be costly and confusing, and it can impede innovation and competition."
Recognizing that even happy couples occasionally get in fights, the harmonization report recommends certain procedures that could be implemented to resolve interagency disputes, such as setting up a timeline for approval or having the Treasury Department or the Presidents Working Group on Financial Markets step in as potential arbiters.
Some have argued that having the Treasury or PWG serve as a moderator is less than ideal, but there are few alternatives.
"This is reminiscent of having to go to a teacher to settle a playground dispute," said Erik Sirri, a professor of finance at Babson College and the former director of the SEC's division of market regulation.