Friday, October 16, 2009


On October 1, 2009, we reported that the SEC and CFTC were planning to issue a joint report to Congress addressing the differences between the regulatory schemes for futures and securities. Today, the two agencies released their Joint Report of the SEC and CFTC on Harmonization of Regulation (“Joint Report”), which identifies these differences and recommends legislative and regulatory actions to address the inconsistencies.

As the Joint Report explains, there are significant differences between securities markets and futures markets. For instance, “[w]hile both regimes seek to promote market integrity and transparency, securities markets are concerned with capital formation, which futures markets are not.” Rather, futures markets are primarily concerned with the management and transfer of risk. Given that capital formation is the driving force in securities markets, securities regulation is in large part directed at proper disclosure to investors, whereas such disclosure is of less importance in futures markets.

In addressing these and other concerns, the lengthy 94 page Joint Report focuses on eight main areas in which the statutory and regulatory structure for the SEC and CFTC differ, including:

• Product listing and approval;
• Exchange/clearinghouse rule changes;
• Risk-based portfolio margining and bankruptcy/insolvency regimes;
• Linked national market and common clearing versus separate markets and exchange-directed clearing;
• Price manipulation and insider trading;
• Customer protection standards applicable to financial advisers;
• Regulatory compliance by dual registrants; and
• Cross-border regulatory matters.

In addition to identifying the differences between the two agencies’ statutory and regulatory structure in the above-referenced areas, the Joint Report contains twenty recommendations to Congress “for strengthening the agencies’ oversight and enforcement, enhancing investor and customer protection, rendering compliance more efficient, and improving coordination and cooperation between the agencies.”

Now that the SEC and CFTC have fully complied with the Obama administration’s recommendation in its White Paper, it is up to Congress to carefully consider these recommendations and work together with the SEC and CFTC to implement them.

A complete copy of the Joint Report can be found here.

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