FINANCIAL SECTOR ASSESSMENT PROGRAM 

UNITED STATES OF AMERICA 

THE IOSCO OBJECTIVES AND PRINCIPLES OF 

SECURITIES REGULATION

REPORT ON STANDARDS 

AND CODES (ROSC) 

JULY 2010 

INTERNATIONAL MONETARY FUND

MONETARY AND CAPITAL MARKETS DEPARTMENT

 Contents Page 

Glossary .....................................................................................................................................3 

I. Introduction and Methodology ...............................................................................................4 

II. Preconditions for Effective Securities Regulation ................................................................5 

III. Main Findings ......................................................................................................................5 

IV. Authorities’ Response to the Assessment ..........................................................................17

Tables 

1. Summary Implementation of the IOSCO Principles .............................................................9

2. Recommended Action Plan to Improve Implementation 

of the IOSCO Principles ..........................................................................................................14

 
3

GLOSSARY

ATSs Alternative Trading Systems 

BDs Broker Dealers 

BSA Bank Secrecy Act 

CEA Commodity Exchange Act 

CFMA Commodity Futures Modernization Act of 2000 

CFTC Commodity Futures Trading Commission 

CIS Collective Investment Schemes 

CPSS Committee on Payment and Settlement Systems 

CPOs Commodity Pool Operators 

DCM Designated Contract Market 

DOJ Department of Justice 

EBOTs Exempt Boards of Trade 

ECM Exempt Commercial Market 

FCM Futures Commission Merchant 

FINRA Financial Industry Regulatory Authority 

FSAP Financial Sector Assessment Program 

FSSA Financial System Stability Assessment 

GAAP Generally Accepted Accounting Principles 

GAAS Generally Accepted Auditing Standards 

IAs Investment Advisers 

IBs Introducing Brokers 

IG Inspector General 

IOSCO International Organization of Securities Commissions 

IOSCO MMOU IOSCO Multilateral Memorandum of Understanding 

MOU Memorandum of Understanding 

NFA National Futures Association 

NMS National Market System 

OCIE Office of Compliance, Inspections, and Examinations (SEC) 

OIG Office of Inspector General 

OTC Over-the-Counter 

PCAOB Public Company Accounting Oversight Board 

SEC Securities and Exchange Commission 

SROs Self-regulatory Organizations
4

I. INTRODUCTION AND METHODOLOGY

1. An assessment of the United States securities and futures market regulatory 

system was conducted by Susanne Bergsträsser, Richard Britton, and Tanis MacLaren 

from October 7 to November 3, 2009 as part of the Financial Sector Assessment 

Program (FSAP).1 The assessment was conducted based on the International Organization 

of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation and 

the associated methodology adopted in 2003.2

2. The conclusions below are based on information and findings as of November 

2009. Important reforms have been introduced in the past year, some of which have already 

been implemented and are beginning to take effect. However, while these promise to address 

many of the issues identified in this assessment, it would still be important to establish a 

consistent track record before their efficacy could be judged. 

3. The assessment was carried out in a post-crisis environment, which had an 

impact on the findings. The financial crisis of 2008 exposed a number of underlying issues 

in the U.S. financial markets, some of which were causally related to the crisis—such as the 

lack of ability of U.S. investment banks to withstand shocks to liquidity—while others arose 

as a result of secondary effects of the crisis—such as the exposure of a giant fraud because of 

the sharp contraction of investment flows. As a result, the regulatory and supervisory 

framework was tested to an unusual degree, revealing weaknesses that might otherwise have 

gone undetected. 

4. The assessment also benefited from the uncommon level of transparency in the 

United States. The mission had access to a wide range of official reports, internal 

evaluations of the regulatory framework, and information on regulatory practice. Moreover, 

the U.S. system is subject to a considerable degree of high quality and critical analysis from 

the private sector, which also informed the assessment. 

5. The legislative framework in the jurisdiction provides a comprehensive, but 

complex, framework for the activities undertaken in the public markets. The 

responsibility for regulation of the markets at a federal level is split between two agencies. 

The Commodity Futures Trading Commission (CFTC) is responsible for the supervision of 

futures markets—the futures exchanges, intermediaries and products offered in the public 

markets. The Securities and Exchange Commission (SEC) regulates securities markets, 

issuers, and participants. In addition, there are state securities regulators involved in both 

licensing and enforcement activities. Further, other law enforcement agencies, such as the 

 

1

 For further discussion see the accompanying Financial System Stability Assessment (FSSA), (www.imf.org). 

2

 The underlying Detailed Assessment Report was published in May 2010 and is available at 

http://www.imf.org/external/pubs/cat/longres.cfm?sk=23867.0.
5 

Department of Justice (DOJ) and state Attorneys General, participate in enforcement 

activities. The CFTC and SEC rely to a significant degree on self-regulatory organizations 

(SROs) for the regulation of the markets and their participants, including exchanges, clearing 

organizations, and securities or futures associations, each of which has authority over their 

members’ activities. 

II. PRECONDITIONS FOR EFFECTIVE SECURITIES REGULATION

6. The general preconditions for effective securities regulation in the United 

States are present. There are no significant barriers to entry and exit for market participants. 

Competition is encouraged and foreign participation is welcomed. The legal and accounting 

system supports the implementation of requirements and effective regulation of market 

participants. The commercial law is up-to-date and is capable of supporting the demands 

posed by cross-border trade, modern financial instruments, and current corporate governance 

standards. The legislation regarding bankruptcy, insolvency, and winding up in the 

jurisdiction and the professionals associated with those matters are sophisticated. 

III. MAIN FINDINGS

7. Complexity is a key challenge. The U.S. securities and futures markets are very 

complex. The regulatory framework and system that have developed are equally complex. 

This is evident in the division of responsibility between the agencies and in the way that each 

is structured. There is a high degree of specialization evident at each agency. Although 

specialization may have benefits in a complex environment, regulators may be challenged to 

appropriately assess overall issues that cross specialization lines—both within an agency and 

between agencies. A greater focus on systemic issues relating to both securities and futures 

markets would make the overall regulatory system more robust.

8. The chairmen of the CFTC and SEC have both recognized the need for change 

and have taken steps toward strengthening their institutions. However, institutional 

culture is not easy to transform. Moreover, the agencies are under strong and continuous 

pressure, including from the industry; their challenge will be to respond to market 

developments in a timely fashion and set a reform agenda in an independent manner. 

9. Issues related to complexity and the need for reform manifest themselves both in 

specific areas and at a system-wide level. The specific areas of concern include the 

enforcement function and the regulation of over-the-counter derivatives markets; but the 

overarching issue is the need to work toward simplification of internal and institutional 

structures. Within the agencies, better internal management structures and improved 

communication between departments should be established to facilitate a regulatory culture 

of continuous learning and response. 

10. Principles relating to the regulator (Principles 1–5): The responsibilities of the 

CFTC and SEC are clearly stated in law. However, there are gaps in coverage of the wide 
6 

range of activity in the U.S. markets and in the scope of authority of both agencies and there 

are differences between the futures and securities regimes in how similar instruments are 

regulated. There are also gaps between the authority of the SEC and the Federal Reserve with 

respect to the regulation and oversight of investment bank holding companies, which adds to 

the fragility of the overall system. The legal system grants the CFTC and SEC sufficient 

protection for their independence and the agencies operate independently on a day-to-day 

basis, and there is a strong system of accountability to Congress. However, neither agency 

has sufficient funding nor sufficient assurance of continuing funding levels to be able to 

commit to long-term capital projects, such as building new market surveillance systems, 

which are necessary to keep pace with changes in the industry. The CFTC and SEC activities 

and processes are transparent and there is public consultation regarding their regulations and 

CFTC and SEC staff and commissioners are subject to codes of ethics and other requirements 

to ensure a high standard of conduct. 

11. Principles relating to self-regulation (Principles 6–7): SROs play a significant role 

in the supervision of markets and their participants. Exchanges and clearing organizations 

and registered associations all perform important self-regulatory functions. SROs are subject 

to an authorization regime based on eligibility criteria that address issues of integrity, 

financial viability, capacity, governance, and fair access—although the regimes are different 

for exchanges in the securities and futures markets. The CFTC has insufficient authority 

regarding exchanges following the coming into force of the Commodity Futures 

Modernization Act of 2000 (CFMA). Moreover, the CFTC has limited ability to intervene in 

the introductions of a new product or changes in rules, such as those governing trading and 

there is no opportunity for stakeholders to have their views taken into account in advance of a 

new product listing or rule change. These deficiencies have been recognized and are now 

being addressed via recommendations for legislative change. 

12. Principles relating to enforcement of securities regulation (Principles 8–10): Both 

agencies have extensive enforcement authority.The anti-fraud provisions under the U.S. 

federal securities laws, as enforced by the SEC via Rule 10b–53 and supported by the courts,

have proved to be a very effective tool for prosecuting offences under the securities laws. 

Private litigation is also an unusually powerful tool for securing compliance and obtaining 

redress in case of breach. The CFTC and SEC can conduct on-site inspections without prior 

notice and can obtain information of all types without the need for a court order. The 

agencies also have broad enforcement powers, including the power to seek injunctions, bring 

 

3

 Rule 10b–5 under the Exchange Act makes it unlawful for any person, directly or indirectly, to use any device, 

scheme or artifice to defraud, to make any untrue statements of material fact or to omit to state a material fact 

necessary in order to make the statements made not misleading, and to engage in any act, practice, or course of 

business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase 

or sale of any security. 
7 

an application for civil proceedings, and compel information and testimony from third 

parties. They also can impose administrative sanctions and refer matters to criminal 

authorities. The CFTC and SEC have substantial compliance and enforcement programs in 

place. Although the assessment identified significant shortcomings in the SEC enforcement 

program, the SEC’s extensive and wide-ranging program to implement the Inspector General 

(IG)’s recommendations and other changes are beginning to generate improvements. Such 

efforts should be brought to a conclusion as a matter of high priority. Further, resources 

dedicated to the examination of SEC-registered Investment Advisers (IAs) (a program 

currently conducted solely by the SEC) are insufficient, thus reducing the effectiveness of the 

program. 

13. Principles for cooperation in regulation (Principles 11–13): The CFTC and SEC 

have broad authority to share information with both domestic and foreign regulators, even 

without having Memoranda of Understanding (MOUs) in place. Both agencies are 

signatories of the IOSCO MOU and also have many bilateral MOUs in place with other 

regulators. The CFTC and SEC have the authority to assist foreign regulators in obtaining 

information that is not in their files, using the powers that are available for their own 

investigative activities. 

14. Principles for issuers (Principles 14–16): Companies that issue securities in the 

public market must provide extensive financial information and other disclosure on initial 

offerings and most are subject to detailed continuing disclosure obligations in line with 

IOSCO standards. Liability provisions are in place to ensure that issuers are held responsible 

for all disclosure provided. This responsibility is enforced by the SEC, the exchanges, and by 

civil suits by investors. However, there is limited authority over municipal government 

issuers. Holders of voting securities of a public issuer are generally treated fairly. 

15. Principles for collective investment schemes (Principles 17–20): Operators and 

marketers of CIS offered to the public are subject to registration requirements but the initial 

eligibility criteria for CIS and their operators should be more extensive, and should be 

demonstrated prior to registration. The initial and ongoing disclosure requirements for CIS 

are comprehensive; however, the update requirements under the Commodity Exchange Act 

(CEA) are not timely. Assets of CIS are valued in accordance with U.S. generally accepted 

accounting principles (GAAP) and verified by an independent auditor at least annually. The 

custodian of CIS assets is not required to be an arm’s length party.

16. Principles for market intermediaries (Principles 21–24): There are minimum entry 

standards for all market intermediaries that include criteria relating to integrity. Capital and 

internal control requirements apply to futures commission merchants and broker dealers; 

these requirements are assessed prior to licensing by the SROs. Advisers are not subject to 

capital requirements or to operational capacity assessments prior to licensing. The applicable 

capital requirements vary by the chief risks undertaken by the intermediary (largely market 

and credit risk). The ability of the prudential requirements (capital formulae and risk 
8 

management requirements) to address the full range of risks present in some business models 

(funding, liquidity, reputational, and affiliate risks) appears to need improvement. The crisis 

brought to light weaknesses in the framework governing investment bank holding companies, 

but the conversion of the remaining entities into bank holding companies has eliminated the 

practical need for the securities regulators to address these problems immediately. There are 

procedures in place at both agencies to address failures of intermediaries, and these have 

been tested in practice. 

17. Principles for the secondary market (Principles 25–30): Securities and futures 

exchanges are subject to authorization and oversight. Under the CEA, there are categories of 

futures trading systems that are exempt from authorization, although recent legislative 

amendments have enabled the CFTC to strengthen oversight of operational Exempt 

Commercial Markets (ECMs) where appropriate. In the securities markets, post-trade 

transparency (details of completed transactions) is comprehensive, as is publicly displayed 

liquidity or pre-trade transparency (best bids and offers). However, roughly a quarter of 

liquidity is not publicly displayed (i.e., dark pool Alternative Trading Systems (ATSs) and 

broker dealer internalization of trading on behalf of clients). The SEC’s concern that a twotier market may be emerging—that provides valuable order information on the best prices for 

National Market System (NMS) stocks only to selected market participants—is justified. Any 

proposed rule changes should be supported by independent factual evidence. 

18. Market surveillance by the securities and futures exchanges and Financial 

Industry Regulatory Authority (FINRA) is effective and has kept pace with 

technological developments in markets. A comprehensive surveillance system for 

securities trading to be used by the exchanges, ATS, and the SEC (such as exists in the 

futures markets) would be beneficial for the detection of market abuse and also for 

identifying indicators of developing stress points. Market manipulation is generally well 

policed in both markets. Insider trading legislation should be more comprehensive in futures 

markets although the approach to insider trading for securities and futures should be different 

given the differences in the nature of the markets. Whether additional expansion of coverage 

is warranted, should be studied. While the IOSCO Principles do not require all markets in 

financial products to be transparent, the opacity of the over-the-counter (OTC) derivatives 

market contrasts with the relative transparency of OTC securities markets for equities and 

bonds. 
9 

Table 1. Summary Implementation of the IOSCO Principles

Principle Assessment 

Principle 1. The responsibilities of the regulator should be 

clearly and objectively stated. 

The responsibilities of the CFTC and SEC are 

clearly stated in the laws. However, there are 

gaps in coverage of products and services in the 

market, differences in treatment of similar 

products, and gaps in the scope of each agency’s 

authority. 

Principle 2. The regulator should be operationally 

independent and accountable in the exercise of its 

functions and powers. 

The CFTC and SEC are operationally 

independent. There is a strong system of 

accountability to Congress. The funding method 

for the authorities does not provide funding 

sufficient to meet their regulatory and 

operational needs on a long-term basis. 

Principle 3. The regulator should have adequate powers, 

proper resources, and the capacity to perform its functions 

and exercise its powers. 

Both authorities have extensive powers over their 

areas of responsibility, but there are gaps. The 

CFTC and SEC need additional resources in 

order to supervise the very large and complex 

U.S. securities and futures markets. 

Principle 4. The regulator should adopt clear and 

consistent regulatory processes. 

The CFTC and SEC are subject to a high degree 

of transparency including public consultation 

regarding their regulations. They are active on 

investor education. 

Principle 5. The staff of the regulator should observe the 

highest professional standards. 

The CFTC and SEC have developed codes of 

ethics. These include investment limitations on 

staff and, in the case of the SEC, reporting 

obligations. There are mechanisms to monitor 

compliance. 

Principle 6 The regulatory regime should make 

appropriate use of SROs that exercise some direct 

oversight responsibility for their respective areas of 

competence and to the extent appropriate to the size and 

complexity of the markets. 

The effectiveness of the regulatory regime is to a 

large degree dependent on the skills and 

resources of the SROs. They play a very 

significant role in the supervision of markets and 

their participants. Exchanges and clearing 

agencies perform important self-regulatory 

functions as do registered associations. 

Principle 7. SROs should be subject to the oversight of the 

regulator and should observe standards of fairness and 

confidentiality when exercising powers and delegated 

responsibilities. 

Following the coming into force of the CFMA, 

the CFTC has had insufficient authority over 

exchanges. This deficiency is now being 

addressed via recommendations for legislative 

change. 

Principle 8. The regulator should have comprehensive 

inspection, investigation, and surveillance powers. 

The CFTC and SEC have broad investigative and 

surveillance powers over regulated entities, 

exchanges, and regulated trading systems. They 

can conduct on-site inspections without prior 
10 

Principle Assessment 

notice. They can obtain books and records and 

request data or information without a court order. 

Principle 9. The regulator should have comprehensive 

enforcement powers. 

The CFTC and SEC have broad enforcement 

powers. These include the power to seek 

injunctions, bring an application for civil 

proceedings, and compel information, 

documents, records, and testimony from third 

parties in the course of their investigations. They 

can impose administrative sanctions and refer 

matters to criminal authorities. 

Principle 10. The regulatory system should ensure an 

effective and credible use of inspection, investigation, 

surveillance, and enforcement powers and implementation 

of an effective compliance program. 

Significant shortcomings were identified in the 

SEC enforcement program. However the current 

extensive and wide-ranging program of change is 

beginning to generate improvements. Important 

elements, such as the restructuring of complaints 

handling processes remain “work in progress.” 

The resources for the examination of registered 

IAs by the SEC are insufficient, thus reducing 

the effectiveness of this program. Resources for 

criminal prosecution of securities fraud are too 

limited. 

Principle 11. The regulator should have the authority to 

share both public and non-public information with 

domestic and foreign counterparts. 

The CFTC and SEC have broad authority to 

share information with both domestic and foreign 

regulators and both agencies have shared 

information extensively with international 

counterparties. 

Principle 12. Regulators should establish informationsharing mechanisms that set out when and how they will 

share both public and non-public information with their 

domestic and foreign counterparts. 

The CFTC and SEC are signatories of the 

IOSCO Multilateral Memorandum of 

Understanding (MMOU). They also have 

bilateral MOUs with other regulators. 

Principle 13. The regulatory system should allow for 

assistance to be provided to foreign regulators who need 

to make inquiries in the discharge of their functions and 

exercise of their powers. 

The CFTC and SEC have authority to assist 

foreign regulators in obtaining information, even 

when that information that is not in their files, 

and regularly do so. 

Principle 14. There should be full, timely, and accurate 

disclosure of financial results and other information that is 

material to investors' decisions. 

There is extensive initial and ongoing disclosure 

for most public issuers. However, there is limited 

direct authority over municipal government. Ongoing disclosure requirements do not apply to all 

public issuers. 

Principle 15. Holders of securities in a company should be 

treated in a fair and equitable manner. 

Holders of voting securities of a public issuer 

generally are treated fairly. 

Principle 16. Accounting and auditing standards should be 

of a high and internationally acceptable quality. 

U.S. GAAP is widely recognized as an 

acceptable accounting standard for use by public 

issuers and the generally accepted auditing 

standards (GAAS) of the U.S. Public Company 

Accounting Oversight Board (PCAOB) also are 

widely accepted globally. 

Principle 17. The regulatory system should set standards 

for the eligibility and the regulation of those who wish to 

Operators and marketers of CIS are subject to 

registration requirements but eligibility criteria 
11 

Principle Assessment 

market or operate a collective investment scheme. are not comprehensive. In addition, at present the 

resources and internal controls of a CIS would be 

subject to an examination by the regulator only 

sometime after the fund began operation, but are 

not preconditions to the original approval. 

Resources at the SEC, CFTC, and National 

Futures Association (NFA) do not allow routine 

examination of the operators to take place with 

sufficient frequency. 

Principle 18. The regulatory system should provide for 

rules governing the legal form and structure of collective 

investment schemes and the segregation and protection of 

client assets. 

There are requirements governing the legal form 

of Collective Investment Schemes (CIS) and 

addressing protection of client assets. Notice of 

changes that affect investor rights should be 

given prior to the effective date of the change, 

whether or not investor approval is required. 

The material change requirements set out in the 

CEA are not timely. The custodian of a CIS’s 

assets is not required to be an arm’s length 

party. 

Principle 19. Regulation should require disclosure, as set 

out under the principles for issuers, which is necessary to 

evaluate the suitability of a collective investment scheme 

for a particular investor and the value of the investor’s 

interest in the scheme. 

The disclosure required for public commodity 

pools and securities CIS is extensive and is 

updated throughout the period when the CIS is 

offering its securities to the public. However, the 

CEA requirements regarding updating the 

Disclosure Documents are not timely. The 

information disclosed is sufficient for investors 

to assess suitability and the value of their 

investments in the CIS. 

Principle 20. Regulation should ensure that there is a 

proper and disclosed basis for assets valuation and the 

pricing and the redemption of units in a collective 

investment scheme. 

Assets of CIS are valued in accordance with 

U.S. GAAP and verified by an independent 

auditor at least annually. The prices of the 

instruments are made available to the investors 

periodically. No guidance is provided on how 

pricing errors in commodity pools should be 

addressed. 

Principle 21. Regulation should provide for minimum 

entry standards for market intermediaries. 

There are minimum entry standards for market 

intermediaries but only some types of 

intermediaries are subject to standards relating to 

financial capacity or assessed with respect to 

their internal controls, risk management, and 

supervisory systems in place before licensing. 

Principle 22. There should be initial and ongoing capital 

and other prudential requirements for market 

intermediaries that reflect the risks that the intermediaries 

Capital requirements apply to Futures 

Commission Merchants (FCMs), non-guaranteed 

Introducing Brokers (IBs,) and BDs that vary by 
12 

Principle Assessment 

undertake. certain of the risks undertaken by the firm. The 

capital formulae and other prudential 

requirements do not address fully the complete 

range of risks to which a firm may be exposed. 

Principle 23. Market intermediaries should be required to 

comply with standards for internal organization and 

operational conduct that aim to protect the interests of 

clients, ensure proper management of risk, and under 

which management of the intermediary accepts primary 

responsibility for these matters. 

There are standards of conduct and internal 

control requirements for the protection of clients 

and intermediaries. The risk management 

expectations for broker dealers (BDs) and FCMs 

should be reexamined, particularly with regard to 

management of liquidity, funding, and 

reputational risks under stress. 

Principle 24. There should be a procedure for dealing with 

the failure of a market intermediary in order to minimize 

damage and loss to investors and to contain systemic risk. 

There are procedures in place at both the CFTC 

and SEC to address failures and these have been 

put to the test. 

Principle 25. The establishment of trading systems 

including securities exchanges should be subject to 

regulatory authorization and oversight. 

Securities and futures exchanges and trading 

system operators are subject to authorization and 

oversight. However, under the CEA, there are 

categories of trading systems which are exempt 

from authorization and are not registered with, or 

designated, recognized, licensed, or approved by 

the CFTC. 

The authorization of so called “dark pool” 

alternative trading systems under Regulation 

ATS, whereby they are not required to publicly 

display their best-priced orders in NMS stocks, 

does not provide for adequate pre-trade 

transparency of trading interests. Thus, the 

consultation currently being conducted by the 

SEC on equity market structure, including issues 

related to “dark pools,” is timely. 

Principle 26. There should be ongoing regulatory 

supervision of exchanges and trading systems, which 

should aim to ensure that the integrity of trading is 

maintained through fair and equitable rules that strike an 

appropriate balance between the demands of different 

market participants. 

The ongoing supervision of ECMs is an 

excessively light-touch regime, although the 

CFTC has recently sought and obtained 

regulatory change which has enabled it to 

strengthen oversight where appropriate. 

CFTC needs explicit statutory authority to 

impose financial resource requirements on 

designated contract markets (DCMs). 

A more holistic approach to capital adequacy 

requirements for exchanges is preferable. 

Principle 27. Regulation should promote transparency of 

trading. 

The CEA and CFTC regulations have not been 

updated to reflect modern concepts of 

transparency. However, the practice in futures 

markets, consistent with the Principle, is real 

time publication. 
13 

Principle Assessment 

Transparency in the securities markets is 

comprehensive. There is public display of pretrade best bids and offers and liquidity. However, 

25 percent of liquidity is not publicly displayed 

(i.e, dark pool ATSs and broker dealer 

internalization of trading on behalf of clients). 

Principle 28. Regulation should be designed to detect and 

deter manipulation and other unfair trading practices. 

Insider dealing law is too narrowly focused in the 

derivatives markets. Changes already have been 

proposed, but additional study is recommended 

to consider whether further restrictions would be 

appropriate. Market surveillance is carried out to 

a high standard by the exchanges and FINRA, 

and is particularly comprehensive in the futures 

markets. The SEC and CFTC are constrained by 

technology limitations. 

Principle 29. Regulation should aim to ensure the proper 

management of large exposures, default risk and market 

disruption. 

The timely and comprehensive information flows 

available in futures markets provide for effective 

early warnings. In securities markets, tracking 

large exposures and other potential sources of 

market disruption is more difficult. 

Principle 30. Systems for clearing and settlement of 

securities transactions should be subject to regulatory 

oversight and designed to ensure that they are fair, 

effective, and efficient and that they reduce systemic risk. 

A separate CPSS-IOSCO assessment was 

conducted for the securities markets. 

Arrangements in the futures markets were not 

assessed. 

 
14 

Table 2. Recommended Action Plan to Improve Implementation of the IOSCO 

Principles 

Principle Recommended Action 

Principles relating to the regulator 

(Principles 1–5) 

Decisions should be taken promptly on the recommendations of the 

Joint Report to enhance investor protection and improve cooperation 

between the CFTC and SEC. Legislative and regulatory gaps 

identified in the Joint Report should be closed. 

Funding of both authorities needs to be increased and the method of 

funding should be reviewed. The annual appropriations process seems 

inadequate to meet the needs for funding necessary long term projects.

Annual funding makes it difficult to commit to major investments in 

software development which takes place over several years. 

Consideration should be given to moving to direct self-funding (i.e., 

ability to capture fee income for own funding rather than remitting it 

to general government revenue and relying on a government budget). 

The total fee income at the SEC presently generated from its activities 

far exceeds the combined budgets of the SEC and the CFTC. 

Taking into account the size and complexity of the markets and the 

number of registrants they oversee, both agencies need more 

resources—human, informational and technological—to fulfill their 

regulatory functions efficiently and effectively. 

Principles relating to self-regulation 

(Principles 6–7)

As recommended in the Joint Report, the CEA should be amended to 

provide the CFTC with greater powers over product and rules 

approval of the futures exchanges and to provide greater scope for 

public consultation prior to their introduction. Corrective measures 

should recognize the need to balance prior product or rule approval 

with the exchanges’ ability to benefit from their innovative endeavors 

in a competitive market. 

The CFTC should remain aware of industry concerns regarding the 

retention of member regulation by demutualized DCMs. 

The SEC should consider delegating sole registration authority for 

BDs to FINRA. 

Principles relating to enforcement of 

securities regulation (Principles 8–10)

Although many improvements have been made or are under way 

within the SEC, the current program in the Enforcement Division and 

Office of Compliance, Inspections and Examinations (OCIE) to 

implement the 21 recommendations set out in the 2009 report of the 

Office of Inspector General (OIG) and other improvements should be 

completed as a matter of high priority. The SEC also may want to 

consider adding enforcement staff with more accounting and 

economics backgrounds. Mixed teams with different skill sets and 

experience in the Enforcement Division could enhance its 

performance. 
15 

Principle Recommended Action 

The number of staff dedicated to the periodic examination of 

registered IAs (whether at the SEC alone, or in combination with 

FINRA and/or state regulators) should be increased at least to a level 

where the percentage of IAs examined annually matches 

the percentage of BDs examined by the SEC and FINRA. 

The enforcement division of the CFTC would benefit from more 

resources. Given the current limited scope of its remit and the 

integrated market surveillance systems it operates in close cooperation 

with the DCMs this is not a pressing problem though it will become 

one if its remit is expanded (e.g., to include OTC derivatives). 

The securities unit of the fraud section in the criminal division of the 

DOJ should be given additional resources to prosecute securities fraud.

Principles for issuers (Principles 14–16) Continuous disclosure requirements should apply to all public issuers. 

The SEC should have the power to mandate both initial disclosure 

requirements and on-going obligations directly on municipal 

government issuers. 

Principles for collective investment 

schemes (Principles 17–20)

The eligibility criteria for CIS and their operators should include the 

human and technical resources to carry out the required functions, the 

appropriate financial capacity and adequate internal management and 

controls. These should be assessed before a CIS or its operator is 

permitted to begin operations. 

The resources at the relevant regulators (statutory or SRO) for routine 

examinations of operators and CIS should be increased. 

Commodity Pool Operators (CPOs) should be required to have 

policies in place to avoid or mitigate conflicts. 

Notice of changes that affect investor or participant rights should be 

given prior to the effective date of that change, whether or not prior 

approval is required. Prompt changes to commodity pool disclosure 

documents should be required when material changes occur. 

Consideration should be given to requiring the custodian of a CIS’s 

assets to be an arm’s length party. Requiring an auditor of a CIS to 

have relevant prior experience might also be considered. 

The CFTC should provide guidance to the industry on how to address 

pricing errors in the valuation of commodity pools. 

Principles for market intermediaries 

(Principles 21–24) 

The threshold for review of the fitness of control persons of an 

intermediary should be the same under the CEA and Exchange Act; 

the lower 10 percent threshold should be adopted. 

There should be an assessment of the back-office capabilities, internal 

controls and policies and procedures of all futures intermediaries and 

IAs prior to the grant of registration. 

FINRA should have clear authority to examine and address all 

securities-related activities of members, including their registered IA 
16 

Principle Recommended Action 

activities. 

Consideration should be given to requiring that the custodian be at 

arm’s length to the IA. 

The proposed changes to the futures capital rules to address gaps 

relating to cleared OTC derivatives and improve the sensitivity of the 

formula to the actual risks undertaken by the firm should be 

implemented promptly. 

The capital rules and other prudential requirements, such as risk 

management standards, should be reexamined to ensure all risks, 

including funding, reputational, liquidity and affiliate risks are 

addressed fully. The regulators should strive to ensure that both capital 

and risk management requirements adequately address risks posed 

when firms are under stress. Consideration should be given to 

reviewing the rules governing BD custody of client assets. 

The CFTC should have authority to review and approve/disapprove 

margin requirements set by the DCMs. 

Principles for the secondary market 

(Principles 25–30)

In addition to pursuing legislative change to secure the enhanced 

powers as set out in the Joint Report the CFTC should consider 

seeking an authorization power over entities seeking to set up ECMs 

and Exempt Boards of Trade (EBOTs). However ongoing legislative 

initiatives are considering the abolition of the ECM and EBOT market 

categories. 

The SEC’s current broad review of equity market structure to 

determine whether the rules have kept pace with changes in trading 

technology and practices should be prioritized with a view to 

encouraging the broadest public debate while reaching actionable 

conclusions promptly. It will be essential that the review be conducted 

on the basis of comprehensive and independent evidence in order to 

establish accurately the needs of investors of all classes. 

The recommendations in the Joint Report regarding insider dealing 

and Chinese Walls in derivatives markets should be implemented. The 

CFTC should undertake a study to consider whether expansion of the 

insider trading prohibition in the futures markets beyond the 

recommendation in the Joint Report is warranted given the current 

state of the markets, contracts and investors. Such a study would 

complement the current debate in Europe as to the appropriate 

coverage of insider trading laws in derivatives markets. The SEC 

should review the extent to which the absence of additional offences 

of insider trading is a limiting factor in the SEC’s enforcement effort 

in this area. 

Current discussions among the securities exchanges and FINRA on 

creating a consolidated surveillance structure to oversee the 

consolidated market should be given greater priority with a view to 

reaching a positive conclusion in a timely manner. 
17 

Principle Recommended Action 

Consideration should be given to amending the regulations to provide 

the SEC and the securities exchanges with accurate and timely 

information on large holders of and traders in securities as the CFTC 

and the futures exchanges have in their markets. This would support 

surveillance and identify emerging market stress points in a timely 

fashion. 

The SEC should join the CFTC in considering the introduction of an 

explicit and comprehensive financial resource requirement for 

exchanges. 

IV. AUTHORITIES’ RESPONSE TO THE ASSESSMENT

19. The U.S. authorities appreciate the effort, time, and resources committed by the IMF 

to prepare the FSAP. The FSAP is intended to promote the soundness of financial systems in 

member countries and to contribute to improving supervisory practices around the world. 

The U.S. assessment has presented a challenging and complex task. In light of the financial 

crisis as well as the maturity, complexity and significance of the U.S. financial system, we 

understand that the U.S. regulatory system was subject to a more stringent standard than in 

previous IMF assessments. Nevertheless, it is essential that regulators hear from third parties 

to gauge their effectiveness. We are grateful for the opportunity to provide the following 

comments regarding the IMF’s Report, although as discussed below we take exception to a 

number of the findings. 

20. As recognized in this Report, the U.S. FSAP is occurring at a critical and 

extraordinary time. According to the G20 leaders in April 2009, major failures in the 

financial system, including in regulation and supervision, were fundamental causes of the 

crisis. The last 18 months have taught regulators around the world much about the new 

realities of our financial markets. We have learned the limits of foresight and the need for 

candor about the risks we face. We were reminded that transparency and accountability are 

essential. Only through strong, intelligent regulation—coupled with aggressive enforcement 

mechanisms—can we fully protect the American public and keep our economy strong. Given 

the global nature of markets, we recognize that U.S. leadership remains critical to the 

stability of markets worldwide. 

21. The financial crisis left regulators with enormous challenges and a heightened interest 

in strengthening regulation. Perhaps most importantly, as the Report recommends, 

comprehensive regulatory reform of the OTC derivatives marketplace is essential. The 

financial crisis highlighted how opaque markets can threaten the financial system and the 

broader public. The U.S. authorities agree with the Report’s strong recommendation for 

increased resources for the CFTC and the SEC should the U.S. Congress expand the 

agencies’ missions to include the regulation of OTC derivatives. The CFTC and SEC 
18 

additionally need greater resources to keep up with the growth of securities and futures 

markets in the United States. The U.S. authorities also agree with the assessment that the 

CFTC and SEC should enhance cooperation and coordination and already have taken steps to 

do so. 

22. While change is needed, the U.S. regulatory system nevertheless helped ensure that 

the world’s largest and most complex exchange-listed equity, commodity futures, and 

options markets continued to function properly and withstood the ultimate stress test during 

the financial crisis. The system has served as a model for regulatory authorities worldwide. 

Moreover, some of the proposed reforms to address risk in OTC derivatives—for example, 

requiring standardized products to trade on regulated trading platforms and to be cleared by 

central counterparties—reflect long-standing elements in the U.S. approach to regulating 

financial markets. 

23. In addition to supporting reform, U.S. regulators have taken action under existing 

authority to remedy problems and to make improvements. For example, in the area of 

disclosure, the SEC proposed new rules that would improve the quality and timeliness of 

disclosure in municipal markets. In the area of investment management, the SEC sought to 

provide greater protections to investors by adopting new custody control rules that include 

surprise inspections to verify assets held by money managers. Finally, in the past year, the 

SEC launched a robust and vigorous review of equity market structure, including issues such 

as dark pools. The CFTC is continuing to improve and extend its world-class system of risk 

surveillance by requiring large trader reporting in the cleared OTC markets. This effort will 

allow the CFTC to conduct financial surveillance in this area consistent with its existing risk 

program for on-exchange trading. 

24. The overall ratings in the Report, however, do not reflect the CFTC’s and SEC’s 

regulatory successes and, in some cases, suggest a misunderstanding of the U.S. regulatory 

system. Thus, the Commissions strongly disagree with many of the ratings in the Report. By 

way of example, while the IOSCO Principles recognize that regulators may use different 

approaches to accomplish the same objectives, the Report’s rating on market intermediaries 

is based on the assumption that every intermediary must be regulated the same way. That is, 

they must undergo an extensive review prior to registration. This requirement, however, 

cannot be found in the Principles or the assessment Methodology. The Report rejects a 

legitimate risk-based approach to a registration requirement and oversight of futures and 

securities intermediaries without evidence that the approach is ineffective. The Report also 

states that capital requirements for futures and securities firms do not fully address risk, yet 

provides no evidence that the CFTC’s and SEC’s current requirements do not already exceed 

recognized international best practice as reflected in the Principles. 

25. In particular, the Report suggests that only systems that call for review of the “fitness 

and properness” of CIS operators are acceptable. The Report finds that the regulatory 

framework in the United States does not address the adequacy of the CIS operators’ human 
19 

and technical resources, financial capacity and internal management and controls. However, 

this finding does not take into account key and unique features of the U.S. system. The U.S. 

system mandates disclosure by CIS operators and also relies on oversight by a separate 

entity, a CIS board, which generally consists of a majority of independent directors. The CIS 

board serves as an initial check on the fitness, resources, and internal controls of the CIS 

operator. Moreover, both the CIS operators and CIS boards are subject to fiduciary duties, 

which are enforced by the SEC and by private litigants. This system offers an ongoing review 

of the fitness, resources, and internal controls of a CIS operator instead of a one-time “fit and 

proper” check. The Report disregards these important features of U.S. market regulation, and 

the effects they have on how regulated entities operate. 

26. As a related matter, the IOSCO Principles make clear that they apply to futures 

markets “where the context permits.” For instance, the Principles relating to CIS were written 

for publicly offered funds, such as mutual funds. The CIS Principles were not intended to 

cover privately-offered funds, such as the vast majority of CFTC-regulated commodity pools. 

The pools that are publicly offered represent a small percentage of total pools regulated by 

the CFTC. The ratings in this area are misplaced given the de minimis number of publicly 

offered funds. 

27. In addition, some of the Report’s adverse conclusions about the U.S. regulatory 

system are not based on objective criteria. For example, the Report finds that per Principle 10 

the U.S. system fails to “ensure an effective and credible use of inspection, investigation, 

surveillance and enforcement powers.” This conclusion appears to be based solely on an SEC 

OIG Report issued in August 2009 that reviewed the failings of a specific high-profile 

investigation, and then extrapolates those failings to all SEC enforcement activities. In so 

doing, the Report overlooks the SEC’s overall success in the area of enforcement. In fiscal 

year 2009, SEC enforcement actions yielded: (1) orders that required wrongdoers to disgorge 

ill-gotten gains in the amount of approximately US$2.09 billion; (2) orders that imposed 

money penalties on wrongdoers in the amount of approximately US$345 million, a 

35 percent increase over the previous fiscal year; and (3) the filing of 664 cases against 1,787 

persons. SEC enforcement actions also have resulted in the return of billions of dollars to 

injured investors since the agency received “Fair Fund” authority in 2002. During fiscal year 

2009 alone, the SEC distributed approximately US$2.1 billion to harmed investors from both 

disgorgement funds and Fair Funds. 

28. These performance measures are a testament to the credibility and effectiveness of the 

SEC enforcement program in relation to the U.S. securities markets—a level of enforcement 

activity and investigative aggressiveness that far exceeds that of any other securities regulator 

in the world. These facts are inconsistent with a conclusion that the SEC enforcement 

program broadly fails to satisfy Principle 10. Granted, the metrics set forth above may not be 

the only objective measures by which to judge the effectiveness of the SEC’s enforcement 

program. But, the Report fails to articulate any objective metrics on which to base the rating. 
20 

29. To be sure, the OIG Report highlights a major failure. The SEC, however, has taken 

action in response. In the past year, the SEC, among other things, restructured the 

Enforcement Division and streamlined its procedures. The SEC also took steps to improve its 

inspection program and place greater reliance on risk assessment. The SEC is actively 

working to improve its technology and modernize the way it handles the massive number of 

tips and complaints it receives each year. The Report’s rating fails to give full credit for these 

improvements. In short, the effectiveness of an enforcement program should not be measured 

by zero tolerance for failure. There are many effective criminal justice systems around the 

world that are held in high esteem, not because of an absence of crime or a perfect record, but 

because, among other things, they apply considerable resources and visible effort to prevent, 

investigate, and prosecute crime. 

30. In conclusion, the SEC and CFTC recognize a number of the areas that the IMF 

identified for improvement. Much is already underway to address these concerns. However, 

these types of suggestions in the Report are the exception rather than the rule. 

31. Further, the SEC believes that the Report’s conclusions are seemingly at odds with 

those of investors from around the world, both large and small. Capital markets essentially 

function to allocate capital. In making decisions about capital allocation and the premiums 

charged for such investments, investors make judgments about the quality of the regulator, 

the breadth and depth of disclosure, the efficacy of the enforcement regime and the fairness 

of the marketplace, among other things. Judging by the degree of global investment in the 

U.S. market and taking into account the cost of capital in the United States, it would appear 

that those whose money is at stake view the U.S. regulatory system in a different, more 

positive light—even in light of recent regulatory failings. 

32. In sum, the U.S. authorities firmly believe that the overall ratings are not reflective of 

the U.S. system for the regulated marketplace. Nonetheless, the U.S. authorities will continue 

to evaluate and, as appropriate, enhance their regulatory programs. The CFTC and SEC look 

forward to a continuing dialogue with the IMF to advance our shared goal of strengthening 

financial regulation and enhancing supervision of the global financial services sector.