UNITED STATES

DETAILED ASSESSMENT OF IMPLEMENTATION

SELF-ASSESSMENT

IOSCO OBJECTIVES AND PRINCIPLES OF 

SECURITIES REGULATION

Prepared By

U.S. Securities and 

Exchange Commission

This self-assessment was prepared by the staff of the 

U.S. Securities and Exchange Commission for 

purposes of the IMF’s Financial Sector Assessment 

Program of the United States and is non-binding, 

informal, and summary in nature. The responses 

contained herein express the views of the staff of the 

Commission and are not rules, regulations, 

interpretations, or statements of the Commission, 

which has neither approved nor disapproved the 

responses.

September 5, 2019
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CONTENTS

I. INTRODUCTION....................................................................................................................................................................3

II. ADDITIONAL GUIDANCE..................................................................................................................................................4

III. DETAILED QUESTIONNAIRE ..........................................................................................................................................8

IV. FREQUENTLY USED ABBREVIATIONS.......................................................................................................164
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I. INTRODUCTION

Jurisdiction: United States of America

Authority: Securities and Exchange Commission

Date prepared: September 5, 2019

1. This self-assessment questionnaire has been prepared in reference to the Methodology 

to assess the implementation of the IOSCO Objectives and Principles of Securities Regulation 

approved by IOSCO. 

2. The questionnaire covers a subset of Principles deemed relevant for the scope of 

the 2020 United States FSAP exercise comprising Principles 1, 2, 3, 6, 7, 9, 24-28, 29-32 

(with respect specifically to market intermediaries that are direct participants in trading 

venues, providers of direct electronic access to such venues and/or first tier direct 

electronic access clients, and operators of trading venues) and 33-37. 

3. Section II provides guidance that should be taken into account when preparing the 

responses to the questionnaire that is particularly important for the IMF to initiate the 

assessment of the efficiency of supervision. Please pay particular attention to the fact that the 

scope of the IOSCO assessment extends beyond the primary securities regulator, if other 

authorities are responsible for regulating, supervising and/or enforcing any elements covered by 

the Principles.

4. As described in the following section III, the authorities are requested to provide detailed 

answers for the identified subset of Principles. 

5. In your answers to the questions, please describe the content of your regulatory 

framework in detail and include precise references to the relevant laws, regulations and 

guidelines. Please also provide us with links to/PDF copies of them. 
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II. ADDITIONAL GUIDANCE

A self-assessment constitutes a critical input in the FSAP work. It provides the authorities’ own 

evaluation of the extent to which the jurisdiction is compliant with the IOSCO Objectives and 

Principles of Securities Regulation. A recurrent challenge for the IMF missions has been to receive 

a sufficient information to determine whether the legal and regulatory framework described in 

the corresponding principle has been implemented in practice. The table below lists the most 

frequent cases where additional information has been requested in the past with respect to the 

above-identified subset of Principles, so that the authorities can take it into consideration when 

preparing the responses. The provision of this information should facilitate a more effective and 

efficient onsite mission work and meetings with the authorities. 

Number of the 

Principle and Question 

Useful information to include under the response to the 

corresponding Principle/Question

1, Question 2(a) • Please ensure that your description identifies any possible 

division of responsibilities in the regulation and supervision 

of securities markets, activities and participants on the 

basis of the type of security, market participant (e.g. bank 

vs. securities dealer/broker) between the various statutory 

and self-regulatory authorities. Please note that the IOSCO 

assessment covers also banks’ securities activities, and if 

more than one authority is responsible for the supervision 

of such activities, the discussion of Principles 1-5 should 

cover all those authorities. In such case, you are also 

expected to include information on the responsibilities and 

activities of all those authorities in all relevant Principles 

(particularly 29-32). 

1, Question 2(b) • Do other types of financial institutions offer securities like 

products (such as CIS-like insurance products or deposit 

instruments that mimic CISs/return based on market 

performance, etc.)?

• If so, how are these other products regulated with respect 

to disclosure, suitability for the client, etc.?

• Is the regulation that is applied equivalent to that which 

applies to equivalent securities products?

1, Question 2(d) • Reference to any MoUs between the domestic authorities 

and the areas that they cover. If possible include copies. 

• Reference to any committees between the domestic 

authorities, with indication of frequency of meetings, and 

types of issues discussed in the past.

3, Question 2 • Information on the budget development of the relevant 

regulatory authorities, including source(s) of funding (for 

the last three years and any budgets or estimates available 

for the upcoming years). 
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3, Question 3 • Information on number of staff dedicated to securities 

markets regulation and supervision, if possible with a break 

down by main functions (licensing, supervision of 

intermediaries, market surveillance, enforcement), as well 

as by profession. 

• Information on average years of experience of staff at 

different levels of the organization, staff turnover, and 

competitiveness of the salaries vis-à-vis private sector

7, Question 1 • What information does the regulator have about securities 

activities in the jurisdiction, including about activities that 

are not subject to regulation?

• Is this information complete, up to date and accurate?

• What kind of analysis/review is done on this information?

9, Question 2 • Details on the SRO's supervision of its members, including 

on- and off-site examinations and enforcement activities 

over the past 3-5 years.

9, Question 3 • Detailed information on the regulator’s oversight program 

in all entities that qualify as SROs as per Principle 9, 

including both off-site reporting and on-site inspections. 

With regards to the latter, include information on the cycle 

of inspections and their scope/coverage.

24, Question 1(a) • Describe the regulation of CIS only sold to sophisticated 

investors (non-retail or wholesale funds) and how it differs 

from the regulation of retail funds.

24, Question 1(b) • Cover in your response all entities involved in the 

operation of a CIS, including the fund management 

company, asset manager, fund administrator, custodian 

etc.

24, Questions 8 and 9 • For the periodic inspection plan of CIS operators, 

custodians and CIS: number of inspections carried out, with 

a break down by type of firm, and by type of inspection 

(due to regular program, and due to complaint/cause). It is 

important that information be included on the criteria used 

to select firms and on the frequency and scope of 

inspections.

• Thematic inspections: number and themes. It is important 

that information be included on the way the themes are 

selected.

• Number of sanctions imposed on fund managers during 

the last three years, if possible with a break down by type 

of misconduct
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26, Questions 6, 7 and 9 • Information on the system, if any, to review the CIS 

offering documents, for example whether all offering 

documents are reviewed or just a sample, and if only a 

sample, what are criteria to select the documents that will 

be reviewed. Similar type of information should be 

provided for the review of periodic reports and other 

disclosure documents. If such review is carried out by the 

exchanges or a SRO, please provide the corresponding 

information based on what the exchanges or SRO do.

• Information on the number of offering documents filed 

with the regulator in the last three years.

• Number of sanctions imposed on CIS operators and others 

involved in the preparation of CIS disclosure documents or 

advertisements, if possible with a break down by type of 

misconduct. 

28, Question 1 • Does the jurisdiction have a definition of hedge fund? If so, 

please provide it. 

28, Question 8 • Number of inspections carried out in hedge fund 

managers/ advisers and/ or hedge funds (if applicable), by 

type of inspection (due to regular program, and due to 

complaint/cause). It is important that information be 

included on the criteria used to select firms and on the 

frequency and scope of inspections.

31, Question 25 • For the periodic inspection plan of intermediaries: number 

of inspections carried out, with a break down by type of 

intermediary, and by type of inspection (due to regular 

program, and due to complaint/cause. It is important that 

information be included on the criteria used to select firms 

and on the frequency and scope of inspections.

• Thematic inspections: number and themes. It is important 

that information be included on the way the themes are 

selected.

• Number of sanctions imposed on market intermediaries

during the last three years, if possible with a break down 

by type of misconduct.

32, Question 3(d) • Is there a compensation fund for investors or a 

settlement/default fund at a clearing house?

• What losses are covered?

• Who is covered?

32, Question 4 • If applicable, concrete examples of how the regulator has 

dealt with a failure of a market intermediary.

34, Question 1 • Information on the oversight of exchanges and trading 

platforms, including both off site reporting and on-site 

inspections. For the latter, please include information on 

the frequency and scope of inspections.
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36, Questions 2 and 3 • Information on administrative/ civil sanctions imposed 

during the last three years on major misconducts, such as 

market manipulation and insider trading.

• Information on criminal sanctions imposed for major 

offenses, such as insider trading and market manipulation. 
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III. DETAILED QUESTIONNAIRE

The following questions have been developed by IOSCO as a tool to assess the level of 

implementation of the IOSCO Objectives and Principles of Securities Regulation. To answer them, 

the authorities should have as a reference the preamble, scope and explanatory notes included in 

the IOSCO Methodology, in connection with each Principle. The questionnaire below covers 

the subset of Principles deemed relevant for the scope of the 2020 United States FSAP 

exercise.

1 See http://www.sec.gov/about/laws/sea34.pdf. 

2 See http://www.sec.gov/about/laws/sa33.pdf. 

3 See http://www.sec.gov/about/laws/tia39.pdf. 

4 See http://www.sec.gov/about/laws/ica40.pdf. 

5 See http://www.sec.gov/about/laws/iaa40.pdf. 

6 See 11 U.S.C. §§ 101-12, 301-08, 321-33, 341-51, 361-66, 501-11, 521-28, 541-62, 701-07, 721-27, 741-

53, 761-67, 781-84, 901-04, 921-30, 1101-16, 1121-29, 1141-46, 1161-74, 1201-08, 1221-31, 1301-08, 1321-30, 

1502-32. 

Principle 1 The responsibilities of the Regulator should be clear and objectively 

stated.

Key Questions

1. Are the regulator’s responsibilities, powers and authority:

(a) Clearly defined and objectively set out, preferably in law, and in the case of 

powers and authority, enforceable? 

[Self-contained answer; no need to consult SEC staff’s 2014 self-assessment]

Yes. As noted in SEC staff’s 2014 self-assessment, the United States (U.S.) Securities and 

Exchange Commission (SEC or the Commission) is an independent agency of the U.S. 

government established pursuant to the Securities Exchange Act of 1934 (Exchange Act).1 

The SEC’s responsibilities, powers, and authority are set forth primarily in the following 

federal statutes: the Securities Act of 1933 (Securities Act),2 the Exchange Act, the Trust 

Indenture Act of 1939 (Trust Indenture Act),3 the Investment Company Act of 1940 

(Investment Company Act),4 and the Investment Advisers Act of 1940 (Advisers Act).5 The 

SEC’s powers and authority also extend to cases involving public companies arising under 

Chapters 9 and 11 of the U.S. Bankruptcy Code.6

Since 1940, various other laws have been promulgated to further define the SEC’s 

responsibilities, powers, and authority, including: the Sarbanes-Oxley Act of 2002 (Sarbanes-
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7 See http://www.sec.gov/about/laws/soa2002.pdf. 

8 See http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf. 

9 See http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf. 

10 See https://www.congress.gov/114/plaws/publ94/PLAW-114publ94.pdf.

11 See https://www.congress.gov/114/plaws/publ284/PLAW-114publ284.pdf.

12 See https://www.congress.gov/115/plaws/publ66/PLAW-115publ66.pdf.

13 See https://www.congress.gov/115/bills/s2155/BILLS-115s2155enr.pdf. 

14 See https://www.sec.gov/Article/whatwedo.html. 

Oxley Act),7 the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (DoddFrank Act),8 and the Jumpstart Our Business Startups Act of 2012 (JOBS Act).9 

In addition, since SEC staff’s 2014 self-assessment, other laws have been promulgated to 

further define the SEC’s responsibilities, powers, and authority, including: the Fixing 

America’s Surface Transportation Act of 2015 (FAST Act),10 the SEC Small Business Advocate 

Act of 2016,11 the Fair Access to Investment Research Act of 2017,12 and the Economic 

Growth, Regulatory Relief, and Consumer Protection Act of 2018.13

SEC Mission, Responsibilities, and Enforceability 

As noted in SEC staff’s 2014 self-assessment, the SEC’s mission is to protect investors; 

maintain fair, orderly, and efficient markets; and facilitate capital formation.14 The SEC works 

with Congress, other executive branch agencies, self-regulatory organizations (SROs) (which 

comprise securities exchanges, clearing agencies, the Financial Industry Regulatory Authority 

(FINRA), and the Municipal Securities Rulemaking Board (MSRB)), accounting and auditing 

standards setters, state securities regulators, law enforcement officials, and many other 

organizations in support of the agency’s mission. Among other things, it is the Commission’s 

responsibility to: 

• interpret and enforce the federal securities laws; 

• issue new rules and amend existing rules; 

• oversee the inspection of brokers, dealers, investment advisers, municipal advisors, 

transfer agents, clearing agencies, credit rating agencies (CRAs) registered as 

nationally recognized statistical rating organizations (NRSROs), and SROs; 

• oversee private regulatory organizations in the securities, accounting, and auditing 

fields; and 

• coordinate U.S. securities regulation with federal, state, and foreign authorities. 
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15 This document references a variety of different investment vehicles. For ease of reference, a “mutual 

fund,” also known as an “open-end fund,” issues redeemable securities and continuously pools money from 

investors and invests the money in stocks, bonds, money market instruments, other securities, or cash. A “closedend fund” generally does not continuously offer its shares for sale but instead sells a fixed number of shares at 

one time that trade at market-determined prices on a national securities exchange. An “exchange-traded fund,” 

or “ETF,” is a type of exchange-traded product that possesses characteristics of both mutual funds and closedend funds. A “money market fund” is a type of mutual fund regulated pursuant to Rule 2a-7 under the 

Investment Company Act.

16 See 17 C.F.R. § 200.1. The SEC is responsible for non-criminal enforcement of the federal securities laws. 

The SEC has the authority to refer criminal cases to federal and state criminal law enforcement authorities. 

As noted in SEC staff’s 2014 self-assessment, the laws administered by the SEC provide for 

the following: (i) public disclosure of pertinent facts concerning public offerings of securities, 

securities listed on national exchanges, and certain securities traded in the over-the-counter 

(OTC) markets; (ii) disclosure requirements in the soliciting of proxies for meetings of security 

holders by certain companies; (iii) regulation of the trading in securities on national securities 

exchanges and in OTC markets; (iv) investigation of securities fraud, manipulation, and other 

federal securities law violations, and the imposition and enforcement of legal sanctions for 

such violations; (v) registration and the regulation of certain activities of brokers, dealers, 

investment advisers, NRSROs, and municipal advisors; (vi) supervision of the activities of 

mutual funds and other investment companies;15 (vii) administration of statutory standards 

governing protective and other provisions of trust indentures under which debt securities are 

sold to the public; (viii) protection of the interests of public investors involved in bankruptcy 

cases involving the adjustment of debts of a municipality; and (ix) administrative remedies 

and sanctions, injunctive and other remedies, civil money penalties, and criminal 

prosecution.16

As an update to SEC staff’s 2014 self-assessment, as of December 31, 2018, the SEC oversaw: 

• approximately 13,000 investment advisers; 

• approximately 20,000 investment companies;

• approximately 3,700 broker-dealers;

• approximately 550 municipal advisors; 

• approximately 330 transfer agents; 

• 22 securities exchanges; 

• 10 CRAs registered as NRSROs; and

• 7 clearing agencies. 

The SEC also oversees the Public Company Accounting Oversight Board (PCAOB), FINRA, 

MSRB, Securities Investor Protection Corporation (SIPC), and the Financial Accounting 
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17 See Section 1 of Reorganization Plan No. 10 of 1950, available at 

http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title5a-node84-leaf114&num=0&edition=prelim.

18 The SEC’s fiscal year ends on September 30. 

19 See 17 C.F.R. PART 200. 

20 See 17 C.F.R. PART 201. 

Standards Board (FASB). In addition, the SEC is responsible for reviewing the disclosures and 

financial statements of companies that file periodic and current reports, of which nearly 7,000 

filed an annual report last year. The responsibilities for this oversight are set out in the 

statutes described above and in regulations promulgated by the Commission under those 

statutes. 

SEC Structure and Governance

As noted in SEC staff’s 2014 self-assessment, the SEC consists of five Commissioners 

appointed by the President and confirmed by the Senate to serve for a term of five years. By 

law, no more than three of the Commissioners may belong to the same political party. The 

SEC Chair is designated by the President.17

Since SEC staff’s 2014 self-assessment, the SEC’s functional responsibilities are now organized 

into five Divisions and 25 Offices, each of which is headquartered in Washington, D.C. The 

SEC also has 11 Regional Offices, which are comprised primarily of SEC staff from the Division 

of Enforcement (Enforcement) and the Office of Compliance, Inspections and Examinations 

(OCIE), the latter of which oversees the majority of the SEC’s examination programs. As of 

the end of fiscal year (FY) 2018,18 the SEC had approximately 4,450 employees. 

As noted in SEC staff’s 2014 self-assessment, the SEC has rules regarding its organization,

program management and the disposition of Commission business.19 The SEC also has 

established Rules of Practice that govern proceedings before the Commission under the 

statutes it administers.20

(b) If the regulator can interpret its authority, are the criteria for interpretation clear 

and transparent? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 1, 

Question 1(b). 

(c) Is the interpretative process transparent enough to preclude situations in which 

an abuse of discretion can occur?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 1, 

Question 1(c).

2. When more than one regulator is responsible for securities regulation:

(a) Where responsibility is divided among regulators, is legislation designed to 
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21 See S. Rep. No. 94-75, 94th Cong., 1st Sess. 7, II (1975).

22 See Exemptions for Banks – Regulation R, Release No. 34–56502 (Sep. 24, 2007), available at 

http://www.sec.gov/rules/final/2007/34-56502fr.pdf.

avoid regulatory differences or gaps? 

[Self-contained answer; no need to consult SEC staff’s 2014 self-assessment]

Yes. As noted in SEC staff’s 2014 self-assessment, only the SEC has the authority to 

administer and enforce the federal securities laws (see response to Principle 1, Question 1(a), 

above). Where responsibility is divided among the SEC and other regulators, legislation is 

generally designed to avoid regulatory differences or gaps. Aspects of certain types of 

products, transactions and functions of financial institutions may also be subject to the 

authority of more than one regulator. For example:

SROs

As noted in SEC staff’s 2014 self-assessment, Congress has vested in the Commission the 

power to supervise SROs as a matter of public interest and has provided the Commission 

with several tools to oversee SROs.21 For example, exchanges, clearing agencies, and national

securities associations must register with the Commission, and SROs must file their rule 

changes with the Commission. In addition, the Commission has the authority to inspect and 

examine SROs (for more information regarding SROs and the SEC’s oversight, see responses 

to Principle 9 questions, below).

Banks and Bank Holding Companies

As noted in SEC staff’s 2014 self-assessment, under applicable federal banking statutes, the 

Board of Governors of the Federal Reserve System (Federal Reserve), Office of the 

Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) have 

regulatory authority over bank holding companies and banks, which can be affiliated with 

broker-dealers and asset management entities regulated by the SEC. The federal banking 

statutes generally do not limit the SEC's authority over such affiliates under the federal 

securities laws, and the SEC and banking regulators coordinate on the regulation of financial 

institutions that comprise entities subject to different regulations. In addition, some activities 

conducted by banks that would be regulated by the SEC if conducted by another type of 

market participant are either excluded or exempt from SEC regulation in light of regulation 

by the banking regulators.22 Absent an exemption, bank holding companies that issue 

securities must register the transactions under the Securities Act, become subject to the 

Exchange Act reporting requirements for at least the fiscal year during which a Securities Act 

registration statement became effective, and are subject to the liability provisions of the 

federal securities laws. Banks and bank holding companies that register securities under the 

Exchange Act are subject to the Exchange Act reporting requirements and the Exchange Act 

liability provisions.

Enforcement Authority
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23 See Joint Statement on CFTC-SEC Portfolio Margining Harmonization Efforts, available at 

https://www.sec.gov/news/public-statement/joint-statement-cftc-sec-portfolio-margining-harmonization-efforts. 

See also Joint Statement on the IDI Exception to the Swap Dealer Definition, available at 

https://www.sec.gov/news/public-statement/joint-statement-sec-and-cftc-swap-dealer-definition; SEC Issues 

Statement on Certain Provisions of Business Conduct Standards for Security-Based Swap Dealers and Major 

Security-Based Swap Participants, available at https://www.sec.gov/news/press-release/2018-249.

24 See SEC and CFTC Announce Approval of New MOU, available at https://www.sec.gov/news/pressrelease/2018-114. 

As noted in SEC staff’s 2014 self-assessment, the SEC is responsible for non-criminal 

enforcement of the federal securities laws. The SEC has the authority to refer criminal cases 

to federal law enforcement authorities and state criminal law enforcement authorities. The 

SEC also regularly coordinates its efforts with domestic and foreign law enforcement partners, 

including coordination on parallel criminal investigations conducted by the U.S. Department 

of Justice (DOJ) and the Federal Bureau of Investigation (FBI), among others. 

OTC Derivatives

As noted in SEC staff’s 2014 self-assessment, the 2008 financial crisis highlighted significant 

issues in the OTC derivatives markets, which had experienced dramatic growth in the years 

leading up to the crisis and are capable of affecting significant sectors of the U.S. economy. 

The Dodd-Frank Act was enacted, among other reasons, to promote the financial stability of 

the U.S. by improving accountability and transparency in the financial system, including in 

connection with swaps and security-based swaps (SBS).

As noted in SEC staff’s 2014 self-assessment, Title VII of the Dodd-Frank Act provides for a 

comprehensive regulatory framework for swaps and SBS. Under this framework, the 

Commodity Futures Trading Commission (CFTC) regulates swaps, while the SEC regulates 

SBS, and the SEC and CFTC jointly regulate mixed swaps. This framework encompasses the 

registration and comprehensive regulation of dealers and major participants, as well as 

requirements related to clearing, trade execution, regulatory reporting, and public 

dissemination of anonymized trade data. 

In its implementation of the Title VII framework for SBS, SEC staff has consulted and 

coordinated regularly with the CFTC. In addition, the staffs of both agencies continue to work 

together to find ways to further harmonize the regulatory regimes for SBS and swaps.23 As a 

part of these efforts, the SEC and CFTC in 2018 updated and enhanced their Memorandum of 

Understanding (MOU). The new MOU includes updates to address the regulatory regime for 

SBS and swaps, make the MOU more relevant in the current market environment and help 

ensure continued coordination and information sharing between the SEC and CFTC.24

Municipal Securities Dealers
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25 See Securities Acts Amendments of 1975, Pub. L. No. 94-29, 89 Stat. 131 (1975).

26 See, e.g., Exchange Act Sections 15(c)(1), 15(c)(2); 17(a); 17(b), 15B(c)(1), and 21(a)(1). Enforcement 

activities regarding municipal securities dealers must be coordinated by the SEC, FINRA and the appropriate bank 

regulatory agency. See Exchange Act Sections 15B(c)(6)(A), 15B(c)(6)(B), and 17(c).

27 See Exchange Act Section 3(a)(4) (defining “broker” as “any person engaged in the business of effecting 

transactions in securities for the account of others”).

28 See Exchange Act Section 3(a)(5) (defining “dealer” as “any person engaged in the business of buying 

and selling securities ... for such person’s own account through a broker or otherwise”).

29 Banks are excepted from the definitions of “broker” and “dealer” with respect to transactions in 

municipal securities. See Exchange Act Sections 3(a)(4)(B) and 3(a)(5)(C).

30 See Exchange Act Section 3(a)(30).

31 See Exchange Act Section 15B.

32 The Securities Act Amendments of 1975 created the MSRB, an SRO subject to SEC oversight, and 

granted it authority to promulgate rules governing the sale of municipal securities by broker-dealers and 

municipal securities dealers. See Exchange Act Section 15B(b).

33 See MSRB Rule A-12.

34 See Exchange Act Section 15B(b)(2)(C).

As noted in SEC staff’s 2014 self-assessment, the Securities Acts Amendments of 197525

required firms transacting business in municipal securities to register with the SEC as brokerdealers, required banks dealing in municipal securities to register as municipal securities 

dealers, and gave the SEC broad rulemaking and enforcement authority over such brokerdealers and municipal securities dealers.26 Therefore, a person who engages in the activities 

of a broker27 or dealer28 in municipal securities, and does not satisfy an exception from the 

registration provisions of the Exchange Act must register with the SEC as a broker-dealer and 

must join an SRO such as FINRA.

A bank transacting business in municipal securities, however, is excluded from the general 

Exchange Act definitions of broker and dealer.29 A bank can be a municipal securities dealer 

because the term is defined to include “any person (including a separately identifiable 

department or division of a bank) engaged in the business of buying and selling municipal 

securities for his own account, through a broker or otherwise.”30 A bank that is a municipal 

securities dealer is required to register with the SEC.31

All broker-dealers and municipal securities dealers that engage in municipal securities 

transactions also must register with the MSRB32 and may not act in contravention of its 

rules.33 The MSRB rules, among other things, establish appropriate standards for brokerdealers and municipal securities dealers and are designed to prevent fraudulent and 

manipulative acts and practices and promote just and equitable principles of trade.34

The current statutory framework clearly establishes the regulatory responsibilities of each 

regulator and is designed to prevent regulatory differences or gaps. While the MSRB does 

not have the authority to enforce its rules, the Exchange Act designates the institutions 

responsible for overseeing compliance with the provisions in the Exchange Act relating to 
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SECURITIES AND EXCHANGE COMMISSION 15

35 See Exchange Act Section 15B(c)(5).

36 See generally Exchange Act Sections 15B and 17(b).

37 See Statement of the Commission Regarding Disclosure Obligations of Municipal Securities Issuers and 

Others, Release No. 33-7049; 34-33741 (Mar. 9, 1994), available at https://www.sec.gov/rules/interp/1994/33-

7049.pdf. See also Exchange Act Sections 15(c)(1) and (2).

38 See Exchange Act Sections 15B(c) and 17(c).

39 See Exchange Act Section 15B(c)(7), which provides that the periodic examination of regulated entities 

shall be conducted by (i) a registered securities association in the case of dealers that are members of the 

registered securities association, (ii) the appropriate regulatory agency (bank regulators) in the case of dealers 

that are not members of a registered securities association, and (iii) the SEC, or its designee, in the case of 

municipal advisors.

municipal securities and the rules of the MSRB.35 The SEC has broad inspection and 

enforcement authority over broker-dealers and municipal securities dealers that engage in 

municipal securities transactions.

36 In addition, broker-dealers and municipal securities 

dealers are subject to regulations adopted by the SEC, including those regulations adopted 

to define and prevent fraud.37

FINRA has inspection and enforcement responsibility over its broker-dealer members and 

federal bank regulators have this responsibility for municipal securities dealers that are banks 

under their respective jurisdictions.38 Currently, in addition to the SEC and FINRA, the FDIC, 

the Federal Reserve, and the OCC all play a role in the enforcement of MSRB rules.39 The 

MSRB, in turn, facilitates the enforcement efforts of these agencies through regulatory 

coordination and enforcement support programs, which provide the agencies with market 

information and reports of potential violations as they become known and consultation 

concerning its rules.

Federal Versus State Securities Regulation

The division of responsibility between federal and state regulation of certain securities 

activities is set forth in the federal securities laws. For example, investment advisers with less 

than $100 million in assets under management generally are not required to register with the 

SEC as investment advisers but are subject to state regulation. As another example, an 

offering of securities must be registered separately under the Securities Act and applicable 

state securities laws, unless an exemption from registration is available. In addition, Section 

18 of the Securities Act creates a class of "covered securities" that preempts state securities 

law registration requirements. 
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40 See Amendments for Small and Additional Issues Exemptions under the Securities Act (Regulation A), 

Release Nos. 33-9741; 34-74578; 39-2501 (Mar. 25, 2015), available at https://www.sec.gov/rules/final/2015/33-

9741.pdf. See also Securities Act Section 18(b)(4)(D). Regulation A is an exemption available to U.S. and Canadian 

companies for public offerings of securities up to $50 million in any 12-month period. See also Amendments to 

Regulation A, Release No. 33-10591 (Dec. 19, 2018), available at https://www.sec.gov/rules/final/2018/33-

10591.pdf. 

41 See Crowdfunding, Release Nos. 33-9974; 34-76324 (Oct. 30, 2015), available at 

https://www.sec.gov/rules/final/2015/33-9974.pdf. See also Securities Act Section 18(b)(4)(C). Regulation 

Crowdfunding is an exemption available to U.S. companies for public offerings of securities up to $1.07 million in 

any 12-month period that are sold online through a registered intermediary. 

42 See Exemptions to Facilitate Intrastate and Regional Securities Offerings, Release Nos. 33-10238; 34-

79161 (Oct. 26, 2016), available at https://www.sec.gov/rules/final/2016/33-10238.pdf.

43 See Securities Act Rule 147.

44 See supra note 41.

45 FSOC recently issued proposed interpretive guidance which would replace its existing interpretive 

guidance on nonbank financial company determinations. The proposed guidance describes the approach the 

FSOC intends to take in prioritizing its work to identify and address potential risks to financial stability in the U.S. 

using an activities-based approach and enhancing the analytical rigor and transparency in the processes FSOC 

intends to follow if it were to consider making a determination to subject a nonbank financial company to 

supervision by the Federal Reserve. See https://home.treasury.gov/system/files/261/Notice-of-ProposedInterpretive-Guidance.pdf. 

Since SEC staff’s 2014 self-assessment, the Commission has amended Regulation A40 and 

adopted Regulation Crowdfunding,41 both of which include transactions that preempt state 

law registration and qualification requirements under Section 18 of the Securities Act. In 

addition, the Commission expanded the intrastate exemption framework for securities 

offerings made solely within a single state to permit intrastate offerings by an issuer 

incorporated out-of-state, if the issuer is a resident of and doing business in the state where 

the offering is made and sales are made only to residents of that state.42 Similar to the 

previously existing intrastate offering exemption,43 offerings under the new intrastate offering 

exemption are not required to be registered pursuant to the provisions of the Securities Act 

but are subject to state regulation.44

Other Areas 

In addition to those areas described above, and as discussed in SEC staff’s 2014 selfassessment, the SEC shares responsibility with other regulators with respect to certain other 

areas such as variable annuities and government-sponsored enterprises. The SEC also shares 

responsibility with the Federal Reserve with respect to certain systemically important financial 

market utilities (see response to Principle 6, Question 1(a)(i), below, for more information on 

the Financial Stability Oversight Council (FSOC)).45 

(b) Is substantially the same type of conduct and product generally subject to 

consistent regulatory requirements? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 1, 

Question 2(b). 
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SECURITIES AND EXCHANGE COMMISSION 17

46 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 929-Z, 124 

Stat. 1376, 1871 (2010).

However, SEC staff notes that in the “Additional Guidance” section of this questionnaire, the 

IMF requested that SEC staff include in its response to Principle 1, Question 2(b) an answer to 

the following additional questions from the IMF:

• Do other types of financial institutions offer securities like products (such as CIS-like 

insurance products or deposit instruments that mimic CISs/return based on market 

performance, etc.)?

• If so, how are these other products regulated with respect to disclosure, suitability for 

the client, etc.?

• Is the regulation that is applied equivalent to that which applies to equivalent 

securities products?

In response, SEC staff provides the following information relating to CIS-like insurance 

products or deposit instruments that mimic CISs/return based on market performance, etc. 

Variable Annuities and Index Annuities

Insurance companies may issue variable annuities, which are contracts that generally provide 

for accumulation of the purchaser’s payment, followed by payment of the accumulated value 

to the purchaser either as a lump sum or as a series of payments. The value of the variable 

annuity fluctuates with the market performance of the underlying investments, which are 

typically mutual funds. Variable annuities are CIS-like insurance products and are securities 

that are subject to SEC jurisdiction with respect to disclosure and other matters. The 

contracts, as well as the underlying funds, are generally required to be registered as 

investment companies under the Investment Company Act, and the offering of their securities 

must be registered under the Securities Act. Like other securities, variable annuities are 

subject to sales practice regulation, such as the suitability requirements of FINRA. In short, 

variable annuities are securities and are therefore subject to securities regulation.

Insurance companies may also issue index annuities. Index annuities provide a return that is 

computed based on the return of a market index, such as the Standard & Poor’s 500 

Composite Stock Price Index. The insurer also undertakes to provide a minimum value to the 

purchaser. Section 989J of the Dodd-Frank Act exempts indexed annuities from the SEC’s 

jurisdiction if they meet the conditions of the statute. These requirements include that the 

annuity meets certain state laws providing for principal protection and minimum interest. 

They also include that the annuity is issued in a state that has adopted minimum suitability 

requirements in the sales of annuities or that the issuing insurance company has adopted 

such requirements.46 The status under the federal securities laws of index annuities that are 

not entitled to the exemption would be determined on a case-by-case basis. An index 

annuity determined to be a security would be subject to the federal securities laws.
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18 SECURITIES AND EXCHANGE COMMISSION

47 See, e.g., Investment Company Act Section 3(c)(11). In relevant part, Section 3(c)(11) excludes from the 

definition of investment company, among other things, any employee’s stock bonus, pension, or profit-sharing 

trust which meets the requirements for qualification under Section 401 of the Internal Revenue Code of 1986; or 

any governmental plan described in Section 3(a)(2)(C) of the Securities Act of 1933; or any collective trust fund 

maintained by a bank consisting solely of assets of one or more of such trusts, governmental plans, or church 

plans, companies or accounts that are excluded from the definition of investment company under Section 

3(c)(14) of the Investment Company Act.

Collective Investment Trusts

Trust companies and banks maintain pooled trust accounts on behalf of certain investors, 

commonly referred to as “collective investment trusts.” Collective investment trusts are 

regulated by the banking regulators, and generally may rely on a statutory exclusion from 

being regulated as investment companies under the Investment Company Act.47

(c) Are responsible authorities required to cooperate and communicate in areas of 

shared responsibility?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 1, 

Question 2(c). 

(d) Are there arrangements for cooperation and communication between 

responsible regulators through appropriate channels and are cooperation and 

communication occurring between responsible regulators without significant 

limitations?

[Self-contained answer; no need to consult SEC staff’s 2014 self-assessment]

Yes. As noted in SEC staff’s 2014 self-assessment, the Commission places great emphasis on 

building and maintaining close partnerships with other entities across various regulatory and 

market segments and national boundaries. The SEC works closely with other regulatory and 

enforcement authorities through a variety of arrangements, including interagency MOUs, and 

through groups such as the FSOC, the International Organization of Securities Commissions 

(IOSCO), and the Financial Stability Board (FSB). The Commission also frequently engages in 

bilateral cooperation with other international, national, or state authorities on specific 

rulemaking activities, regulatory initiatives, examinations and enforcement investigations and 

cases. 

In addition to statutory provisions facilitating the sharing of information with other 

regulators, there are a variety of formal and informal mechanisms by which domestic 

regulators with responsibility over a particular activity effectively cooperate and communicate 

information relevant to their respective missions. 

As noted in SEC staff’s 2014 self-assessment, SEC Divisions and Offices collaborate with other 

regulatory entities to oversee the financial markets. For example:
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48 For example, the Commission, the federal banking regulators (i.e., the Federal Reserve, OCC, and the 

FDIC), and the CFTC adopted a common rule under Section 13 of the Bank Holding Company Act to restrict 

banking entities – including banks and their affiliated broker-dealers and investment advisers – from engaging in 

proprietary trading, sponsoring hedge funds and private equity funds, or investing in such funds. The common 

rule (also known as the Volcker Rule) includes exemptions for certain permitted activities, including market 

making-related activities and risk-mitigating hedging. The requirements of the common rule generally apply 

consistently to similar conduct and products. See 17 CFR 255 (please note that each aforementioned agency 

responsible for implementing the Volcker Rule has codified the rule in its part of the Code of Federal Regulations 

resulting in five different citations; the reference provided here is the SEC’s citation). 

49 See 15 U.S.C. § 78dd-1, et seq.

• SEC staff consults and coordinates routinely with staff from the U.S. Department of 

the Treasury (Treasury), the Federal Reserve, other banking regulators, the CFTC, and 

foreign regulators. These activities include the designation of registered clearing 

agencies, ongoing supervision of clearing agencies, transition periods in the SBS 

“push-out” rules in Section 716 of the Dodd-Frank Act, and the implementation of the 

Volcker Rule,48 among other initiatives.

• SEC staff organizes and participates in discussions with international regulators of the 

globally-active CRAs through quarterly meetings of supervisory colleges, as well as 

bilateral and other multilateral discussions. The supervisory colleges were formed to 

enhance communication among CRA regulators globally with respect to examinations 

of the relevant CRAs.

• The SEC and FINRA regularly communicate to discuss strategic initiatives, examination 

coordination, risk assessment efforts, rulemaking issues, and industry risks. This type 

of collaboration is ultimately intended to make oversight of broker-dealers more 

effective and efficient and to improve compliance within the industry.

• The SEC regularly coordinates its efforts with domestic and foreign law enforcement 

partners, including coordination on parallel criminal investigations conducted by DOJ 

and the FBI, among others. One example is the Southern District of Florida Securities 

and Investment Fraud Initiative, an initiative designed to combat securities and 

investment fraud and protect the interests of the investing public, which has resulted 

in charges against over 200 individuals and orders for more than $2.5 billion in 

restitution. The SEC also promotes the development of broader information-sharing 

arrangements and efforts to secure the proceeds of fraud in order to successfully 

prosecute cross-border violations in areas such as offering frauds, market abuse, 

insider trading, and Foreign Corrupt Practices Act of 1977 (FCPA)49 cases.

• SEC staff works with other regulators to issue joint alerts and bulletins, including an 

SEC-CFTC investor alert on binary options, an SEC-FINRA alert on pump-and-dump 

stock schemes, and an SEC-FINRA bulletin on pension and settlement income 

streams. SEC staff in OCIE collaborates with various federal agencies on Financial 

Literacy and Education Commission initiatives and partners with interested federal 

agencies on joint investor alerts and bulletins.
UNITED STATES PRINCIPLE 1

20 SECURITIES AND EXCHANGE COMMISSION

50 See https://www.sec.gov/news/press-release/2018-240. 

51 See U.S. Securities and Exchange Commission Annual Staff Report Relating to the Use of Form PF Data 

(Dec. 14, 2018) at 1 and 9, available at https://www.sec.gov/files/2018-form-pf-report-to-congress.pdf

• SEC staff consults and coordinates with the MSRB, FINRA, the Internal Revenue 

Service (IRS), and banking regulators with respect to municipal securities issues on an 

ongoing basis.

• In 2018, the SEC established the Strategic Hub for Innovation and Financial 

Technology (FinHub).50 Among its other functions, the FinHub serves as a liaison to 

other domestic and international regulators regarding emerging technologies in 

financial, regulatory, and supervisory systems (see response to Principle 6, Question 4, 

below, for more information on the FinHub).

In addition, domestic regulators frequently enter into information and regulatory cooperation 

arrangements for certain products and activities, as described below.

MOUs with Other Federal Regulators

As noted in SEC staff’s 2014 self-assessment, the Commission has entered into arrangements 

with various federal regulators that provide for the cooperation and communication of 

information between and among the relevant authorities on subjects relating to, among 

other things, credit default swaps, novel derivative products and security futures products. 

Since then, the Commission has entered into several new arrangements related to private 

funds, novel derivative products and financial technology. For example, 

• SEC staff previously identified an MOU between the SEC and the Federal Reserve that 

facilitates the agencies’ sharing of information and cooperation across a number of 

important areas of common interest, including anti-money laundering (AML), bank 

brokerage activities under the Gramm-Leach-Bliley Act of 1999 (GLBA), clearance and 

settlement in the banking and securities industries, and the regulation of transfer 

agents. Since then, the SEC and the Federal Reserve have entered into a second 

MOU,51 under which the SEC shares data contained in, or derived from filings with the 

SEC on the “Reporting Form for Investment Advisers to Private Funds and Certain 

Commodity Pool Operators and Commodity Trading Advisors” (Form PF), subject to 

conditions designed to protect the confidentiality of this information consistent with 

section 204(b)(10) of the Advisers Act. This Form contains information regarding 

private funds (e.g., hedge funds, private equity funds, and other private funds) 

reported by certain SEC-registered investment advisers) (see response to Principle 6, 

Question 1(a)(i), below, for additional information on Form PF).
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52 See SEC and CFTC Announce Approval of New MOU, available at https://www.sec.gov/news/pressrelease/2018-114. The MOU is available at https://www.cftc.gov/sites/default/files/2018-

06/CFTC_MOU_InformationSharing062818.pdf.

53 See SEC’s Controls Over Sensitive/Nonpublic Information Collected and Exchanged With the Financial 

Stability Oversight Council and Office of Financial Research, available at https://www.sec.gov/files/509.pdf. See 

also Audit of the Financial Stability Oversight Council’s Controls over Non-public Information, available at 

https://www.fdicoig.gov/sites/default/files/publications/Audit%20of%20the%20Financial%20Stability%20Oversig

ht%20Council%27s%20Controls%20over%20Non-public%20Information.pdf. 

• In 2018, the SEC and the CFTC entered into an MOU to help facilitate continued 

coordination and information sharing between the two agencies.52 The MOU 

updated and enhanced the MOU described in SEC staff’s 2014 self-assessment to 

make it more relevant in the current market environment and promote efficiency in 

rulemaking, regulatory oversight, and enforcement. The MOU continues a regulatory 

liaison between the agencies, and facilitates the discussion and coordination of 

regulatory action, as well as information exchange and data sharing regarding issues 

of common regulatory interest. 

Although not mentioned in SEC staff’s 2014 self-assessment, the SEC also entered into an 

MOU in 2011 with the FSOC and its voting and non-voting members, including (among 

others) the U.S. Treasury, Federal Reserve, CFTC, FDIC, OCC, Consumer Financial Protection 

Bureau (CFPB), Federal Housing Finance Agency (FHFA), National Credit Union Administration 

(NCUA), and Office of Financial Research (OFR) that governs information sharing and the 

protection of non-public information obtained from or shared among the parties in 

connection with or related to the functions and activities of FSOC and OFR.53 

Through the above mechanisms and others, the SEC coordinates and communicates with 

other authorities with respect to areas of shared regulatory responsibilities without significant 

limitations. Please also refer to response to Principle 1, Question 2(a), above. 
UNITED STATES PRINCIPLE 2

22 SECURITIES AND EXCHANGE COMMISSION

Principle 2 The Regulator should be operationally independent and accountable 

in the exercise of its powers and functions.

Key Questions

Independence

1. Does the regulator have the ability to operate on a day-to-day basis without:

(a) External political interference?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 2, 

Question 1(a). 

(b) Interference from commercial or other sectoral interests?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 2, 

Question 1(b). 

2. Where particular matters of regulatory policy require consultation with, or even 

approval by, a government minister or other authority: 

(a) Is the consultation process established by law? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 2, 

Question 2(a).

(b) Do the circumstances, in which consultation is required, exclude decision 

making on day-to-day technical matters? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 2, 

Question 2(b).

(c) Are the circumstances in which such consultation or approval is required or 

permitted clear and the process sufficiently transparent, or the failure to 

observe procedures and the regulatory decision or outcome subject to 

sufficient review, to safeguard its integrity? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 2, 

Question 2(c). 

3. Does the regulator have a stable and continuous source of funding sufficient to meet 

its regulatory and operational needs?

[Self-contained answer; no need to consult SEC staff’s 2014 self-assessment]

As noted in SEC staff’s 2014 self-assessment, the SEC’s budget request is part of the federal 

budget that is prepared by the President and submitted to Congress. Each year, the SEC 

prepares a budget estimate, which it forwards to the Office of Management and Budget 
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SECURITIES AND EXCHANGE COMMISSION 23

54 The SEC’s current and past budget requests are available on the SEC’s website at 

http://www.sec.gov/about/secreports.shtml. See also Chairman Clayton’s Testimony before the Financial Services 

and General Government Subcommittee of the U.S. Senate Committee on Appropriations (May 8, 2019), available 

at https://www.sec.gov/news/testimony/testimony-financial-services-and-general-government-subcommitteeus-senate-committee and Chairman Clayton’s Testimony before the U.S. Senate Committee on Banking, Housing, 

and Urban Affairs (Dec. 11, 2018), available at https://www.sec.gov/news/testimony/testimony-oversight-ussecurities-and-exchange-commission-0. 

(OMB). This document outlines the major program areas of the SEC and estimates the 

resources (including SEC staff and expenses such as salary, facilities, information technology

(IT), cybersecurity, and other supplies) needed to operate them. The SEC’s budget is part of 

the budget request that the President typically submits to Congress in February for the fiscal 

year that begins the following October.54

Funding for the SEC is made through an annual appropriation from Congress. Any amount 

appropriated to the agency is offset by private sector securities transaction fees, which are 

periodically adjusted and assessed on national securities exchanges and national securities 

associations in accordance with Section 31 of the Exchange Act. As such, the SEC’s funding 

is designed to be deficit-neutral. 

The SEC also has a reserve fund, which can, under certain circumstances, be used for the 

agency’s expenses. The SEC has dedicated the reserve fund to large, multi-year, missioncritical IT programs and projects. The SEC can use up to $100 million, assuming sufficient 

budget authority, from the reserve fund in a given year. The funding is provided by deposits 

of up to $50 million per year in securities registration fees, with the remaining registration 

fees going to the U.S. Treasury. 

4. Are the regulator, the head and members of the governing body of the regulator, as 

well as its staff, accorded adequate legal protection for the bona fide discharge of their 

governmental, regulatory and administrative functions and powers?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 2, 

Question 4. 

5. Are the head and governing board of the regulator subject to mechanisms intended 

to protect independence, such as: procedures for appointment; terms of office; and 

criteria for removal?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 2, 

Question 5. 

Accountability

6. With reference to the system of accountability for the regulator’s use of its powers 

and resources: 

(a) Is the regulator accountable to the legislature or another government body on 

an ongoing basis?
UNITED STATES PRINCIPLE 2

24 SECURITIES AND EXCHANGE COMMISSION

55 See 5 U.S.C. Subchapter II. 

56 See SEC Rule of Practice 110.

57 See SEC Rule of Practice 101(a)(5).

No significant update from SEC staff’s 2014 self-assessment in response to Principle 2, 

Question 6(a). 

(b) Is the regulator required to be transparent in its way of operating and use of 

resources and to make public its actions that affect users of the market and 

regulated entities, excluding confidential or commercially sensitive 

information?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 2, 

Question 6(b). 

(c) Is the regulator’s receipt and use of funds subject to review or audit? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 2, 

Question 6(c). 

7. Are there means for natural or legal persons adversely affected by a regulator’s 

decisions or exercise of administrative authority ultimately to seek review in a court, 

specifically:

(a) Does the regulator have to provide written reasons for its material decisions? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 2, 

Question 7(a). 

(b) Does the decision-making process for such decisions include sufficient 

procedural protections to be meaningful?

[Self-contained answer; no need to consult SEC staff’s 2014 self-assessment]

Yes. As noted in SEC staff’s 2014 self-assessment, the U.S. Constitution requires 

administrative agencies, such as the SEC, to conduct their proceedings with due process. 

Section 554 of the Administrative Procedure Act (APA)55 specifically requires the SEC to 

permit interested parties a hearing to submit facts and argument. Hearings in SEC-instituted 

administrative proceedings are heard before the Commission or, if the Commission so 

orders, a hearing officer.56 A hearing officer may be an administrative law judge (ALJ), a 

panel of Commissioners constituting less than a quorum of the Commission, an individual 

Commissioner, or another person duly authorized to preside.57 

Since SEC staff’s 2014 self-assessment, the U.S. Supreme Court ruled that SEC ALJs are 

officers of the United States who must be appointed by the President, a court of law, or the 
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SECURITIES AND EXCHANGE COMMISSION 25

58 See Lucia v. SEC 138 S. Ct. 2044 (2018).

59 See In re: Pending Administrative Proceedings, Release Nos. 33-10440; 34-82178; IA-4816; IC-32929 

(Nov. 30, 2017), available at https://www.sec.gov/litigation/opinions/2017/33-10440.pdf. 

60 See In re: Pending Administrative Proceedings, Release Nos. 33-10536; 34- 83907; 40-4993; 40-33211 

(Aug. 22, 2018), available at https://www.sec.gov/litigation/opinions/2018/33-10536.pdf. 

61 Id.

62 Id.

Commission, as head of a department.58 Prior to the Supreme Court’s ruling, the SEC 

ratified the appointments of its ALJs who were selected by SEC staff.59 Following the ruling, 

the SEC issued an order reiterating its approval of the appointments of the ALJs under the 

Constitution.60 The SEC also ordered that in any pending administrative proceeding 

pending before an ALJ or pending before the Commission, the respondents be provided 

with the opportunity for a new hearing before an ALJ who did not previously participate in 

the matter.61 The SEC remanded proceedings that were then pending before the 

Commission and vacated any prior opinions the Commission had issued in those 

proceedings.

62

(c) Are affected persons permitted to make representations prior to such a 

decision being taken by a regulator in appropriate cases?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 2, 

Question 7(c). 

(d) Are all such decisions taken by the regulator subject to a sufficient, 

independent review process, ultimately including judicial review?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 2, 

Question 7(d). 

8. Where accountability is through the government or some other external agency, is 

confidential and commercially sensitive information subject to appropriate safeguards 

to prevent inappropriate use or disclosure?

[Self-contained answer; no need to consult SEC staff’s 2014 self-assessment]

Yes. As noted in SEC staff’s 2014 self-assessment, the Securities Act, Exchange Act and 

Advisers Act all contain statutory provisions that are designed to safeguard the 

confidentiality of information obtained in the course of examinations or investigations. The 

SEC has also adopted rules under the Securities Act and the Exchange Act to permit requests 

for confidential treatment of certain information. In addition, the SEC’s rules include 

restrictions on sharing non-public information. For example, Rule 24c-1 under the Exchange 

Act provides that the SEC may provide nonpublic information in its possession to certain 

entities, including other domestic and foreign governmental entities, but only if it receives 

appropriate assurances of confidentiality. Moreover, the SEC has procedures in place 
UNITED STATES PRINCIPLE 2

26 SECURITIES AND EXCHANGE COMMISSION

63 See 5 U.S.C. § 552.

64 See 17 C.F.R § 200.83.

65 See 17 C.F.R. § 200.80(d)(6).

66 See https://edpb.europa.eu/sites/edpb/files/files/file1/2019-02-12-opinion_2019-4_art.60_esma_en.pdf.

designed to ensure that assurances of confidentiality are obtained either through an MOU 

or access request letters, among other processes. The terms and conditions of the SEC’s 

MOUs with domestic and/or foreign authorities are designed to satisfy the requirement for 

confidentiality assurances. Furthermore, SEC staff has written procedures addressing the 

manner in which information sharing is to occur with other regulatory authorities and both 

foreign and domestic law enforcement. 

Freedom of Information Act 

In addition, as noted in SEC staff’s 2014 self-assessment, the United States has laws related 

to protecting certain information provided by regulated entities and issuers who are subject 

to SEC reporting requirements and are required to make public filings with the SEC. The 

Freedom of Information Act (FOIA) governs public access to certain types of documents.63 

FOIA also enables the public to obtain access to agency records unless the record falls under 

an exemption from the general disclosure requirement. The exemptions protect from 

disclosure: (i) documents that relate solely to an agency’s internal personnel rules and 

practices; (ii) trade secrets and confidential commercial or financial information; 

(iii) deliberative or otherwise privileged intra-agency or inter-agency memoranda or letters; 

(iv) law enforcement records the disclosure of which would interfere with law enforcement 

proceedings; and (v) records related to examinations. The SEC has also promulgated a 

confidential treatment regulation that, among other things, permits persons who have 

submitted records containing trade secrets or confidential commercial or financial 

information to the SEC to object to their disclosure in response to a FOIA request.64

As noted in SEC staff’s 2014 self-assessment, the SEC’s FOIA Office responds to requests for 

records under FOIA and requests for confidential treatment by submitters of records. These 

responses may be appealed, pursuant to a delegation of authority from the Commission, to 

the SEC’s Office of the General Counsel (OGC), which may grant or deny appeals, or may 

release records in the exercise of discretion.65 OGC may also refer appealed matters in 

appropriate cases to the Commission for its review.

IOSCO Administrative Arrangement 

In 2019, the SEC entered into the IOSCO Administrative Arrangement (AA) for the transfer of 

personal data between European Economic Area (EEA) and non-EEA IOSCO members. The 

AA supplements existing memoranda of understanding by setting out safeguards that 

authorities use to protect personal data. The European Data Protection Board issued an 

opinion in February 2019,66 noting that the AA ensures appropriate safeguards when 

personal data will be transferred on the basis of the AA to public bodies in third countries 

not covered by a European Commission adequacy decision. 
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SECURITIES AND EXCHANGE COMMISSION 27

67 See https://www.sec.gov/news/public-statement/statement-clayton-2017-09-20.

68 See, e.g., Chairman Clayton’s Testimony on Examining the SEC's Agenda, Operation, and Budget (Oct. 4, 

2017), available at https://www.sec.gov/news/testimony/testimony-examining-secs-agenda-operation-andbudget; Chairman Clayton’s Testimony before the Financial Services and General Government Subcommittee of 

the Senate Committee on Appropriations (Jun. 5, 2018), available at

https://www.sec.gov/news/testimony/testimony-financial-services-and-general-government-subcommitteesenate-committee; Chairman Clayton’s Testimony on Oversight of the U.S. Securities and Exchange Commission 

(Jun. 21, 2018), available at https://www.sec.gov/news/testimony/testimony-oversight-us-securities-andexchange-commission; Chairman Clayton’s Testimony on Oversight of the U.S. Securities and Exchange 

Commission (Dec. 11, 2018), available at https://www.sec.gov/news/testimony/testimony-oversight-us-securitiesand-exchange-commission-0; Fiscal Year 2018 Agency Financial Report, available

at https://www.sec.gov/files/sec-2018-agency-financial-report.pdf.

69 See https://www.sec.gov/files/sec-2017-agency-financial-report.pdf.

Cybersecurity 

The SEC also devotes substantial resources and attention to cybersecurity, including the 

protection of personally identifying information (PII) (see response to Principle 7, Question 2, 

below, for additional information). 

Following the 2016 intrusion into the SEC’s Electronic Data Gathering, Analysis, and Retrieval 

(EDGAR) system,67 the SEC pursued various reviews of the EDGAR system and the SEC's 

information technology systems more broadly,

68 increasing its investments in tools,

technologies, and services to protect the security of the agency’s network, systems, and 

sensitive data.69

During FY 2019, the SEC continued efforts to enhance its information security and privacy 

programs pursuant to the Federal Information Security Modernization Act of 2014 and other 

applicable requirements. The agency continued to prioritize compliance with emerging 

security directives and initiatives from OMB and the Cybersecurity and Infrastructure Security 

Agency within the Department of Homeland Security. The SEC made progress toward 

implementing the National Institute of Standards and Technology Cybersecurity Framework 

pursuant to Executive Order 13800, focusing on the agency’s High Value Assets. The SEC 

hired its first Chief Risk Officer to coordinate the SEC’s continued efforts to identify, monitor, 

and mitigate key risks facing the Commission and serve as a key adviser on other matters 

related to enterprise risks and controls. The SEC also hired a new Senior Advisor for 

Cybersecurity Policy who will continue efforts across the agency to address cybersecurity 

policy matters, engage with external stakeholders, and help enhance the SEC’s mechanisms 

for addressing cyber-related risks.
UNITED STATES PRINCIPLE 3

28 SECURITIES AND EXCHANGE COMMISSION

70 For more information regarding SEC staff, please see the most recent Agency Financial Report, available 

at https://www.sec.gov/reports-and-publications/annual-reports/sec-2018-agency-financial-report. 

Principle 3 The Regulator should have adequate powers, proper resources and the 

capacity to perform its functions and exercise its powers.

Key Questions

1. Are the powers and authorities of the regulator sufficient, taking into account the nature 

of a jurisdiction’s markets and a full assessment of these Principles to meet the 

responsibilities of the regulator(s) to which they are assigned?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 3, 

Question 1. 

2. With regard to funding: 

(a) Is the regulator's funding adequate to permit it to fulfil its responsibilities, taking 

into account the size, complexity and types of functions subject to its regulation, 

supervision or oversight?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 3, 

Question 2(a). 

(b) Can the regulator affect the operational allocation of resources once funded?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 3, 

Question 2(b).

3. Does the level of resources recognize the difficulty of attracting and retaining 

experienced and skilled staff? 

[Self-contained answer; no need to consult SEC staff’s 2014 self-assessment]

Yes. As noted in SEC staff’s 2014 self-assessment, the SEC strives to maintain an organizational 

climate in which high-performing employees wish to remain with the SEC. Although turnover 

can fluctuate based on a variety of factors, including the health of the economy and the 

number of outside job opportunities available for SEC staff, the agency aims to keep its 

turnover rate relatively low, below 8% per year. Since SEC staff’s 2014 self-assessment, the SEC 

has experienced annual turnover rates that average less than 6%, which is below the overall 

federal sector turnover rate. 

The SEC continues to make a concerted effort to recruit and hire employees with the skill sets 

required to fulfill mission requirements. Additionally, the SEC continues to implement 

enhanced employee benefits, market-based pay structure, multiple day telework, flexible work 

schedules, and pay-for-performance, all of which are designed to encourage skilled staff to 

remain.70 
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71 See https://www.sec.gov/news/press-release/2018-88. 

72 See https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins.

4. Does the regulator ensure that its staff receives adequate ongoing training?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 3, 

Question 4. 

5. Does the regulator have policies and governance practices to perform its functions and 

exercise its powers effectively?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 3, 

Question 5. 

6. Does the regulator play an active role in promoting education in the interest of protecting 

investors?

[Self-contained answer; no need to consult SEC staff’s 2014 self-assessment]

Yes. As part of its mission to protect investors, the SEC promotes informed investment 

decision-making through education initiatives aimed at providing Main Street investors with a 

better understanding of our capital markets and the opportunities and risks associated with the 

array of investment choices presented to them. The SEC’s Office of Investor Education and 

Advocacy (OIEA) spearheads these efforts by communicating daily with investors, responding 

to their complaints and inquiries, and providing educational programs and materials. In 2018, 

for example, OIEA conducted over 150 in-person investor education events focused toward 

various segments of the population, including senior citizens, military personnel, younger 

investors, and affinity groups. In addition to in-person education events, the SEC has 

developed informative, innovative, and accessible educational initiatives.

The SEC uses a variety of channels to alert investors of potential indicators of fraud. For 

example, in 2018, OIEA created a website to educate the public about emerging risks involving 

potential initial coin offering (ICO) scams and demonstrate how easy it is for bad actors to 

engineer this type of fraud— HoweyCoins.com.71 This mock website promoted a fictional ICO 

and was created in-house, very quickly, with few resources. It attracted over 100,000 people 

within its first week. 

Since SEC staff’s 2014 self-assessment, OIEA has also published a variety of investor alerts and 

bulletins to warn Main Street investors about other possible schemes, including celebrity 

endorsements, self-directed individual retirement accounts, the risks in using credit cards to 

purchase an investment, and the potential harm and annoyance resulting from sharing their 

personal contact information with online investment promoters.72 
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73 See https://www.sec.gov/litigations/sec-action-look-up. 

74 See https://www.sec.gov/page/investment-tips-chairman-jay-clayton. 

75 See https://www.sec.gov/page/oasb-videos. 

The SEC also continues to promote its national public service campaign, “Before You Invest, 

Investor.gov.” This initiative encourages investors to research the background of their 

investment professional. In May 2018, the SEC supplemented this information service with a 

new online search tool, the SEC Action Lookup for Individuals (SALI).73 This tool enables 

investors to find out if the individual or firm he or she is dealing with has been sanctioned as a 

result of SEC action.

Most recently, the SEC launched a video series for retail investors. In these videos, SEC 

Chairman Clayton shares his personal notes on investing. For example, these videos have 

discussed compounding, diversification, fees, costs and taxes, and how to avoid fraud.74

Since the 2014 self-assessment, a new Office of the Advocate for Small Business Capital 

Formation (OASB) was created pursuant to the SEC Small Business Advocate Act of 2016, 

focused on advocating for solutions to issues faced by small businesses and their investors 

from start-ups all the way to companies with a public float under $250 million. In addition, 

OASB is working to develop educational outreach materials that help small businesses and their 

investors better navigate the current rules and engage in the rulemaking process. A recent 

example is OASB’s initiative to simplify and highlight pertinent rulemakings that impact small 

businesses in quick videos that are designed to reach broad audiences of businesses and 

investors.75
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76 See SEC Names Jeffrey Dinwoodie Senior Counsel and Policy Advisor for Market and Activities-Based 

Risk (Mar. 25, 2019), available at https://www.sec.gov/news/press-release/2019-41. 

Principle 6 The Regulator should have or contribute to a process to identify, 

monitor, mitigate and manage systemic risk, appropriate to its 

mandate.

Key Questions

1.

(a) Does the regulator have clear responsibilities in:

(i) identifying, monitoring, mitigating and appropriately managing 

systemic risks related to securities markets; and 

[This is a new question for the 2020 FSAP]

The SEC has a three-part statutory mission: to protect investors; maintain fair, orderly, and 

efficient markets; and facilitate capital formation.

In fulfilling this mission, the SEC actively identifies, monitors, and responds to risks related to 

the securities markets, including systemic risks. Described further below are several of the 

regulatory programs and initiatives that the SEC and its staff have implemented and are 

pursuing in this area. 

Additionally, in recognition of the SEC’s important role and function in identifying, 

monitoring, and responding to market risks, in March 2019, the SEC Chairman created a new 

position, the Senior Counsel and Policy Advisor for Market and Activities-Based Risk.76 This 

senior officer position is responsible for managing and coordinating the agency’s efforts to 

identify, monitor and respond to market risks—including activities-based risks—affecting the 

U.S. capital markets. In addition, the SEC Chairman has created a Chief Risk Officer position. 

This senior officer position is responsible for coordinating the SEC’s continued efforts to 

identify, monitor, and mitigate key operational and programmatic risks facing the 

Commission. The Chief Risk Officer also serves as a key adviser on other matters related to 

enterprise risks and controls. 

Relevant SEC and SEC Staff Programs and Initiatives

The SEC and its staff have implemented and advanced numerous regulatory programs and 

initiatives aimed at identifying, monitoring and responding to risks related to the securities 

markets, including systemic risks. Highlighted below are a cross-section of examples of the 

Commission and SEC staff programs and initiatives related to such risks. 

Division of Economic and Risk Analysis

The SEC’s Division of Economic and Risk Analysis (DERA) plays an important role in the 

Commission’s work relating to systemic risk issues. DERA was created in September 2009 to 

integrate financial economics and rigorous data analytics into the core mission of the SEC. 

DERA is involved across the entire range of SEC activities, including policy-making, rulemaking, enforcement, and examination. As the agency's "think tank," DERA relies on a 
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variety of academic disciplines, quantitative and non-quantitative approaches, and 

knowledge of market institutions and practices to help the Commission approach complex 

matters in a fresh light. DERA also assists in the Commission's efforts to identify, analyze, 

and respond to risks and trends, including those associated with new financial products and 

strategies. Through the range and nature of its activities, DERA serves the critical function of 

promoting collaborative efforts throughout the agency and breaking through silos that 

might otherwise limit the impact of the agency's institutional expertise.

DERA activities include:

• providing detailed, high-quality economic and statistical analyses, and specific 

subject-matter expertise to the Commission and other Divisions and Offices;

• identifying and analyzing issues, trends, and innovations in the marketplace;

• developing customized, analytic tools and analyses to proactively detect market risks 

indicative of possible violations of the Federal securities laws (using data, DERA staff 

create analytic programs designed to detect patterns identifying risks, enabling 

Commission divisions and offices to deploy scarce resources targeting possible 

misconduct);

• working with outside experts in academia and industry to strengthen the 

Commission’s foundation of market knowledge;

• managing and analyzing public and private data to support relevant initiatives and 

projects; and

• creating knowledge through high-quality research and publication in peer-reviewed 

journals.

DERA also organizes, hosts and contributes thought leadership to seminars, conferences, 

and round-tables relating to market risk and regulation issues. For example:

• In coordination with the Lehigh University’s Center for Financial Services, the 

University of Maryland’s Center for Financial Policy, and the CFA Institute, DERA 

hosts an Annual Conference on Financial Market Regulation;

• DERA organizes an annual “Quant Congress” aimed at discussing possible 

application of the latest machine learning technologies to the securities markets and 

SEC’s registrant space; and

• DERA participates in technical exchange meetings with other securities market 

regulators to discuss the latest advances in applied and advanced analytics as they 

pertain to regulatory, surveillance and policy applications for securities and financial 

market regulating agencies.
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77 See Risk Management Controls for Brokers or Dealers with Market Access, Release No. 34-63241 (Nov. 

3, 2010), available at https://www.sec.gov/rules/final/2010/34-63241.pdf. 

Division of Trading and Markets

The Division of Trading and Markets’ (TM) Office of Analytics and Research (OAR) has a 

frontline role in identifying, monitoring, mitigating, and appropriately managing systemic 

risks related to securities markets. OAR’s market monitoring program has dedicated staff 

responsible for reviewing and analyzing a wide range of public and regulatory information, 

data, and alerting tools to identify issues, trends, and events that may affect the fair, orderly, 

and efficient operations of markets. OAR’s market monitoring program communicates 

information and analysis in a variety of means including periodic notifications, ad hoc alerts, 

and dashboard type tools. OAR’s market monitoring team also plays a key role in 

coordinating SEC responses to issues impacting markets overseen by the SEC. 

Following significant market disruptions or as circumstances warrant, information assembled 

by OAR’s market monitoring team may be prioritized for more in-depth forensic research 

and analysis by OAR’s applied research program to assess potential impacts, identify 

additional risks, and formulate potential policy responses. In addition, OAR’s applied 

research program provides specialized subject matter expertise and quantitative analysis on 

issues related to the structure and functioning of securities markets. This research, which is 

typically based on empirical analysis of complex, regulatory data, often informs the 

development of new automated market monitoring tools that are incorporated into OAR’s 

market monitoring program. 

Addressing the Integrity of the Securities Markets

A key focus of the SEC in recent years has been monitoring and responding to increasing 

use of technology in our securities markets and episodes of increased market volatility—and 

the effects that these trends have on investors and our capital markets generally. In the past 

decade, the SEC has undertaken a multi-step approach in this area. Key regulatory 

responses include, among others: 

• Market Access Rule. As described in SEC staff’s 2014 self-assessment, in November 

2010, the SEC adopted Rule 15c3-5 – Risk Management Controls for Brokers or 

Dealers with Market Access, commonly known as the “Market Access Rule,” to curb 

individual and systemic risks related to market access by broker-dealers and their 

customers.77 Rule 15c3-5 applies to broker-dealers with access to trading securities 

by virtue of being an exchange member, an alternative trading system (ATS) 

subscriber, or an ATS operator with non-broker-dealer subscribers. Broker-dealers 

with such market access are required to establish, document, and maintain a system 

of risk management controls and supervisory procedures that, among other things, 

are reasonably designed to: (i) systematically limit the financial exposure of the 

broker or dealer and its customer that could arise as a result of market access, and 

(ii) ensure compliance with all regulatory requirements that are applicable in 

connection with market access. Specifically, the risk management controls and 
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78 See 17 C.F.R. §242.1000-1007. See also Regulation Systems Compliance and Integrity, Release No. 34-

73639 (Nov. 19, 2014), available at https://www.sec.gov/rules/final/2014/34-73639.pdf.

supervisory procedures are required to be reasonably designed to: (i) prevent the 

entry of orders that exceed appropriate pre-set credit or capital thresholds, or that 

appear to be erroneous; (ii) prevent the entry of orders unless there has been 

compliance with all regulatory requirements that must be satisfied on a pre-order 

entry basis; and (iii) prevent the entry of orders that the broker-dealer or customer is 

restricted from trading, restrict market access technology and systems to authorized 

persons, and ensure appropriate surveillance personnel receive immediate posttrade execution reports.

• Regulation Systems Compliance and Integrity (SCI). In SEC staff’s 2014 selfassessment, SEC staff noted that the Commission had proposed Regulation SCI, 

which was designed to enhance market stability by ensuring technological adequacy 

of market participants. In 2014, the SEC adopted Regulation SCI.78 As adopted, 

Regulation SCI imposes requirements on certain key market participants intended to 

reduce the occurrence of systems issues, improve resiliency when systems problems 

occur, and enhance the SEC’s oversight and enforcement of securities market 

technology infrastructure. Regulation SCI applies to, among other entities, stock and 

options exchanges, clearing agencies, disseminators of consolidated market data 

(known as plan processors), and certain alternative trading systems (ATSs) (together 

referred to as “SCI entities”). The rule requires these SCI entities to have written 

policies and procedures reasonably designed to ensure that their systems have levels 

of capacity, integrity, resiliency, availability, and security adequate to maintain their 

operational capability and promote the maintenance of fair and orderly markets, and 

that they operate in a manner that complies with the Exchange Act. 

In addition, Regulation SCI requires these entities to take corrective action with 

respect to SCI events (defined to include systems disruptions, systems compliance 

issues, and systems intrusions), notify the SEC of such events, and disseminate 

information about certain SCI events to affected members or participants (and, for 

certain major SCI events, to all members or participants of the SCI entity). Moreover, 

Regulation SCI requires SCI entities to conduct a review of their systems by objective, 

qualified personnel at least annually, submit quarterly reports regarding completed, 

ongoing, and planned material changes to their SCI systems to the SEC, and 

maintain certain books and records. It also requires SCI entities to mandate 

participation by designated members or participants in scheduled testing of the 

operation of their business continuity and disaster recovery plans, including backup 

systems, and to coordinate such testing on an industry- or sector-wide basis with 

other SCI entities.

• Approval of the SROs’ Limit-Up Limit-Down Plan (LULD). As noted in SEC staff’s 

2014 self-assessment, in May 2012, the SEC approved a National Market System 

(NMS) plan - known as LULD plan - proposed by SROs to address extraordinary 
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79 See Joint Industry Plans; Order Approving, on a Pilot Basis, the National Market System Plan to Address 

Extraordinary Market Volatility by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Board Options Exchange, 

Incorporated, Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry 

Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market LLC, 

National Stock Exchange, Inc., New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc., Release No. 34-

67091 (May 31, 2012), available at https://www.sec.gov/rules/sro/nms/2012/34-67091.pdf. 

80 See Joint Industry Plan; Order Approving the Eighteenth Amendment to the National Market System 

Plan To Address Extraordinary Market Volatility by Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA 

Exchange, Inc., Cboe EDGX Exchange, Inc., Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, 

Inc., Investors Exchange LLC, NASDAQ BX, Inc., NASDAQ PHLX LLC, The Nasdaq Stock Market LLC, NYSE National, 

Inc., New York Stock Exchange LLC, NYSE American LLC, and NYSE Arca, Inc., Release No. 34-85623 (Apr. 11, 

2019), available at https://www.sec.gov/rules/sro/nms/2019/34-85623.pdf. . 

81 See 17 C.F.R. 242.613. See also Consolidated Audit Trail, Release No. 34-67457 (July 18, 2012), available 

at https://www.sec.gov/rules/final/2012/34-67457.pdf.

82 See Joint Industry Plan; Order Approving the National Market System Plan Governing the Consolidated 

Audit Trail, Release No. 34-79318 (Nov. 15, 2016), available at https://www.sec.gov/rules/sro/nms/2016/34-

79318.pdf. 

volatility in individual securities.

79 At that time, the LULD plan was implemented on 

a pilot basis. In April 2019, the SEC approved an amendment to make the LULD plan 

permanent.80 The LULD plan creates a market-wide limit up-limit down mechanism 

to address extraordinary volatility in individual NMS securities, which can undermine 

the integrity of the securities market. The LULD Plan provides for market-wide, 

single-stock price bands designed to prevent trades in individual NMS stocks from 

occurring outside of specified price bands while allowing trading to continue if a 

price move is only temporary.

• Approval of the SROs’ Market-wide Circuit Breakers. As noted in SEC staff’s 2014 

self-assessment, in May 2012, the SEC also approved SRO rules establishing marketwide circuit breakers. Such circuit breakers at the securities and futures markets 

provide for brief, coordinated, cross-market trading halts during a securities market 

decline. Market-wide trading halts are implemented if the market declines below 

specified levels (currently based on S&P 500). These circuit breakers are applicable 

to all NMS securities and contain three different “triggers” with associated lengths of 

trading halts, which may also vary depending on time of day. Circuit breaker 

thresholds will be recalculated at the beginning of each trading session based on the 

closing value of the S&P 500 index from the previous session.

• Consolidated Audit Trail (CAT). As noted in SEC staff’s 2014 self-assessment, in 2012, 

the SEC adopted Rule 613 under the Exchange Act to require the national securities 

exchanges and FINRA to establish a market-wide CAT to significantly enhance 

regulators’ ability to monitor and analyze trading activity.81 Among other things, the 

rule required the self-regulatory organizations (SROs) to jointly submit a plan –

called an NMS plan – to create, implement and maintain CAT (CAT NMS Plan). The 

rule specified the type of data to be collected and when the data is to be reported to 

a central repository. In November 2016, the SEC approved the CAT NMS Plan.82 The 

CAT NMS Plan requires that the plan processor chosen by the SROs build a central 
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83 The term “financial responsibility rules” generally refers to the following SEC Exchange Act rules 

governing broker-dealers: Rule 15c3-1 (net capital), Rule 15c2-1 (hypothecation of customer securities); 

Rule 15c3-3 (customer protection), Rule 17a-3 (required books and records), Rule 17a-4 (recordkeeping and 

record retention), Rule 17a-5 (financial reporting), Rule 17a-11 (notices), and 17a-13 (quarterly securities count). 

See 17 C.F.R. 240.15c2-1; 17 C.F.R. 240.15c3-3; 17 C.F.R. 240.17a-3; 17 C.F.R. 240.17a-4; 17 C.F.R. 240.17a-5; 

17 C.F.R. 240.17a-11; 17 C.F.R. 240.17a-13.

repository that will receive, consolidate, and retain the trade and order data reported 

as part of the CAT. For more information on the CAT, please see Principle 33, 

Question 6(b), below.

Broker Dealer Financial Responsibility

As discussed in SEC staff’s 2014 self-assessment, with respect to broker-dealers, the SEC has 

developed rules and processes designed to monitor, mitigate, and appropriately manage 

risk (systemic and otherwise). TM is responsible for overseeing broker-dealers and 

administers the SEC’s financial responsibility rules governing broker-dealers.83 These rules 

are designed to help ensure that broker-dealers operate with a level of capital that is 

sufficient to protect the broker-dealer’s counterparties and customers in the event that the 

broker-dealer fails. In this regard, the SEC’s financial responsibility rules are intended to help 

ensure that customer assets are available for return to customers if a broker-dealer fails. 

Furthermore, the SEC’s financial responsibility rules for broker-dealers are designed to help 

minimize the impact of the failure of a broker-dealer on counterparties and customers and

are designed to minimize the systemic risk and follow-on effects to the financial system that 

may be associated with the failure of any broker-dealer, including any large broker-dealer 

that may be part of a large financial firm.

TM has a staff of quantitative and analytical experts to evaluate risk measurements used by 

broker-dealers and other financial regulators. This expert staff also participates in the 

ongoing supervision of certain large broker-dealers, also known as alternative net capital 

(ANC) broker-dealers, that may be approved to use value-at-risk (VAR) models to compute 

deductions for market or credit risk in lieu of standardized “haircuts” as provided in the SEC’s 

net capital rule, or that are owned by a holding company supervised by the SEC pursuant to 

Section 17(h) of the Exchange Act. Such oversight includes regular meetings with the 

broker-dealers’ senior risk managers as well as those persons at the broker-dealers 

responsible for, among other things, internal audit, price verification results, and the 

management of the firm’s balance sheet. TM’s broker-dealer office also has an inspection 

unit that augments monitoring efforts with testing of broker-dealers’ controls. In 

conducting all of its work, TM’s broker-dealer office staff regularly collaborates with staff at 

other U.S. regulators, such as the Federal Reserve, and international colleagues, such as the 

U.K. Prudential Regulatory Authority and Germany’s BaFin. Such collaboration helps ensure 

that regulatory efforts are coordinated to the maximum possible extent.

Oversight of Financial Market Utilities 
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84 Section 803(6)(A) of the Dodd-Frank Act defines a “financial market utility” as “any person that manages 

or operates a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or 

other financial transactions among financial institutions or between financial institutions and the person.” 12 

U.S.C. § 5462(6)(A).

85 See, e.g., 17 C.F.R. 240.17Ad-22(B)(2).

86 See 17 C.F.R. § 240.17Ad-22(e).

87 See Standards for Covered Clearing Agencies, Release No. 34-78961 (Sep. 28, 2016), available at 

https://www.sec.gov/rules/final/2016/34-78961.pdf.

88 See Standards for Covered Clearing Agencies, Release No. 34-78961 (Sep. 28, 2016), available at 

https://www.sec.gov/rules/final/2016/34-78961.pdf (“. . . the Commission believes that the requirements 

applicable to clearing agencies set forth in the Exchange Act and the rules thereunder, including the rules 

adopted today, are consistent with the standards set forth in the PFMI.”).

Financial market utilities (FMUs)84 provide the essential infrastructure to clear and settle 

payments and other financial transactions upon which the financial markets and the broader 

economy rely to function effectively.

As noted in SEC staff’s 2014 self-assessment, as part of its supervisory activities, SEC staff 

closely monitors the operations and financial risk management of each clearing agency, 

including their respective stress testing programs. In the United States, the clearance and 

settlement of securities transactions generally occur through several registered central 

counterparties (CCPs) and registered central securities depositories (CSDs), which operate 

independently from exchanges or trading systems and are registered with the SEC as 

clearing agencies under the Exchange Act. 

In October 2012, the SEC adopted rules establishing standards for the risk management and 

operation of all SEC-registered clearing agencies. The rule requires a review of margin 

requirements and related risk-based models and parameters (including stress testing) on at 

least a monthly basis.85

As noted in SEC staff’s 2014 self-assessment, the SEC adopted in 2012 Rule 17Ad-22 –

Clearing Agency Standards – (a) through (d) under the Exchange Act to strengthen the 

substantive regulation of registered clearing agencies, promote the safe and reliable 

operation of registered clearing agencies, and improve efficiency, transparency, and access 

to registered clearing agencies. Since then, in 2016, the SEC adopted Rule 17Ad-22(e) under 

the Exchange Act.86 Rule 17Ad-22(e) built on the existing framework for clearing agencies 

by establishing new requirements for certain clearing agencies referred to as “covered 

clearing agencies”87 (the covered clearing agency standards are described in more detail in 

the response to the Principle 37, Question 1(a), below). In developing Rule 17Ad–22(e), the 

SEC considered the Committee on Payments and Market Infrastructures (CPMI)-IOSCO 

Principles for Financial Market Infrastructures (PFMI). Specifically, the SEC stated that the 

Commission believes that the requirements applicable to clearing agencies set forth in the 

Exchange Act and the rules thereunder, including Rule 17Ad-22(e), are consistent with the 

standards set forth in the PFMI.88 
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89 See Dodd-Frank § 807, 12 U.S.C. § 5466. 

Rule 17Ad-22(e) establishes requirements for covered clearing agencies in the areas of 

general organization, financial risk management, settlement, CSDs and exchange-of-value 

settlement systems, default management, business and operational risk management, 

access, efficiency, and transparency.

Finally, as noted in SEC staff’s 2014 self-assessment, the Dodd-Frank Act provided the SEC 

with additional authority over FMUs for which it is the supervisory agency and that the FSOC 

designates as systemically important. In July 2012, FSOC designated eight FMUs as 

systemically important, including four for which the SEC acts as the supervisory agency.

The Dodd-Frank Act provides a framework for an enhanced supervisory regime for these 

designated FMUs. It permits the SEC to prescribe regulations for risk management and 

operations and also directs the SEC to consider relevant international standards and existing 

prudential requirements for the designated FMUs it supervises. The SEC is also required to 

examine these FMUs annually.89 FRB staff also participates in developing the scope and 

methodology of examinations of CCPs that are designated FMUs, and may participate (in 

practice, does participate) with CFTC or SEC staff in all examinations.

The Dodd-Frank Act also establishes a process for a designated FMU to submit to the SEC, 

with a copy to the Federal Reserve, advance notices identifying changes to its rules, 

procedures, or operations that could materially affect the nature or level of risk presented by 

the FMU. In June 2012, the SEC adopted rules that establish procedures for how it will 

address these advance notices. The SEC has considered a significant number of such notices 

since those rules were adopted.

OTC Derivatives

As noted in SEC staff’s 2014 self-assessment, the Dodd-Frank Act established a new 

oversight regime for the OTC derivatives marketplace. Title VII of the Dodd-Frank Act 

requires the SEC to regulate “security-based swaps,” or SBS, the CFTC to regulate swaps and 

the SEC and CFTC jointly to regulate mixed swaps. This regime encompasses the 

registration and comprehensive regulation of dealers and major participants, as well as 

requirements related to clearing, trade execution, regulatory reporting, and public 

dissemination of anonymized trade data.

Since SEC staff’s 2014 self-assessment, the SEC has continued to implement its regulatory 

framework for SBS consistent with Title VII of the Dodd-Frank Act. In particular, since 2014, 

the SEC has adopted rules and guidance regarding (i) capital and margin requirements for 

SBS dealers (SBSDs) and major SBS participants (described in more detail in response to 

Principle 31, Question 6(b), below) and segregation requirements for SBSDs (described in 
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90 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major 

Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, Release No. 34-

86175 (Jun. 21, 2019), available at https://www.sec.gov/rules/final/2019/34-86175.pdf.

91 See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Release No. 

34-74244 (Feb. 11, 2015), available at https://www.sec.gov/rules/final/2015/34-74244.pdf, amended by Release 

No. 34-78321 (Jul. 14, 2016), available at https://www.sec.gov/rules/final/2016/34-78321.pdf.

92 See Security-Based Swap Data Repository Registration, Duties, and Core Principles, Release No. 34-

74246 (Feb. 11, 2015), available at https://www.sec.gov/rules/final/2015/34-74246.pdf. 

93 See Access to Data Obtained by Security-Based Swap Data Repositories, Release No. 34-78716 (Aug. 29, 

2016), available at https://www.sec.gov/rules/final/2016/34-78716.pdf. 

94 See Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants, 

Release No. 34-75611 (Aug. 5, 2015), available at https://www.sec.gov/rules/final/2015/34-75611.pdf. 

95 See Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap 

Participants, Release No. 34-77617 (Apr. 16, 2016), available at https://www.sec.gov/rules/final/2016/34-

77617.pdf. 

96 See Trade Acknowledgment and Verification of Security-Based Swap Transactions, Release No. 34-78011 

(Jun. 8, 2016), available at https://www.sec.gov/rules/final/2016/34-78011.pdf. 

97 See Applications by Security-Based Swap Dealers or Major Security-Based Swap Participants for 

Statutorily Disqualified Associated Persons to Effect or Be Involved in Effecting Security-Based Swaps, Release No. 

34-84858 (Dec. 19, 2018), available at https://www.sec.gov/rules/final/2018/34-84858.pdf. 

98 See Treatment of Certain Communications Involving Security-Based Swaps That May Be Purchased Only 

By Eligible Contract Participants, Release No. 33-10450 (Jan. 5, 2018), available at 

https://www.sec.gov/rules/final/2018/33-10450.pdf. 

99 See Security-Based Swap Transactions Connected With a Non-U.S. Person’s Dealing Activity That Are 

Arranged, Negotiated, or Executed by Personnel Located in a U.S. Branch or Office or in a U.S. Branch or Office of 

an Agent; Security-Based Swap Dealer De Minimis Exception, Release No. 34-77104 (Feb. 10, 2016), available at 

https://www.sec.gov/rules/final/2016/34-77104.pdf. 

more detail in response to Principle 31, Question 12, below);

90 (ii) reporting of SBS to data 

repositories (described in more detail in response to Principle 33, Question 6(d), below),91

(iii) registration of SBS data repositories (described in more detail in response to Principle 33, 

Question 6(d), below),92 (iv) authorities’ access to SBS data held in SEC-registered data 

repositories,93 (v) registration of SBSDs and major SBS participants (described in more detail 

in response to Principle 29, Question 8, below),94 (vi) business conduct standards for SBSDs 

and major SBS participants (described in more detail in response to Principle 31, Question 6, 

below),95 (vii) trade acknowledgment and verification of SBS transactions (described in more 

detail in response to Principle 31, Question 4, below),96 (viii) an application process for 

SBSDs and major SBS participants to allow statutorily disqualified persons to effect or be 

involved in effecting SBS trades,97 and (ix) treatment of certain communications involving 

SBS.98 The Commission also has adopted cross-border rules and guidance regarding 

registration thresholds for SBSDs and major SBS participants and the application of the Title 

VII framework to cross-border transactions.99 

Investment Management
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40 SECURITIES AND EXCHANGE COMMISSION

100 See Form ADV, available at https://www.sec.gov/files/formadv.pdf. Note that this form must be updated 

annually. In addition, this form must be updated promptly (i.e. in addition to the annual updates) if, among other 

things, certain information previously provided becomes materially inaccurate or otherwise changes.

101 See Form N-MFP, available at https://www.sec.gov/files/formn-mfp.pdf. 

102 See Form PF, available at https://www.sec.gov/files/formpf.pdf. Please see SEC staff’s 2014 selfassessment in response to Principle 6, Question 3 for additional information regarding Form PF. 

103 See Form N-PORT, available at https://www.sec.gov/files/formn-port.pdf; see also Amendments to the 

Timing Requirements for Filing Reports on Form N-PORT, Release No. IC-33384 (Mar. 6, 2019), available at 

https://www.sec.gov/rules/interim/2019/ic-33384.pdf. 

104 See Form N-CEN, available at https://www.sec.gov/files/formn-cen.pdf. 

As noted in SEC staff’s 2014 self-assessment, the SEC collects data about the activities of the 

entities it oversees. For example, the SEC is responsible for overseeing investment 

companies, including mutual funds, exchange-traded funds (ETFs), and hedge funds, and the 

activities of registered investment advisers. SEC rules require investment companies and 

registered investment advisers to provide data that facilitate the SEC’s monitoring of the 

asset management industry in several key areas.

 

• Form “Uniform Application for Investment Adviser Registration and Report by 

Exempt Reporting Advisers” (Form ADV). Registered investment advisers must 

report information about their investment management business, including (among 

other things) certain information about private funds under management and 

separately managed accounts;100

• Form “Monthly Schedule of Portfolio Holdings of Money Market Funds” (Form NMFP). Money market funds must report monthly portfolio holdings and certain other 

information;101 and 

• Form PF. SEC-registered investment advisers with at least $150 million in private 

fund assets under management must report certain data about their private funds 

confidentially;102 

Since SEC staff’s 2014 self-assessment, the Commission has adopted new reporting 

requirements that will provide SEC staff with additional data that may be used for, among 

other purposes, monitoring and identifying risks that could be systemic. 

• Form “Monthly Portfolio Investments Report” (Form N-PORT). In 2016, the SEC 

adopted rules and a form that require most registered investment companies, 

including mutual funds other than money market funds, ETFs, and closed-end funds, 

to report quarterly public and monthly non-public portfolio holdings and other 

information, each quarter, such as the fund’s assets and liabilities, risk metrics, 

information regarding monthly returns, and flow information);103 and

• Form “Annual Report for Registered Investment Companies” (Form N-CEN).

104 In 

2016, the SEC adopted rules and a form that require most registered investment 
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105 Form N-CEN asks whether an affiliated person, promoter, or principal underwriter of the registrant or an 

affiliated person of such person provided any form of financial support to the registrant during the reporting 

period. Form N-CEN defines “a provision of financial support” to include any (i) capital contribution; (ii) purchase 

of a security from a money market fund in reliance on rule 17a-9 under the Investment Company Act; (iii) 

purchase of any defaulted or devalued security at fair value reasonably intended to increase of stabilize the value 

or liquidity of the registrant’s portfolio; (iv) execution of letter of credit or letter of indemnity; (v) capital support 

agreement (whether or not the registrant ultimately received support); (vi) performance guarantee; or (vii) other 

similar action reasonably intended to increase or stabilize the value or liquidity of the registrant’s portfolio. Form 

N-CEN further provides that “a provision of financial support” does not include any (i) routine waiver of fees or 

reimbursement of registrant’s expenses; (ii) routine inter-fund lending; (iii) routine inter-fund purchases of 

registrant’s shares; or (iv) action that would qualify as financial support that the board of directors has otherwise 

determined not to be reasonably intended to increase or stabilize the value or liquidity of the registrant’s 

portfolio.

106 Forms N-PORT and N-CEN improved SEC data collection in two ways, first, by updating and enhancing 

the content of the data collected and, second, by requiring data to be submitted in a structured XML data format 

rather than in unstructured text files. 

companies, including mutual funds, closed-end funds, unit investment trusts (UITs), 

and ETFs, to report certain census-like information on an annual basis, including 

information about their securities lending activities and any provision of financial 

support105 and, for ETFs, information about their authorized participants and 

creation/redemption activities.106 

The SEC also has staff dedicated to analyzing the data collected from investment 

management firms. The response to Principle 6, Question 2 in SEC staff’s 2014 selfassessment included a discussion of the Division of Investment Management’s (IM) Risk and 

Examinations Office (REO), established in 2012, which has been renamed the “Analytics 

Office.” The Analytics Office includes quantitative analysis experts who manage, monitor, 

and analyze data collected from registrants together with other industry and market data. 

The Analytics Office also includes examination staff and industry experts who work together 

with these quantitative analysts to provide ongoing financial and risk analysis of the asset 

management industry, gather and analyze operational information directly from asset 

management industry participants, and otherwise maintain industry knowledge and 

technical expertise relating to the asset management industry. These activities inform the 

SEC’s perspective on the asset management industry, the role of registered investment 

companies and private funds in broader financial markets, and how markets and geopolitical 

events may affect the asset management industry. 

For example, SEC staff’s analysis of data from Forms N-MFP and PF informed the 

Commission’s understanding of the effects of its money market reform implementation and 

SEC rulemaking and other initiatives to promote effective liquidity risk management by 

registered investment companies. The Analytics Office also supports the SEC’s participation 

in the FSOC in connection with asset management activities. SEC staff also uses data 

collected from firms to assist the SEC in efficiently allocating its examination and 

enforcement resources by helping staff to prioritize particular firms for inspections and 

examinations and to identify outliers for specific areas of interest, such as identifying firms 

holding complex products that are at increased risk of valuation manipulation.
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The Analytics Office has developed various analytical tools to use industry data, including 

data collected from registrants on, for example, Forms ADV, PF, N-MFP, and the recently 

implemented Forms N-CEN and N-PORT, in support of monitoring registered investment 

advisers, registered investment companies, and private funds, consistent with systems and 

controls designed to protect the confidentiality of information provided by registrants where 

required by applicable law or SEC rules. These tools enhance SEC staff’s ability to assess 

large volumes of data and streamline analysis of the data by automating certain analytical 

processes. Relevant to monitoring and assessing systemic risk, these analytical tools have 

enhanced SEC staff’s ability to gather and analyze operational information directly from 

participants in the asset management industry, to gain insight into developing market risks, 

understand the effects of macroeconomic developments, and identify particular funds or 

advisers that may require additional monitoring. Specifically, the Analytics Office works to:

• identify registered investment companies and private funds based on one or more 

areas of policy interest, such as type of investment strategy, types of portfolio 

investments, securities lending activities, extent of leverage, and use of financial 

support;

• monitor changes and trends in the asset management industry, such as trends in 

exposures, asset composition, and trading activity; 

• identify “outliers” among investment companies and private funds based on, for 

example, performance, investment exposures, and liquidity; and

• empirically test claims made in the financial press or other public sources relating to 

the asset management industry.

The Analytics Office’s use of Form PF illustrates how the SEC harnesses data to identify 

trends and develop analyses that deepen SEC staff’s understanding of private funds, private 

fund advisers and the markets in which they participate. The data set resulting from Form PF 

has provided SEC staff with a better perspective of the trading strategies and other activities 

of private funds, and of how private funds and their advisers may be affected by market and 

geopolitical events. Through this analysis, SEC staff may consider persistent questions and 

test perceptions – and in some cases, misconceptions – about the activities of private funds 

and the effects of these activities in the markets the SEC regulates. For example, SEC staff 

uses Form PF data to assess funds’ use of borrowing and leverage, liquidity trends (including 

portfolio, investor and financing liquidity), funds’ use of certain strategies such as high 

frequency trading, and how private fund advisers use risk management tools such as stress 

tests and VaR reporting. SEC staff also analyzes Form PF data to determine how private 

funds and private fund advisers might be affected by market and geopolitical events. 

Information from Form PF is also used to assess the potential impact of rulemaking 

proposals and analyze impacts of rulemaking on markets and market participants, including, 

for example, the effects of money market reform implementation. The Analytics Office also 
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107 SEC quarterly private funds statistics are available at https://www.sec.gov/divisions/investment/privatefunds-statistics.shtml. 

108 See Money Market Fund Reform, Release Nos. 33-9616, IA-3879; IC-31166; (Jul. 23, 2014), available at 

https://www.sec.gov/rules/final/2014/33-9616.pdf.

109 See Liquidity Risk Management Programs, Release Nos. 33- 10233; IC- 32315 (Oct. 13, 2016), available at 

https://www.sec.gov/rules/final/2016/33-10233.pdf; See also Investment Company Act rule 22e-4.

110 See Form N-LIQUID, available at https://www.sec.gov/files/formn-liquid.pdf.

111 See Liquidity Risk Management Programs, Release Nos. 33- 10233; IC- 32315 (Oct. 13, 2016), available at 

https://www.sec.gov/rules/final/2016/33-10233.pdf; See also ICA rules 22e-4, 30b1-10; and Form N-LIQUID, 

available at https://www.sec.gov/files/formn-liquid.pdf.

issues a quarterly public report, “Private Funds Statistics”, which provides analyses of 

aggregated Form PF data, including information about industry trends.107

With regard to money market funds, as noted in SEC staff’s 2014 self-assessment, in July 

2014, the SEC adopted amendments to the rules that govern money market mutual funds

(MMFs). The amendments made structural and operational reforms to address money 

market funds’ susceptibility to heavy redemptions in times of stress, improve their ability to 

manage and mitigate potential contagion from such redemptions, and increase the 

transparency of their risks, while preserving, as much as possible, their benefits.108

With regard to liquidity, since SEC staff’s 2014 self-assessment, the SEC has adopted rules 

and enhanced data collection designed to promote effective liquidity risk management 

throughout the open-end fund industry, thereby reducing the risk that funds will be unable 

to meet their redemption obligations and mitigating dilution of the interests of fund 

shareholders.109 For additional information regarding liquidity risk management, please see 

response to Principle 24, Question 24(h), below. 

In addition, Form “Current Report Open-end Management Investment Company Liquidity” 

(Form N-LIQUID) requires funds to confidentially notify the SEC when the fund’s level of 

illiquid investments that are assets exceeds 15% of its net assets or when its highly liquid 

investments fall below a certain minimum for more than a specified period of time, which 

assists SEC staff in monitoring the reporting fund and other funds that may have 

comparable liquidity characteristics and could be similarly affected by market events.110

Form N-LIQUID was adopted in October 2016, along with Investment Company Act rules 

22e-4 and 30b1-10, in order to address trends, such as shorter settlement periods, open-end 

fund growth, and more complex markets, and provide investors with increased protection 

regarding how liquidity in their open-end funds is managed, thereby reducing the risk that 

funds will be unable to meet redemption or other legal obligations, and mitigating dilution 

of the interests of fund shareholders. These reforms also were intended to give investors 

better information to make investment decisions, and to give the SEC better information to 

conduct comprehensive monitoring and oversight of an ever-evolving fund industry.111

SEC Participation in the FSOC and Interagency Coordination on Market Risk Issues

The SEC also plays an active and important role in the FSOC. 
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By way of background, in response to the financial crisis of 2007 to 2009, the United States 

Congress established FSOC to bring together the United States financial regulatory 

community to identify and respond to emerging threats to financial stability. The statutory 

purposes of FSOC are: (i) to identify risks to the financial stability of the United States that 

could arise from the material financial distress or failure, or ongoing activities, of large, 

interconnected bank holding companies or nonbank financial companies, or that could arise 

outside the financial services marketplace; (ii) to promote market discipline, by eliminating 

expectations on the part of shareholders, creditors, and counterparties of such companies 

that the government will shield them from losses in the event of failure; and (iii) to respond 

to emerging threats to the stability of the U.S. financial system.

The Chairman of the SEC is one of ten voting members of FSOC. In addition to voting on 

proposed FSOC actions, the SEC Chairman actively contributes to FSOC deliberations and 

the development of FSOC’s priorities and agenda. 

SEC staff across the agency also participates in and contribute to the work of FSOC in several 

ways. For example, SEC staff provides substantive assistance to Treasury staff in the 

development of FSOC’s annual report. SEC staff also participate in FSOC’s staff-led 

committees, including the: 

• FSOC’s Systemic Risk Committee, which serves as a forum for FSOC member agency 

staff to identify and analyze potential risks.

• Regulation and Resolution Committee, which supports FSOC in its duties to identify 

potential gaps in regulation that could pose risks to U.S. financial stability. 

• FMU Committee, which supports FSOC’s work in monitoring and evaluating risks 

relating to FMUs and their activities. 

The SEC Chairman also participates in the Presidential Working Group on financial markets, 

an inter-agency group that focuses on risk and economic issues. 

Separate from formal working groups, the SEC staff regularly participates in conference calls 

and meetings with other regulators to share information, observations and analysis on 

market trends, dynamics and risks. 

(ii) contributing to processes in relation to other financial markets.

[This is a new question for the 2020 FSAP]

Yes. The SEC contributes to processes in relation to other financial markets. The SEC works 

closely with other regulatory and enforcement authorities through a variety of 

arrangements, including MOUs (see response to Principle 1, Question 2(d), above), and 

through groups such as the FSOC (as noted in response to Principle 6, Question 1(a), above), 

IOSCO, and the FSB (as noted in response to Principle 6, Question 3(b), below). 

(b) Is there a clear definition of systemic risk within the jurisdiction?
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112 See https://www.sec.gov/about/offices/oia/oia_regcooperation.shtml. For a complete list of the SEC’s 

MOUs for supervisory cooperation, see Cooperative Arrangements with Foreign Regulators, available at 

http://www.sec.gov/about/offices/oia/oia_cooparrangements.shtml.

[This is a new question for the 2020 FSAP]

No. "Systemic risk" is not defined in any of the SEC’s primary governing statutes (i.e., in the 

Securities Exchange Act of 1934, Securities Act of 1933, Investment Advisers Act of 1940, 

the Investment Company Act of 1940), or in the Dodd–Frank Wall Street Reform and 

Consumer Protection Act of 2010 nor is the term defined in the SEC's regulations. 

2. Does the regulator have, or contribute to a regulatory process (which may be focused 

on the securities market or be cross-sectoral) through formalized arrangements to 

identify, monitor, mitigate and appropriately manage systemic risk, according to the 

complexity of the regulator’s market consistent with its mandate and authority?

Yes. Please refer to response to Principle 1, Question 2(d) and Principle 6, Question 1, above, 

as well as SEC staff’s 2014 self-assessment in response to Principle 6, Question 3.

3.

(a) Is there an effective information sharing framework in place with other 

regulators and supervisors within the jurisdiction covering systemic risks, 

which is supported by formal cooperation or institutional arrangements?

Yes. There is an effective information-sharing framework in place between the SEC and 

other regulators and supervisors within the jurisdiction covering systemic risks, which is 

supported by formal cooperation or institutional arrangements. Please see response to 

Principle 1, Question 2(d), and Principle 6, Question 1, above, as well as SEC staff’s 2014 selfassessment in response to Principle 6, Question 3.

(b) Does the regulator communicate information and data about identified 

systemic risk(s) with regulators in other jurisdictions under established 

procedures or arrangements and/or supported by bilateral and/or multilateral 

memoranda of understanding (MoUs)?

Yes. As noted in SEC staff’s 2014 self-assessment response to Principle 6, Question 3, the 

SEC has developed, and continues to develop, arrangements to facilitate communication 

and cooperation with foreign regulators on supervisory issues, including those that might 

have systemic implications.112 MOUs for supervisory cooperation establish clear 

mechanisms for consultation, cooperation, and exchange of supervisory information, 

supported by safeguards for confidential or non-public information. These MOUs reduce 

the need to address supervisory information sharing on an ad hoc basis.
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113 See https://www.iosco.org/library/pubdocs/pdf/IOSCOPD322.pdf. 

The SEC’s MOUs for supervisory cooperation enhance the SEC staff’s ability to share 

information about regulated entities, such as investment advisers, broker-dealers, NRSROs, 

exchanges, and clearing agencies. Such information may include routine supervisory 

information and other information regulators need to monitor risk concentrations, identify 

emerging systemic risks, and better understand a globally active entity’s compliance culture. 

These MOUs also facilitate the ability of the SEC and its counterparts to conduct onsite 

examinations of SEC-registered entities located outside the U.S.

The SEC has entered into MOUs that cover information sharing and cooperation related to, 

among other things, the registration of firms with both the SEC and a foreign authority; the 

affiliates of a financial group with headquarters in either regulator’s jurisdiction; the 

oversight of markets in the United States and a foreign jurisdiction affiliated through a 

common ownership structure; and the sharing of nonpublic issuer-specific information 

relating to the application of International Financial Reporting Standards (IFRS). These 

MOUs are consistent with IOSCO’s Principles for Cross-Border Cooperation, published in May 

2010.113

SEC staff also participates in supervisory colleges for certain complex global financial 

institutions. These colleges create a framework for ongoing dialogue and cooperation 

among multiple financial authorities with a view to enhancing the risk assessment of 

internationally active entities and to supporting effective supervision of such entities. The 

SEC also cooperates with its counterparts on supervisory matters on an ad hoc basis and 

engages in bilateral and multilateral consultations with counterpart regulators to discuss 

issues of general regulatory concern that exist at a higher, more market-wide level. 

In addition, the SEC is a member of the FSB and the SEC Chairman serves as the SEC’s 

representative to the FSB’s Plenary and Steering Committee. Other Commissioners and SEC 

staff are members of various FSB standing committees and working groups. In those roles, 

the SEC Chairman, Commissioners, and SEC staff substantially contribute to the FSB’s 

ongoing monitoring and assessment of vulnerabilities affecting the global financial system, 

in particular with regard to securities market developments and their implications for 

regulatory policy. Most notably, SEC staff has been actively engaged in recent years in work 

relating to non-bank financial intermediation and emerging financial technologies. One of 

the Commissioners also serves as the SEC’s representative on the FSB’s Standing Committee 

on Assessment of Vulnerabilities (SCAV), which focuses on macro-financial related 

vulnerabilities and risks arising from structural weaknesses in the financial system (such as 

misaligned incentives, amplification mechanisms, or other forms of potential market stress).

The SEC Chairman and staff also engage in discussions about potential systemic risks 

through participation in the IOSCO Board, committees and working groups. A number of 

IOSCO projects seek to assist members with identifying the appropriate tools, data, and 

information needed to identify, monitor and mitigate systemic and emerging risks in their 

jurisdictions. These projects typically engage SEC staff across the agency. The SEC Chief 

Economist serves as the SEC’s representative on IOSCO’s Committee on Emerging Risk, 
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114 Available at https://www.sec.gov/reports-and-publications/strategic-plan/reports-strategic-plan-2018-

2022. 

115 See SEC Names Gabriel Benincasa As Its First Chief Risk Officer (Feb. 28, 2019), available at 

https://www.sec.gov/news/press-release/2019-24. 

which serves as a forum for IOSCO members to exchange views on emerging risk.

As noted in response to Principle 6, Question 1, above, in March 2019, the SEC announced 

the appointment of a Senior Counsel and Policy Advisor for Market and Activities-Based 

Risk. The Senior Counsel and Policy Advisor serves as Chairman Clayton’s Deputy 

Representative to FSOC and as a primary liaison with respect to these matters to other 

federal agencies and international organizations.

4. Does the regulator have appropriately skilled human and adequate technical 

resources to support effective risk arrangements?

[This is a new question for the 2020 FSAP]

Yes. The SEC’s 2018 – 2022 Strategic Plan114 includes initiatives that support continued 

investment in our human capital, modernization of key information technology systems, and 

strengthening the agency’s cybersecurity and enterprise risk management. In fact, the 

agency recently hired a Chief Risk Officer who will help coordinate its enterprise risk 

management efforts across the agency and promote a culture that emphasizes the 

importance of data security and operational resilience throughout SEC Divisions and 

Offices.

115

To stay abreast of market knowledge and trends, expand its capability to perform high 

quality economic and statistical analysis, and develop and leverage analytic tools that sort 

through market and disclosure data to detect risks, the agency’s staffing strategy is focused 

on recruiting and retaining highly qualified and highly accomplished professionals who 

understand the various risks within and throughout the financial industry. Additionally, the 

SEC offers a robust training program that allows our staff to stay current with market trends 

and developments. SEC staff also routinely participates in industry and professional 

conferences where they interact with their counterparts in the financial and securities 

industry and with other regulators.

Human Resources

Examples of the SEC’s human resources in place to support effective risk arrangements 

include: 

• Senior Counsel and Policy Advisor for Market and Activities-Based Risk. Senior 

officer responsible for managing and coordinating the agency’s efforts to identify, 

monitor and respond to market risks—including activities-based risks—affecting the 

U.S. capital markets. Serves as Chairman’s Deputy Representative to the FSOC and 

as a primary liaison with respect to these matters to other federal regulatory 

agencies and international organizations.
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• Senior Advisor to the Chairman for Cybersecurity Policy. Senior advisor responsible 

for leading efforts across SEC Divisions and Offices to manage cybersecurity 

priorities, strengthen cyber incident response planning and enhance threat 

intelligence capabilities. Also responsible for coordinating cybersecurity policy 

efforts across federal financial regulators, enhancing the SEC's ability to assess cyberrelated market risks and improving the SEC's cybersecurity posture.

• Chief Risk Officer. Responsible for coordinating the agency’s continued efforts to 

identify, monitor, and mitigate key risks facing the Commission. The Chief Risk 

Officer also serves as a key adviser on other matters related to enterprise risks and 

controls. 

• TM’s Office of Risk Supervision (ORS). SEC staff in this office participates in a variety 

of ongoing monitoring reviews focused on clearing agency risk frameworks and 

processes. As part of this process, SEC staff reviews a clearing agency’s governance 

framework, which may include: compliance processes; internal audit findings and 

resolution; board of directors’ interaction; and risk management framework, 

including new products/initiative review and approvals, margin methodology, backtesting and stress-testing procedures, risk monitoring practices, model governance 

practices, and sizing and allocation of total financial resources.

• TM’s Office of Analytics and Research (OAR). SEC staff in this office apply specialized 

subject matter expertise and quantitative analytical skills to the monitoring of 

markets, the analysis of significant market disruptions, and the conduct of market 

structure research aimed at identifying risks and potential policy responses. 

• IM’s Analytics Office. SEC staff in this office coordinates with other SEC Divisions and 

Offices to analyze, share expertise, and foster enhanced monitoring of the asset 

management industry. SEC staff’s work has recently been enhanced by new data 

collection requirements for investment advisers and funds, as well as development of 

quantitative data analysis tools. See response to Principle 6, Question 1(a)(i), above, 

for additional information on the Analytics Office. 

• OCIE’s Office of Risk and Strategy (ORS). ORS was established in 2016 to consolidate 

and streamline OCIE’s risk assessment, market surveillance, large firm monitoring 

and quantitative analysis teams, and provide operational risk management and 

organizational strategy for OCIE’s examination program. ORS is responsible for 

supporting OCIE’s risk-based and data-driven processes through the identification of 

risks and emerging issues in the financial markets. It also supports OCIE’s exam 

targeting and selection efforts, resource allocation, and investment in quantitativebased examination initiatives. The following teams are within ORS:

o OCIE’s Quantitative Analytics Unit (QAU). OCIE’s QAU is staffed by financial 

engineers who employ quantitative techniques and modeling to focus on 

areas that pose substantial risk, such as potential fraud and market 
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116 See https://www.sec.gov/news/testimony/testimony-04-21-16.html. 

abuse. QAU’s expertise provides valuable support to the SEC’s examinations 

of investment advisers and investment companies by providing analysis of 

large data sets and by creating and deploying customized data-analytic 

tools. 

o OCIE’s Risk Analysis Examination (RAE) Team. The RAE team uses technology 

to conduct examinations of some of the nation’s largest broker-dealers, in 

particular clearing firms. By analyzing transactions cleared by firms over 

several years, RAE has identified possible problematic behavior across 

multiple firms, including, among other things, unsuitable recommendations, 

misrepresentations, inadequate supervision, churning, reverse churning, and 

load waivers.116 

o OCIE’s Office of Risk Assessment and Surveillance (RAS). SEC staff in this 

office aggregates and analyzes data from SEC filings from registrants and 

individuals to identify activity that may warrant examination. This office has 

led the development and implementation of predictive risk models, 

dashboards to enhance the analysis and visual display of data, and 

technology to perform text analytics on certain registrant filings.

o OCIE’s Large Firm Monitoring Program (LFM). LFM has an ongoing 

engagement with select large firms and through this engagement keeps 

abreast of both firm-specific and industry-wide business, risk, and control 

issues and themes. The insights gained through these efforts are used to 

support the overall risk-based examination selection and scoping process 

used by OCIE. LFM focuses on certain large and complex firms that could 

pose significant risk to the various markets and to their customers due to 

their size, complexity, and connectivity with other large firms and financial 

institutions.

o OCIE’s Technology Control Program (TCP). In 2014, OCIE created the TCP, 

which conducts examinations of entities covered by Regulation SCI, 

discussed in Question 6(a)(i), above, to evaluate, among other things, 

whether they have effectively implemented and enforced written policies and 

procedures required by Regulation SCI. TCP’s Cyberwatch program conducts 

monitoring and analysis of SCI events reported by SCI entities. In addition to 

its responsibilities under Regulation SCI, TCP staff also conducts technology 

focused examinations of non-SCI entities, and offers technical assistance to 

other OCIE examination programs on other technology-related issues that 

may arise during their examinations.

• DERA’s Office of Risk Assessment (ORA). In 2014, DERA created its Office of Risk 

Assessment (ORA), which provides data-driven risk assessment tools and models to 

enhance a wide range of SEC activities. ORA supports supervisory, surveillance, and 
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117 See https://www.sec.gov/news/press-release/2017-176. 

118 See https://www.sec.gov/finhub. 

119 See https://www.sec.gov/news/press-release/2018-102. 

investigative programs related to corporate issuers, broker-dealers, investment 

advisers, and number of OTC securities markets.

• Enforcement’s Center for Risk and Quantitative Analytics (CRQA). SEC staff in this 

office focuses on developing and using data, technology, and analytics to proactively 

identify potential securities law violations and support Enforcement investigations, 

the Tips, Complaints and Referrals (TCR) and Suspicious Activity Report (SAR) review 

programs, and initiatives.

• Enforcement’s Cyber Unit and the Retail Strategy Task Force. In 2017, Enforcement 

announced two new initiatives to build on its ongoing efforts to address cyberbased threats and protect retail investors.117 The Cyber Unit focuses on cyberrelated trading schemes and abusive practices, dark web-related conduct, 

cybersecurity and related internal controls of regulated entities and large market 

participants, digital currencies and initial coin offerings, and issuer disclosure of 

cybersecurity risks and events. Furthermore, the Retail Strategy Task Force is 

charged with developing proactive, targeted initiatives to identify misconduct 

impacting retail investors, leveraging data analytics and technology. 

• Corporation Finance’s Office of Risk and Strategy. SEC staff in this office focuses on 

the division’s risk management and develops risk-based approaches to the Division’s 

regulatory practices, primarily relating to disclosure reviews. 

• Strategic Hub for Innovation and Financial Technology (FinHub). In 2018, the SEC 

launched FinHub as a platform for SEC staff to acquire and disseminate information

and engage with industry and the public on innovative ideas and technological 

developments on FinTech-related issues and initiatives, such as distributed ledger 

technology and digital assets, automated investment advice, digital marketplace 

financing, and artificial intelligence/machine learning.118 Staff from across the SEC’s 

Divisions and Offices contributes to the work of the FinHub. Relatedly, in 2018, the 

SEC named an Associate Director in the Division of Corporation Finance as the 

Senior Advisor for Digital Assets and Innovation to coordinate efforts across SEC 

Divisions and Offices regarding the application of U.S. securities laws to emerging 

digital asset technologies and innovations, including initial coin offerings and digital 

assets.119 

Technical Resources

SEC also has technical resources to support effective risk arrangements. Some of those 

resources include:
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120 See https://www.sec.gov/marketstructure/midas.html#.XMrZ8re6NEY. 

• DERA’s Broker-Dealer Risk Assessment (BDRA) model. DERA’s BDRA is currently 

being used by OCIE’s National Examination Program (NEP) as part of its exam 

candidate selection process. The framework provided by the BDRA helps to prioritize 

the examination of approximately 3,700 registered broker-dealers and to focus 

OCIE’s resources to firms with higher risk profiles by detecting broker-dealers’ 

aberrational performance against their peers along multiple risk factors. 

• Market Information Data and Analytics System (MIDAS). SEC staff’s 2014 selfassessment included a discussion of the then-fairly newly implemented Market 

Information Data and Analytics System (MIDAS).120 The system provides the SEC 

with near real-time access to all of the data feeds made available to market 

participants by the exchanges, thus providing the SEC with the ability to see the 

market in the same manner as the most sophisticated market participants. The SEC 

has also invested heavily in the development of monitoring applications that provide 

insight into the health and function of U.S. equities markets.

• IM Analytics Office Tools. See response to Principle 6, Question 1(a)(i), above, for a 

description of technical resources developed and used by the Analytics Office in 

support of monitoring and assessing risk of CISs and CIS operators. In addition, IM 

staff has developed Monitoring and Analytics Graphical User Interface (MAGIC) for 

CISs. MAGIC enables the IM staff to quickly put together data sets and to analyze 

CISs in a variety of ways, such as the ability to compare a particular CIS’s portfolio to 

its strategy or how a particular CIS’s holdings are aligned with its investment 

restrictions. IM staff can also use this tool to run custom queries across thousands 

of open-end and closed-end funds. For example, IM staff can quickly identify which 

CISs may have exposure to certain assets (e.g., cryptocurrencies). In particular, 

MAGIC’s capabilities provide staff with powerful tools to evaluate registered 

investment company disclosures and to evaluate possible trends.
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Principle 7 The Regulator should have or contribute to a process to review the 

perimeter of regulation regularly.

Key Questions

1. Does the regulator have or participate in a process, to identify and assess whether its 

regulatory requirements and framework adequately addresses risks posed by products, 

markets, market participants and activities to investor protection, fair, efficient and 

transparent markets and the reduction of systemic risk? 

General

Yes. The SEC has broad statutory authority to adopt new rules and to update rules. The SEC 

uses this authority to identify and assess whether its regulatory requirements and framework 

adequately address risks posed by products, markets, market participants and activities to 

investor protection, fair, efficient and transparent markets and the reduction of systemic risk 

and address risks and concerns related to the securities markets. SEC staff is continually 

reviewing and assessing the SEC’s regulatory requirements and framework in order to assure 

the SEC is effectively addressing these risks.

One of the key principles for Chairman Clayton’s chairmanship is that the Commission should 

continually strive to identify and monitor emerging risks and issues, including developments in 

other areas that affect the securities markets. The Commission must then continually evaluate 

whether it should adjust its regulatory approach to respond to this ever-changing risk 

landscape. 

SEC staff works closely with fellow regulators, as well as colleagues across the Commission, to 

proactively identify, monitor and respond to risks and developments. Through both formal 

and informal processes, the SEC reviews the scope of its regulatory framework. These 

processes include, among others:

• proactive evaluations of risks identified through examinations and enforcement

actions, followed by appropriate revisions of SEC rules or the issuance of guidance;

• implementation review programs to monitor and assess the efficacy of new rules as 

they are put in place and their impact on the market;

• “post-mortem” identification and implementation of measures to remedy risks 

highlighted by market events; 

• review of existing regulations retrospectively as part of studies of broad substantive 

program areas;

• consideration of suggestions to review existing rules through various types of 

communications, ranging from formal petitions for rulemaking to informal 

correspondence from investors, investor and industry groups, Congress, fellow 

regulators, the bar, and the public; and
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121 See https://www.sec.gov/finhub. 

• establishment of standing working groups or programs to assess and recommend 

measures to identify evolving risks within an industry or market.

SEC Cross-Functional Programs

Specific examples of these working groups and programs that the SEC uses to assess and 

recommend measures to identify evolving risks with an industry or market are listed below.

• Fixed Income Market Structure Advisory Committee. Responsible for providing advice 

to the Commission on the efficiency and resiliency of the corporate bond and 

municipal securities markets and identifying opportunities for regulatory 

improvements. The Committee is comprised of a diverse group of outside experts, 

including individuals representing the views of retail and institutional investors, small 

and large issuers, trading venues, dealers, and self-regulatory organizations, among 

others.

• Investor Advisor Committee. Responsible for advising the Commission on regulatory 

priorities; the regulation of securities products, trading strategies, fee structures, and 

the effectiveness of disclosure; and on initiatives to protect investor interests and to 

promote investor confidence and the integrity of the securities marketplace. The 

Committee, which was established by the Dodd-Frank Act, is comprised of the SEC’s 

Investor Advocate and a diverse group of outside experts, including academics, 

investor and consumer advocates, and market participants, among others. 

• Small Business Capital Formation Advisory Committee. Responsible for advising the 

Commission on rules, regulations and policy matters relating to small businesses, 

including smaller public companies. The Committee, which was established by the SEC 

Small Business Advocate Act of 2016, is comprised of the SEC’s Advocate for Small 

Business Capital Formation and a diverse group of outside experts, including 

individuals representing the views of investors, companies, and professional advisors 

for companies and participants in the marketplace, among others. 

• FinHub. As noted in Principle 6, Question 4, above, in 2018, the SEC launched the 

FinHub as a platform for SEC staff to acquire and disseminate information and engage 

with industry and the public on innovative ideas and technological developments on 

FinTech-related issues and initiatives, such as distributed ledger technology and digital 

assets, automated investment advice, digital marketplace financing, and artificial 

intelligence/machine learning.121 In addition, the SEC named an Associate Director in 

the Division of Corporation Finance as the Senior Advisor for Digital Assets and 

Innovation to coordinate efforts across SEC Divisions and Offices regarding the 

application of U.S. securities laws to emerging digital asset technologies and 

innovations, including initial coin offerings and digital assets. 

Trading and Markets
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• Office of Market Supervision (OMS). TM has dedicated staff in OMS to the review of 

exchange proposals to list and trade new exchange-traded products. In 2018, the SEC 

and the CFTC updated and enhanced their existing MOU to enhance coordination. 

The MOU is discussed in more detail in response to Principle 1, Question 2(a), above.

• Crisis Management Groups. SEC staff from TM participates in Crisis Management 

Groups with other U.S. and foreign financial regulators for the oversight of large crossborder financial entities. These crisis management groups establish bilateral and 

multilateral contacts and formal and informal dialogue focused on the development of 

a framework for early intervention triggers around recovery efforts and resolution 

planning.

• MIDAS. As discussed in response to Principle 6, Question 4, above, SEC staff uses 

MIDAS to conduct sophisticated, fast analysis of market events, support policy 

questions, and conduct exams and investigations, all of which can be relevant to 

determining whether the SEC's regulatory requirements and framework adequately 

address risks.

• CAT: As discussed in response to Principle 6, Question 1, above, and Principle 33, 

Question 6(b), the SEC approved the CAT NMS Plan on November 15, 2016. CAT was 

intended to create a system that provides regulators with more timely access to a 

sufficiently comprehensive set of trading data, enabling regulators to more efficiently 

and effectively reconstruct market events, monitor market behavior, and identify and 

investigate misconduct.

Investment Management

• IM staff has and participates in a number of processes for the purpose of identifying 

and assessing whether its regulations adequately address risk. For example, IM staff 

seeks to identify and assesses risks posed by activities, products, and market 

participants through its Analytics Office (see response to Principle 6, Question 1(a)(i) 

for a detailed description of the Analytics Office and its role in identifying, monitoring, 

and assessing risks associated within the asset management industry.) In addition, IM 

staff’s review of disclosure filings and its participation in inter-agency and intergovernmental workstreams contribute to its ability to identify and assess these types 

of risks, and its policymaking initiatives regularly involve an assessment of, and a 

means of gathering, information concerning, whether the Commission’s regulatory 

requirements and framework adequately addresses risks posed by products, markets, 

market participants, and activities.

Office of Compliance Inspections and Examinations

• Examination Priorities. As noted in SEC staff's 2014 self-assessment in the introduction 

to the response to Principle 12, OCIE has published its examination priorities annually 

since 2013 to educate and inform registrants of particular areas of examination focus 
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122 The National Examination Program Examination Priorities for 2019 are available at 

https://www.sec.gov/files/OCIE%202019%20Priorities.pdf. 

and to provide such entities an opportunity to evaluate their compliance systems and 

remediate any issues identified before they might be selected for examination.122 The 

Priorities Memorandum’s objective is to focus OCIE’s resources on those activities 

(principally examinations) that are expected to best support the achievement of OCIE’s 

mission to improve compliance, prevent fraud, monitor risk, and inform policy, all of 

which also align with the SEC’s mission. The key areas of focus and risk themes for a 

given year are developed collaboratively by senior management from OCIE’s twelve 

offices, as well as by senior representatives of other SEC Divisions and Offices, based 

on an assessment of a range of factors including, for example:

o news and other information sources, such as industry publications;

o information reported by registrants in required SEC filings;

o comments and tips received directly from investors and registrants;

o communications with other U.S. and international regulators and agencies; and

o information gathered through OCIE’s and other regulators’ examinations.

2. Does the regulator have formalized arrangement and/or a process to review, when there 

is evidence of changing circumstances, its past regulatory policy decisions on products, 

markets, entities, market participants or activities, especially decisions to exempt, and 

take measures as appropriate? 

Yes. As noted in response to Principle 7, Question 2 in SEC staff’s 2014 self-assessment, and as 

explained above, the SEC has processes to review when there is evidence of changing 

circumstances, its past regulatory policy decisions on products, markets, entities, market 

participants or activities, especially decisions to exempt, and take measures as appropriate. 

The SEC continuously examines its rules and policy guidance to address changing 

circumstances, including new market developments and opportunities for regulatory arbitrage.

Exemptive Authority

With respect to exemption decisions, the SEC has general exemptive authority under certain of 

its governing statutes that allows the SEC to exempt a person, security, or transaction from 

various securities laws and regulations. This broad authority helps the SEC respond to changes 

in the markets, including advancing technology and internationalization. Due to the nature of 

this relief, requests for exemptions bring new information to staff regarding changes in the 

markets. SEC staff also reviews compliance with previously granted exemptive orders in order 

to help the SEC better assess the extent to which the conditions of the applicable exemptive 

orders are functioning as intended. SEC staff’s observations have also enabled the SEC to 
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56 SECURITIES AND EXCHANGE COMMISSION

123 See Exchange-Traded Funds, Release Nos. 33-10515, IC-33140 (proposed Jun. 28, 2018), available at 

https://www.sec.gov/rules/proposed/2018/33-10515.pdf; See also 83 Fed. Reg. 37332 (Jul. 31, 2018).

124 See Funds of Funds Arrangements, Release Nos. 33-10590, IC-33329 (proposed Dec. 19, 2018), available 

at https://www.sec.gov/rules/proposed/2018/33-10590.pdf; See also 84 Fed. Reg. 1286 (Feb. 1, 2019).

consider whether to engage in rulemaking in particular areas (e.g., exchange-traded funds123 

and funds that invest in other funds)124 to codify exemptive orders, such that funds are not 

required to apply individually for exemptive relief but may rely on the applicable exemptive 

rule.

Regulatory Flexibility Act

As noted in response to Principle 7, Question 2 in SEC staff’s 2014 self-assessment, the SEC 

also has formal processes to review existing regulatory policies. For example, under the 

Regulatory Flexibility Act (RFA), U.S. agencies are required to review regulations that have a 

significant economic impact upon a substantial number of small entities within 10 years of the 

publication of such rules. 

The purpose of the RFA review is to determine whether such rules should be continued 

without change, or should be amended or rescinded to minimize any significant economic 

impact of the rules upon a substantial number of small entities. The RFA sets forth specific 

considerations that must be addressed in the review of regulations, including: the continued 

need for the rule; the nature of comments from the public concerning the rule; the complexity 

of the rule; the extent to which the rule overlaps, duplicates, or conflicts with other rules; the 

length of time since the rule has been evaluated; and the degree to which technology, 

economic conditions, or other factors have changed in the area affected by the rule.

Investor Advisory Committee 

As noted in response to Principle 7, Question 2 in SEC staff’s 2014 self-assessment, Section 911 

of the Dodd-Frank Act established the Investor Advisory Committee to advise the SEC on 

regulatory priorities; regulation of securities products, trading strategies, fee structures, and 

effectiveness of disclosure; and initiatives that protect investor interests and promote investor 

confidence and the integrity of the securities marketplace. The Dodd-Frank Act authorizes the 

committee to submit findings and recommendations for review and consideration by the SEC. 

Advisory Committee on Small Business Capital Formation

The SEC Small Business Advocate Act of 2016 established the Advisory Committee on Small 

Business Capital Formation, which is designed to provide a formal mechanism for the 

Commission to receive advice and recommendations on Commission rules, regulations and 

policy matters relating to small businesses, including smaller public companies.

Public Comment
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125 See Exchange-Traded Funds, Release Nos. 33-10515, IC-33140 (proposed Jun. 28, 2018), available at 

https://www.sec.gov/rules/proposed/2018/33-10515.pdf. 

126 See Covered Investment Fund Research Report, Release Nos. 33-10580; 34-84710; IC-33311 (Nov. 30, 

2018); available at https://www.sec.gov/rules/final/2018/33-10580.pdf (note that this SEC action was based on 

Congressional directive from the Fair Access to Investment Research Act of 2017, Pub. L. 115-66, 131 Stat. 1196 

(2017)).

127 See Securities Offering Reform for Closed-End Investment Companies, Release Nos. 33-10619;34-85382; 

IC-33427 (Mar. 20, 2019); available at https://www.sec.gov/rules/proposed/2019/33-10619.pdf (note that this SEC 

action was based on Congressional directive from the Small Business Credit Availability Act Pub. L. No. 115–141, 

132 Stat. 348 (2018) and the Economic Growth, Regulatory Relief, and Consumer Protection Act (Pub. L. No. 115–

174, 132 Stat. 1296 (2018)).

128 See Agency Rule List – Fall 2018, 3235-AL60, SEC (Use of Derivatives by Registered Investment 

Companies and Business Development Companies), available at

https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST¤tPub

=true&agencyCode=&showStage=active&agencyCd=3235. 

129 See Investment Company Liquidity Risk Management Programs, Release Nos. 33-10233; IC- 32315 (Oct. 

13, 2016), available at https://www.sec.gov/rules/final/2016/33-10233.pdf. 

As noted in SEC staff’s 2014 self-assessment, the SEC welcomes and receives comments from 

the public regarding the operation of its rules. Through these various processes, SEC staff is 

continually reviewing existing regulations and working to improve the SEC’s regulations.

In addition, every division and office within the SEC has responsibility for monitoring existing, 

evolving and new markets, market processes, market participants, and financial products. 

Examples of the SEC and staff responses to changing circumstances in the securities markets 

follow.

FinHub

Please see response to Principle 6, Question 4, above, for a discussion of the SEC’s FinHub.

Division of Investment Management

• IM staff utilizes the policymaking process to review its past regulatory policy decisions 

and take appropriate measures. For instance, one of IM’s priorities is modernizing the 

regulatory framework for the asset management industry. Specifically, IM staff has 

been reviewing existing policies and approaches and assessing whether they are (or 

remain) efficient, effective, and appropriate; whether they take into account 

advancements in technology, business, and investor relationships; and whether they 

have unintended consequences and costs. IM’s recent actions as part of this 

modernization initiative have focused on, for example, ETFs,125 covered investment 

fund research reports,126 offering modernization for closed-end CISs and BDCs,127 use 

of derivatives by CISs (and BDCs),128 CIS board responsibilities , and CIS liquidity risk 

management framework and disclosure:129

• Ongoing Risk Monitoring. IM staff’s risk monitoring includes regular outreach to 

industry participants to gain insight into developing market risks and understand the 
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58 SECURITIES AND EXCHANGE COMMISSION

130 Certain limited types of proposed SRO rule changes may be immediately effective upon filing with the 

SEC. See generally 15 U.S.C. 78s(b) (governing the SRO rule filing process).

effects of macroeconomic developments. This includes ad-hoc outreach to asset 

management firms regarding specific emerging risks or market events. For example, 

IM staff may contact asset management firms to understand the effects of significant 

market events or newly implemented regulations or to gather information to support 

consideration of policy initiatives. IM staff also seeks to maintain regular contact with 

asset management firms to gain more general insight into developing asset 

management trends and new risks by engaging with firms’ senior managers and CISs 

boards, including by in-person meetings. Such meetings may encompass discussions 

of range of topics, as relevant to each particular firm’s business, such as key business 

risks and general regulatory issues, the firm’s growth strategy and any associated risks; 

and the firm’s approach to operational and investment risk management, including the 

fund board and senior management engagement in effective risk oversight.

• IM’s Analytics Office. IM’s Analytics Office participates in regulation reviews, through 

managing, monitoring, and analyzing data that informs industry trends, including data 

submitted by asset managers and Collective Investment Schemes (CISs) in regulatory 

filings. Examples are the Analytics Office’s monthly review and analysis of money 

market fund data reported on Form N-MFP and its quarterly public report of 

aggregated private funds data reported on Form PF. The Analytics Office anticipates 

performing similar analysis of registered investment company data reported on Form 

N-CEN and N-PORT as more data becomes available over time as a result of recently 

adopted rules. See Principle 6, Question 1(a)(i), above, for additional information on 

IM’s Analytics Office.

Division of Trading and Markets

• Section 19 reviews. SEC staff in TM actively engages in the rule filing review process in 

place for SROs, which is governed by Section 19 of the Exchange Act and Rule 19b-4 

thereunder. Specifically, all registered clearing agencies, as SROs, are required to file 

with the SEC copies of any proposed rule or any proposed change in, addition to, or 

deletion of the clearing agency’s rules. The SEC staff reviews all proposed rule changes 

and the SEC publishes them for comment.130 

• Advance Notice Reviews. Pursuant to Section 806(e)(1)(A) of the Clearing Supervision 

Act, a clearing agency designated as systemically important must file a 60 day advance 

notice of changes to its rules, procedures, or operations that could materially affect the 

nature or level of risk presented by it (Advance Notice). Advance Notices are required 

for the implementation of any proposed change to a clearing agency’s rules if it could 

materially affect the nature or level of risks presented by the entity. The SEC considers 

Advance Notices and determines whether to object to the proposal, as further 

described in Section 806(e). As part of its consideration of an Advance Notice, the SEC 

generally considers the stated objectives and principles of Section 805(b) of the 

Clearing Supervision Act. For purposes of this requirement, the phrase “materially 
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131 See Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice 

Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable to 

All Self-Regulatory Organizations, Release No. 34-67286 (Jun. 28, 2012), available at 

https://www.sec.gov/rules/final/2012/34-67286.pdf. 

132 Id.

affect the nature or level of risks presented” is defined in Exchange Act Rule 19b–

4(n)(2)(i) to mean the existence of a ”reasonable possibility that the change could 

affect the performance of essential clearing and settlement functions or the overall 

nature or level of risk presented by the designated clearing agency.” This definition 

was designed to include all changes that would affect the risk management functions 

performed by the clearing agency that are related to systemic risk, as well as changes 

that could affect the clearing agency’s ability to continue to perform its core clearance 

and settlement functions because the Commission stated that it believes that such 

changes could materially affect the nature or level of risk presented by the clearing 

agency.131 To help designated clearing agencies determine whether an Advance 

Notice is required, Exchange Act Rule 19b– 4(n)(2)(ii) includes a list of categories of 

changes to rules, procedures or operations that the Commission believes could 

materially affect the nature or level of risks presented by a designated clearing agency. 

The list of such changes includes, but is not limited to, changes that materially affect 

participant and product eligibility, daily or intraday settlement procedures, default 

procedures, system safeguards, governance, or financial resources of the designated 

clearing agency. The Commission stated that it believes that changes in these areas 

pertain to core functions of a clearing agency and, as a result, may affect the ability of 

a designated clearing agency to manage its risks appropriately and to continue to 

conduct systemically important clearance and settlement services.132

Division of Enforcement

• Specialized Units and Task Forces. Enforcement considers changes and developments 

in the marketplace in its role of pursuing violations of the securities laws. Enforcement 

deploys and redeploys staff to meet new and evolving challenges, for example, by 

establishing Specialized Units and Task Forces with expertise and knowledge in 

programmatically important areas. By redeploying staff in this manner, Enforcement is 

able to timely respond to emerging areas of risk identified through a number of 

information sources including: Enforcement’s investigative and market surveillance 

activities; coordination with criminal authorities, other regulators, and SROs; tips and 

complaints submitted by the public; and referrals from other Divisions and Offices of 

the SEC.

Office of Credit Ratings (OCR)

• Examinations and Monitoring. OCR is required by statute to conduct an examination 

of each CRA registered as a NRSRO at least annually, covering eight specific review 

areas. OCR staff conducts risk assessments within the eight review areas to prioritize 

resources on areas of greatest risk and identify areas for enhanced focus, such as 
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60 SECURITIES AND EXCHANGE COMMISSION

cybersecurity and information technology. OCR staff also monitors trends and 

developments affecting the credit rating industry. OCR staff may meet with NRSROs 

and a variety of other market participants, including investors, issuers, regulators, and 

industry organizations. OCR uses the information obtained through its monitoring 

efforts to inform risk-assessment, exam scoping, and OCR’s policy recommendations 

to the Commission.

Office of Compliance Inspections and Examinations

• OCIE carries out the SEC’s examination authority through examinations or inspections 

(collectively, “examinations”) of securities firms registered with the SEC, including, 

among others, broker-dealers, municipal securities dealers, clearing agencies, transfer 

agents, investment advisers, investment companies, and municipal advisors 

(collectively, “registrants”). OCIE examines and oversees the SROs, which use a number 

of automated surveillance techniques to monitor trading activity on the exchange(s). 

In carrying out these responsibilities, OCIE uses a risk-based approach for selecting 

which firms, areas, and issues to examine and draws on a variety of resources, 

including its staff’s specialized knowledge, risk analytics, and advanced technology, to 

target its resources most efficiently on the areas that pose the highest risk to investors, 

the markets, or capital formation.

• Digital Assets. As the number of financial market activities related to the offer, sale, 

and trading of cryptocurrencies, coins, and tokens that are securities (collectively, 

Digital Assets) has rapidly grown, OCIE has made examining for Digital Assets a 

priority. Given the significant growth and risks presented in this market, OCIE is 

monitoring the offer and sale, trading, and management of digital assets and where 

the products are securities, examining for regulatory compliance. OCIE has taken steps 

to identify market participants who are offering, selling, trading, and managing these 

products. For firms actively engaged in the Digital Asset market, OCIE is conducting 

examinations focused on, among other things, portfolio management of digital assets, 

trading, safety of client funds and assets, pricing of client portfolios, compliance, and 

internal controls.

Division of Corporation Finance

• The Division of Corporation Finance organizes its selective review program by industry 

in order to be able to closely monitor changing circumstances and take action as 

appropriate during the course of the review of disclosures by public companies. The 

Division has a long-standing policy of making the filing review correspondence 

publicly available after the completion of a review, which allows the public to assess 

the effectiveness of the Division’s disclosure reviews. Further, the Division continually 

assesses how to promote the agency’s mission to facilitate capital formation, 

exemplified by the Division’s 2017 expansion of the nonpublic review process for draft 

registration statements. The Division also assesses the Commission’s rules and 

disclosure requirements and makes recommendations to the Commission to change 
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rules when appropriate. Any rule proposal is subject to a formal process providing for 

public notice and comment.

3. Does the regulator participate in a process (with other financial system supervisors and 

regulators if appropriate) which reviews unregulated products, markets, market 

participants and activities, including the potential for regulatory arbitrage, in order to 

promote investor protection and fair, efficient and transparent markets and reduce 

systemic risks?

Yes. Please refer to response to Principle 6, Question 1, above. 

4. Does the regulator seek legislative or other changes when it identifies a regulatory 

weakness or risk to investor protection, market fairness, efficiency and transparency that 

requires legislative or other changes?

Yes. As noted in response to Principle 7, Question 4 in SEC staff’s 2014 self-assessment, the 

SEC seeks legislative changes when it identifies a regulatory weakness or risk to investor 

protection, market fairness, efficiency, and transparency that requires legislative or other 

changes. 

SEC staff monitors and assesses developments in existing, evolving, and new markets; market 

processes; market participants; and financial products. Based on information and observations 

the staff collects through these efforts, the SEC publicly reports to Congress and may make 

recommendations to, or requests of, Congress regarding the SEC’s authority.

In addition, any person may request that the Commission issue, amend or repeal a rule of 

general application. Petitions must contain the text or substance of any proposed rule or 

amendment or specify the rule or portion of a rule requested to be repealed. Persons 

submitting petitions must also include a statement of their interest and/or reasons for 

requesting Commission action. All petitions are forwarded to the appropriate office or division 

of the Commission for consideration and recommendation. 
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133 See Exchange Act Section 3(a)(26), 15 U.S.C. §78(c)(a)(26). The Municipal Securities Rulemaking Board is 

also included for purposes of sections 19(b), 19(c), and 23(b) of the Exchange Act.

Principle 9 Where the regulatory system makes use of Self-Regulatory 

Organizations (SROs) that exercise some direct oversight 

responsibility for their respective areas of competence, such SROs 

should be subject to the oversight of the Regulator and should 

observe standards of fairness and confidentiality when exercising 

powers and delegated responsibilities.

Key Questions

Authorization or Delegation Subject to Oversight

1. As a condition to authorization, does the legislation or the regulator require the SRO 

to demonstrate that it:

(a) Has the capacity to carry out the purposes of its governing laws, regulations 

and SRO rules consistent with the responsibility of the SRO, and to enforce 

compliance by its members and associated persons subject to its laws, 

regulations and rules?

Under the U.S. regulatory framework and for purposes of SEC staff’s self-assessment 

response, SROs include national securities exchanges, registered securities associations (like 

FINRA), and registered clearing agencies.133 Otherwise, there has been no significant update 

from SEC staff’s 2014 self-assessment in response to Principle 9, Question 2(a).

(b) Treats all members of the SRO, applicants for membership and similarly 

situated market participants subject to its rules in a fair and consistent 

manner?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 2(b).

(c) Develops rules that are designed to set standards for its members and to 

promote investor protection?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 2(c).

(d) Submits to the regulator its rules and any amendments thereto, for review 

and/or approval, as the regulator deems appropriate, and ensures that the 

rules of the SRO are consistent with the public policy requirements 

established by the regulator?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 2(d).

(e) Cooperates with the regulator and other domestic SROs to investigate and 
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enforce applicable laws, regulations and rules?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 2(e).

2. Does the SRO:

(a) Have statutory delegation or other formal recognition from the regulator?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 3(a).

(b) Have MoUs or other arrangements in place to secure cooperation between it 

and the regulator?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 3(b).

(c) Have its own rules which are enforced and whose non-compliance is 

appropriately sanctioned?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 3(c).

(d) Where applicable, e.g., a mutualized organization, assures a fair 

representation of members in selection of its board of directors and 

administration of its affairs?

No significant update since SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 3(d).

(e) Avoid rules that may create anti-competitive situations as defined in the 

Explanatory Note?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 3(e).

(f) Avoid using the oversight role to allow any market participant unfairly to gain 

an advantage in the market?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 3(f).

Oversight

3. Does the regulator: 

(a) Have in place an effective ongoing oversight program of the SRO, which may 
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64 SECURITIES AND EXCHANGE COMMISSION

include: 

(i) inspection of the SRO;

See SEC staff’s 2014 self-assessment in response to Principle 9, Question 4(a)(i) for a general 

overview of SRO examinations.

FINRA

Since SEC staff’s 2014 self-assessment, OCIE reorganized its examination program in FY 

2016. As part of this reorganization, OCIE established the FINRA and Securities Industry 

Oversight (FSIO) program, which has examination teams dedicated solely to examinations of 

FINRA, the MSRB, and FINRA oversight examinations. 

FSIO conducts risk-based programmatic inspections of FINRA and the MSRB as described in 

response to Principle 9, Question 4(a)(i), below. In addition, FSIO is now responsible for 

conducting the oversight examinations that are described in SEC staff’s 2014 self-assessment 

in response to Principle 10, Question 1(b) in the third paragraph under the heading “SEC 

Examinations of SROs” and on page 128 of Principle 9 under the “Additional IMF Question”. 

FSIO conducts two types of FINRA oversight examinations: 

• standalone oversight examinations, which are reviews of specific examinations that 

FINRA conducted of its member firms; and

• thematic oversight examinations, which are a series of oversight examinations that 

evaluate FINRA’s review of a particular regulatory area or an investment product 

across a number of FINRA member firms.

The process to evaluate risk and prioritize areas of focus in inspections of FINRA that is 

described in the last full paragraph of page 128 of Principle 9 in the SEC staff’s 2014 selfassessment as a new process to be used for future risk-scoping purposes is currently in use 

by FSIO. In addition, the monitoring described as being conducted by OCIE’s dedicated SRO 

examination program is now conducted by FSIO. 

In developing its risk-based plan for providing oversight of FINRA and the MSRB, FSIO uses 

the following sources:

• risk assessment of FINRA that includes consideration of the areas specified in Section 

964 of Dodd-Frank Act; 

• identification of FINRA examinations as oversight examination candidates either for 

standalone review of the adequacy of a single FINRA examination comprehensively 

or in response to a particular risk identified, or for a thematic review of several 

underlying exams for the same or similar risks or issues;

• observations from FSIO staff dedicated to the monitoring and risk assessment of 

FINRA; and
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• regular meetings with FINRA and other Commission divisions and offices to discuss 

risks, regulation, and business.

Other SROs

See SEC staff’s 2014 self-assessment in response to Principle 9, Question 4(a)(i) for a 

discussion of other SRO examinations. These exams are now conducted by OCIE’s BrokerDealer Exchange (BDX) group. In addition, recent risk areas identified since SEC staff’s 2014 

self-assessment for examination of exchanges include: the regulatory funding of exchanges; 

surveillance programs; governance of the consolidated data plans; internal audit functions; 

systems outages, errors and integrity; and various exchange specific incidents that OCIE 

determined warranted examination. 

The chart below reflects the frequency of SRO examinations (including FINRA oversight 

examinations):

FY Number of Examinations

2016 68

2017 115

2018 186

The chart below reflects the frequency of TCP examinations of SCI entities, which includes 

FINRA and other SROs:

FY Number of Examinations

2016 61

2017 70

2018 67

(ii) periodic reviews;

As described in SEC staff’s 2014 self-assessment in response to Principle 9, Question 4(a)(i), 

OCIE monitors FINRA to assist in OCIE’s risk-scoping activities. As part of its monitoring, 

FSIO may review FINRA’s program areas, including its examination and enforcement 

programs, and its internal audit program.

See response to Principle 6, Question 4, above, for an overview of TCP. In addition to 

ensuring compliance with Regulation SCI, TCP examination staff will focus on, among other 

things, controls relating to software development life cycles and related governance 

procedures, effectiveness of internal audit programs, inventory management, and threat 

management capabilities.

(iii) reporting requirements;

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 
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66 SECURITIES AND EXCHANGE COMMISSION

Question 4(a)(iii).

(iv) review and revocation of SRO governing laws, regulations, and rules; 

and

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 4(a)(iv).

(v) the monitoring of continuing compliance with the conditions of 

authorization or delegation.

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 4(a)(v).

(b) Retain full authority to inquire into matters affecting the investors or the 

market?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 4(b).

(c) Take over or support an SRO’s responsibilities where the powers of an SRO 

are inadequate for inquiring into or addressing particular misconduct or 

allegations of misconduct or where a conflict of interest necessitates it?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 4(c).

Professional Standards similar to those Expected of a Regulator

4. Does the regulator, the law or other applicable regulation require the SRO to follow 

similar professional standards of behaviour as would be expected of a regulator:

(a) On matters relating to confidentiality and procedural fairness?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 5(a).

(b) On the appropriate use of information obtained in the course of the SRO’s 

exercise of its powers and discharge of its responsibilities?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 5(b).

Conflicts of Interest

5. Does the regulator, the law or other applicable regulation assure that potential

conflicts of interest at the SRO are avoided or appropriately managed? 
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No significant update from SEC staff’s 2014 self-assessment in response to Principle 9, 

Question 6.
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Principle 24 The regulatory system should set standards for the eligibility, 

governance, organization and operational conduct of those who wish 

to market or operate a collective investment scheme. 

Key Questions 

Eligibility Criteria 

1. Does the regulatory system set standards for the eligibility of those who wish to: 

(a) Market a CIS? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 1(a).

(b) Operate a CIS?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 1(b).

2. Do the eligibility criteria for a CIS operator include the following: 

(a) Honesty and integrity of the operator? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 2(a).

(b) Having appropriate and sufficient human and technical resources to ensure 

that is capable of carrying out the necessary functions of a CIS operator? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 2(b).

(c) Financial capacity of the CIS or the CIS operator that would allow the 

launching and operation of the CIS in appropriate conditions? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 2(c).

(d) Ability to perform specific powers and duties?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 2(d).

(e) Having, or employing, appropriate identification, monitoring and 

management of risks, based on, among other things, the size, the complexity 

and the risk profile of the CIS? 

Since SEC staff’s 2014 self-assessment in response to Principle 24, Question 2(e), the SEC has 

adopted liquidity risk management requirements for CISs. For additional information, see 
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134 See Investment Company Act Section 1(b)(2).

135 See Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Release No. IA5248 (Jun. 5, 2019), available at https://www.sec.gov/rules/interp/2019/ia-5248.pdf. 

response to Principle 24, Question 14(h), below. 

(f) Having internal controls and compliance arrangements sufficient to ensure it 

can carry out its business diligently, effectively, honestly and fairly?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 2(f).

3. Does the regulatory system provide for effective mechanisms to assess compliance 

with the criteria referred to in Questions 2(a) to 2(f)?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 3.

4. Does the regulatory system set standards for the CIS governance seeking to ensure 

that CIS are organized and operated in the interests of CIS investors, and not in the 

interests of CIS connected persons? 

As a supplement to SEC staff’s 2014 self-assessment response to Principle 24, Question 4, 

SEC staff notes that the Investment Company Act expressly states that a purpose of the Act 

is to mitigate and, so far as possible, eliminate conflicts of interest between the interests of 

CIS investors and the interests of CIS affiliates. In this regard, the Investment Company Act 

states that the national public interest and the interest of investors are adversely affected 

when, among other things, CISs are organized, operated, managed, or their portfolio 

securities are selected, in the interest of directors, officers, CIS operators, depositors, or other 

affiliated persons.134 

In addition, in June 2019, the Commission issued an interpretation reaffirming and in some 

cases clarifying an adviser’s fiduciary duty to its clients (including CISs), including the 

adviser’s duty of care and duty of loyalty (2019 Interpretation).135 The duty of loyalty 

requires that an adviser not subordinate its clients’ interests to its own.

5. Does the authorization/registration of CIS take into account the possible need for 

international cooperation in the case of CIS marketed across jurisdictions or where 

promoters, managers or custodians are located in several different jurisdictions? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 5. For information about the SEC’s international cooperation, please see responses 

to Principle 1, Question 1(d) and Principle 6, Question 3.

Supervision and Ongoing Monitoring 
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136 Form N-SAR was referenced in the 2014 self-assessment at notes 707 and 708 and the accompanying 

text.

137 See Investment Company Reporting Modernization, Release Nos. 33-10231; 34-79095; IC-32314 (Oct. 

13, 2016), available at https://www.sec.gov/rules/final/2016/33-10231.pdf. 

138 Id. 

6. Is the regulator responsible for monitoring ongoing compliance with the standards 

applicable to CIS and CIS operators? In particular, does the regulator have clear 

responsibilities and powers with respect to: 

(a) Registration or authorization of a CIS? 

Yes. As a supplement to SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 6(a), SEC staff notes that the SEC rescinded Form N-SAR.136 Form N-SAR had been 

used by a CIS since 1985 to report census-type information and was replaced with Form NCEN.137 The SEC made this change to Form N-CEN in order to improve the quality and 

utility of information reported and replace items that were outdated with those of greater 

relevance.138 Additionally, Form N-CEN is filed in a structured format that increases the 

usability of the information. Like Form N-SAR, Form N-CEN requires that CISs file a copy of 

the independent public accountant’s report on internal controls. 

(b) Inspections to ensure compliance by CIS operators? 

Yes. As a supplement to SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 6(b), OCIE notes that its examination program is a risk-based program, with 

emphasis placed on the registrants and practices that pose the greatest potential risk of 

securities law violations that can harm investors and the markets. 

(c) Investigation of suspected breaches? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 6(c).

(d) Remedial action in the event of breach or default? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 6(d).

7. Does the ongoing monitoring involve a review of reports submitted to the regulator 

with regard to CIS and entities involved in the operation of a CIS (CIS operators, 

custodians, etc.) on a routine basis or on a risk-assessment basis? 

Yes. As noted in SEC staff’s 2014 self-assessment in response to Principle 24, Question 7, in 

order to assure the prompt and orderly processing of CISs’ filings, SEC staff conducts a risk 

based review of reports submitted to the regulator by a CIS. 
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As a supplement to the 2014 response, SEC staff notes that in 2016, the SEC adopted new 

rules that require CISs to regularly submit additional information to the SEC on Forms NPORT and N-CEN, and to submit information on Form N-LIQUID when certain conditions are 

met (see Principle 6, Question 1(a)(i)). Data collected from these filings help enable staff to 

better understand industry trends, inform policy, and assist with OCIE’s examination 

program. Additionally, IM’s Analytics Office has developed various analytical tools to use 

data collected from these recently implemented forms, as well as from Forms ADV, PF, and 

N-MFP, to assist in monitoring registered investment advisers (i.e., CIS operators), CISs, and 

private funds, consistent with systems and controls designed to protect the confidentiality of 

information provided by registrants where required by applicable law or SEC rules. 

Moreover, since 2014, the SEC has added more staff with quantitative backgrounds to 

routinely monitor and analyze CIS industry and market data, and provide ongoing financial 

and risk analysis of the CIS industry. For additional details, see response to Principle 6, 

Question 4. 

8. Does the ongoing monitoring involve, where appropriate, performance of on-site 

inspections of entities involved in operating CIS (CIS operators, custodians, etc.)? 

[Self-contained answer; no need to consult SEC staff’s 2014 self-assessment]

Yes. OCIE examines entities involved in operating CISs by performing onsite examinations or 

inspections of CISs and their operators. In many cases, examinations are conducted in 

conjunction with an examination of the CIS’s operator, because CIS operators often perform 

recordkeeping and operational duties, and may perform custodial services for the CIS. The 

scope of examinations of CISs is tailored to the activities of the CIS and its compliance risks. 

In formulating the observations of the examination, the examiners may consult with other 

staff, including supervisory staff and staff in relevant Offices and Divisions, to ensure that 

their observations are consistent with SEC rules, regulations, and interpretations. 

Since 2014, the SEC has continued to work to increase examination coverage of registered 

investment advisers (e.g., CIS operators). For example, in FY16, OCIE transitioned some 

resources from other parts of the examination program to the investment 

adviser/investment company program with a goal of increasing the size of the investment 

adviser/investment company program. SEC staff examined 11% of investment advisers in FY 

2016 and 15% of investment advisers in FY. In FY18, SEC staff examined 17% of investment 

advisers while the number of registered investment advisers increased by approximately 5% 

from the previous fiscal year. 

The chart below reflects OCIE’s examinations of fund complexes in fiscal years 2016, 2017, and 

2018:

FY16 FY17 FY18

Number of exams 184 95 138

Percentage of fund complexes examined 17% 11% 15%
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139 OCIE Risk Alert, Risk-Based Examination Initiatives Focused on Registered Investment Companies (Nov. 

8, 2018), available at https://www.sec.gov/files/OCIE%20Risk%20Alert%20-%20RIC%20Initiatives_0.pdf; National 

Examination Program Examination Priorities for 2019, available at 

https://www.sec.gov/files/OCIE%202019%20Priorities.pdf

The chart below reflects OCIE’s examinations of investment advisers in fiscal years 2016, 

2017, and 2018:

FY16 FY17 FY18

Number of exams 1,447 2,114 2,312

Percentage of investment advisers examined 11% 15% 17%

The chart below reflects OCIE’s examinations that resulted from tips, complaints, and referrals:

FY16 FY17 FY18

191 177 211

OCIE uses a risk-based approach in selecting firms, areas, and issues to examine and draws 

on a variety of resources, including its staff’s specialized knowledge, risk analytics, and 

advanced technology, to target its resources most efficiently on the areas that pose the 

highest risk to investors, the markets, or capital formation. 

As part of its compliance oversight, OCIE may also conduct risk-targeted initiatives, in which 

OCIE typically focuses on a particular practice area among a number of CISs and operators. 

Recent thematic initiatives have focused on CISs and/or operators that fall into one or more 

of the following categories: 

• index funds that tract custom-built indexes;

• smaller ETFs and/or ETFs with little secondary market trading volume;

• mutual funds with higher allocations to certain securitized assets;

• funds with aberrational underperformance relative to their peer groups; 

• advisers relatively new to managing mutual funds; and

• advisers with practices or business models that may create increased risks of 

inadequately disclosed fees, expenses, or other charges.139

9. Do the regulatory authorities proactively perform investigative activities in order to 

identify suspected breaches with respect to entities involved in the operation of a CIS? 

As noted in SEC staff’s 2014 self-assessment response to Principle 24, Question 9, SEC staff 

conducts investigations of CISs, their operators, and other entities involved in the operation 
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of a CIS when it has reason to believe that a violation of the federal securities laws is about 

to occur or has already occurred. As a result of these investigations, during the past three 

years (i.e., 2016 – 2018), there were 30 cases in which sanctions were imposed on CIS 

operators for breaches (e.g., misrepresentations, improper valuation, affiliated transactions).

10. Is the operator of a CIS subject to a general and continuing obligation to report to the 

regulatory authority or investors, either prior to or after the event, any information 

relating to: material changes in its management or organization, or in the by-laws of 

the CIS, or the CIS operator?

As a supplement to SEC staff’s 2014 self-assessment in response to Principle 24, Question 

10, SEC staff notes that Form N-CEN requires that CISs provide copies of all material 

amendments to the CIS’s charter, by-laws or other similar organizational documents that 

occurred during the relevant reporting period. 

11. Does the regulatory system assign clear responsibilities for maintaining records on the 

organization and business of the CIS operator? Does the regulatory system provide 

for the keeping of books and records in relation to transactions involving CIS assets, 

and all transactions in CIS shares or units or interests?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 11.

Conflicts of Interest and operational conduct

12. Are there provisions:

(a) To prohibit, restrict or manage (including, if appropriate, by disclosure) 

certain conduct likely to give rise to conflicts of interest between a CIS and 

its operators or their associates or connected parties? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 12(a).

However, as a supplement to that response, the 2019 Interpretation clarifies that under its 

fiduciary duty of loyalty, a CIS operator must not subordinate its clients’ interests to its own 

interest. It must make full and fair disclosure to its clients of all material facts relating to the 

advisory relationship and must eliminate or at least expose through full and fair disclosure 

all conflicts of interest which might incline a CIS operator – consciously or unconsciously – to 

render advice which was not disinterested so that the client can provide informed consent. 

While such disclosure and informed consent prevent the presence of those material facts or 

conflicts themselves from violating the adviser’s fiduciary duty, such disclosure and consent 

do not themselves satisfy the adviser’s duty to act in the client’s best interest. In addition, in 

cases where the CIS operator cannot fully and fairly disclose a conflict of interest to a client 

such that the client can provide informed consent, the CIS operator should either eliminate 

the conflict or adequately mitigate the conflict such that full and fair disclosure and 

informed consent are possible. A CIS operator is also prohibited from overreaching or 

taking unfair advantage of a client’s trust.
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(b) To require a CIS operator to seek to minimize potential conflicts of interest 

and ensure that any conflicts that do arise are identified and properly 

managed by taking appropriate actions (including, where appropriate, 

through disclosure) so that the interests of investors are not adversely 

affected? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 12(b). However, as a supplement to that response, see also the supplement to 

Question 12(a), above.

13.

(a) Does the regulatory system require the CIS operator to comply with 

operational conduct standards? 

As noted in SEC staff’s 2014 self-assessment in response to Principle 24, Question 13(a) and 

(b), the CIS operator has a fiduciary duty to its clients, including the CIS. As a supplement to 

that response, the 2019 Interpretation reaffirms and in some cases clarifies certain aspects 

of a CIS operator’s fiduciary duties to its clients, including providing the Commission’s view 

regarding the CIS operator’s duty of care, which includes duties to (i) provide advice that is 

suitable for and in the best interest of its clients, (ii) seek best execution of client 

transactions, and (iii) provide advice and monitoring over the course of the CIS operator’s 

provision of advisory services to its clients. In order to provide best interest advice, an 

adviser must have a reasonable understanding of the client’s objectives, which would 

include, for institutional clients, an understanding of the investment mandate. 

(b) In particular, is the CIS operator required to act in the best interest of 

investors and in accordance with the principle of fair treatment?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Questions 13(a) and (b). 

14. Does the regulatory system address the regulatory issues associated with: 

(a) Best execution? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 14(a).

However, as a supplement to the 2014 response, the 2019 Interpretation clarifies that, when 

seeking best execution of a CIS’s transactions, a CIS operator should consider the full range 

and quality of a broker’s services in placing brokerage including, among other things, the 

value of research provided as well as execution capability, commission rate, financial 

responsibility, and responsiveness to the CIS operator and should periodically and 

systematically evaluate the execution it is receiving.
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(b) Appropriate trading and timely allocation of transactions? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 14(b). 

However, as a supplement to that response, the 2019 Interpretation clarifies that, among 

other things, a CIS operator, when allocating investment opportunities among eligible clients 

(which could include CISs), must eliminate or at least expose through full and fair disclosure 

the conflicts associated with its allocation policies, including how the CIS operator will 

allocate investment opportunities, such that a client can provide informed consent. The CIS 

operator’s allocation practices must not prevent it from providing advice that is in the best 

interest of its clients. 

(c) Churning? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 14(c).

(d) Related party transactions? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 14(d).

(e) Underwriting arrangements? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 14(e).

(f) Due diligence in the selection of investments?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 14(f).

However, as a supplement to that response, the 2019 Interpretation clarifies that, among 

other things, CIS operators should develop a reasonable understanding of the client’s (such 

as a CIS) investment guidelines and objectives, and must have a reasonable belief that the 

advice it provides is in the best interest of the client based on the client’s objectives. The CIS 

operator must also conduct a reasonable investigation into the investment sufficient not to 

base its advice on materially inaccurate or incomplete information.

(g) Fees and expenses, in order to ensure that no unauthorized charges or 

expenses are levied against a CIS, or CIS investors, and that: commission 

rebates; soft commission arrangements; and inducements, do not conflict 

with the CIS operator’s duty to act in the best interest of investors?
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140 See Investment Company Liquidity Risk Management Programs, Release Nos. 33-10233, IC-32315 (Oct. 

13, 2016), available at https://www.sec.gov/rules/final/2016/33-10233.pdf; Investment Company Act Rule 22e-4. 

Since 2016, the SEC has permitted open-end CISs (except money market funds or ETFs) to use “swing pricing,” 

which is the process of adjusting a CIS’s net asset value per share to pass on to purchasing or redeeming 

shareholders certain of the costs associated with their trading activity. It is designed to protect existing 

shareholders from dilution associated with shareholder purchases and redemptions and serves as another tool to 

help funds manage liquidity risks. While money market funds are open-end CISs, money market funds are 

excluded from the scope of Rule 22e-4 because, based on the historical redemption patterns of money market 

fund investors and the characteristics of the assets held by money market funds, they are already subject to 

extensive and stringent requirements concerning the liquidity of their portfolio assets and to broad liquidity 

related disclosure and reporting requirements. See Investment Company Act rule 2a-7.

141 ETFs are generally structured so that an authorized participant will purchase or redeem a creation unit 

with a “portfolio deposit,” which is a basket of assets (and sometimes cash) that generally reflects the 

composition of the ETF’s portfolio.

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 14(g).

(h) Requirements for CIS operators or CIS to establish and implement sound 

liquidity risk management processes taking into account normal and stress 

market conditions?

[This is a new question for the 2020 FSAP]

Yes. Rule 22e-4 under the Investment Company Act requires open-end CISs, including 

open-end ETFs but not including money market funds, to establish a written liquidity risk 

management program.140 Specifically, Rule 22e-4 requires a CIS to assess, manage, and 

periodically review (with such review occurring no less frequently than annually) its liquidity 

risk, based on the following factors as applicable: (i) investment strategy and liquidity of 

portfolio investments during both normal and reasonably foreseeable stressed conditions 

(including whether the investment strategy is appropriate for an open-end CIS, the extent to 

which the strategy involves a relatively concentrated portfolio or large positions in particular 

issuers, and the use of borrowings for investment purposes and derivatives); (ii) short-term 

and long-term cash flow projections during both normal and reasonably foreseeable 

stressed conditions; and (iii) holdings of cash and cash equivalents, as well as borrowing 

arrangements and other funding sources. In addition to these factors, an ETF also must 

consider, as applicable: (i) the relationship between the ETF’s portfolio liquidity and the way 

in which, and the prices and spreads at which, ETF shares trade, including the efficiency of 

the arbitrage function and the level of active participation by market participants (including 

authorized participants); and (ii) the effect of the composition of baskets141 on the overall 

liquidity of the ETF’s portfolio. A CIS may incorporate other considerations, in addition to 

the above factors, in evaluating its liquidity risk. In addition, this requirement is principlesbased, and thus each CIS may develop and adopt procedures to review the CIS’s liquidity 

risk tailored as appropriate to reflect the CIS’s particular facts and circumstances.

Rule 22e-4 also requires several additional elements as part of a CIS’s liquidity risk 

management program. 

• First, a CIS is required to classify each of the investments in its portfolio. The 
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142 An investment is considered illiquid if the fund reasonably expects that an investment cannot be sold or 

disposed of in current market conditions in seven calendar days or less without the sale or disposition 

significantly changing the market value of the investment.

143 These officers could not be solely the portfolio managers of the CIS.

classification must be based on the number of days in which the CIS reasonably 

expects the investment would be convertible to cash in current market conditions 

without significantly changing the market value of the investment, and the 

determination must take into account the market depth of the investment. 

• Second, a CIS is required to determine a minimum percentage of its net assets that 

must be invested in highly liquid investments, defined as cash or investments that 

are reasonably expected to be converted to cash within three business days without 

significantly changing the market value of the investment. The CIS also is required 

to implement policies and procedures for responding to a highly liquid investment 

minimum shortfall, which must include board reporting in the event of a shortfall. 

• Third, a CIS is not permitted to purchase additional illiquid investments if more than 

15 percent of its net assets are illiquid assets. If a CIS breaches the 15 percent limit, 

the occurrence must be reported to the board, along with an explanation of how the 

CIS plans to bring its illiquid investments back within the limit within a reasonable 

period of time, and if it is not resolved within 30 days, the board must assess 

whether the plan presented to it is in the best interest of the CIS. In this regard, a 

CIS must also confidentially notify the SEC, on Form N-LIQUID, when its level of 

illiquid investments142 exceeds 15 percent of its net assets or when its highly liquid 

investments fall below the CIS’s minimum percentage for highly liquid investments 

for more than seven consecutive calendar days. 

• Fourth, a CIS’s board, including a majority of the CIS’s independent directors, is 

required to approve the CIS’s liquidity risk management program and the 

designation of the CIS’s operator, a CIS officer, or CIS officers143 to administer the 

program. The CIS’s board also is required to review, at least annually, a written 

report on the adequacy of the program and the effectiveness of its implementation.

Delegation 

15. Does the regulatory system provide for a clear indication of circumstances under 

which delegation is allowed and is there prohibition of systematic and complete 

delegation of core functions of the CIS operator to the extent that there is a 

transformation, gradual or otherwise, into an empty box? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 15.

16. If delegation is permitted, is the delegation done in such a way so as not to deprive 

the investor of the means of identifying the company legally responsible for the 

delegated functions? In particular: 
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78 SECURITIES AND EXCHANGE COMMISSION

(a) Is the CIS operator responsible for the actions or omissions, as though they 

were its own, of any party, to whom it delegates a function, including 

compliance with the rules of conduct and other operating conditions?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 16(a).

(b) Does the regulatory system require the CIS operator to retain adequate 

capacity and resources and have in place suitable processes to monitor the 

activity of the delegate and evaluate the performance of the delegate? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 16(b).

(c) Can the CIS operator terminate the delegation and make alternative 

arrangements for the performance of the delegated function where 

appropriate? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 16(c).

(d) Are there requirements for disclosure to investors in relation to the 

delegation arrangements and the identity of the delegates? 

Yes. As a supplement to SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 16(d), SEC staff notes that a CIS may seek exemptive relief from the SEC to permit 

investment advisers (i.e., CIS operators), subject to board approval, to retain sub-advisers 

(and materially amend existing subadvisory agreements) without obtaining shareholder 

approval required under Section 15(a) of the Investment Company Act. In the event that a 

new sub-adviser is retained, the identity of the new sub-advisers must be disclosed in the 

CIS’s registration statement. Additionally, this relief is contingent, among other things, upon 

appropriate disclosure being provided to CIS shareholders. The relief requires that the 

prospectus for each subadvised CIS will disclose the existence, substance, and effect of any 

order granted pursuant to an application for relief. Each prospectus must also prominently 

disclose that the CIS operator has the ultimate responsibility, subject to oversight by the 

Board, to oversee the sub-advisers and recommend their hiring, termination and 

replacement. Finally, each subadvised CIS must disclose certain aggregate fee disclosure in 

its registration statement. 

(e) Does the regulatory system allow the regulator to take appropriate actions in 

case of delegations which may give rise to a conflict of interest between the 

delegate and the investors? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 16(e).
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17. If delegation is permitted, is the delegation done in such a way so as not to jeopardize 

the ability of the regulator to effectively access data related to the delegated functions, 

either directly through the delegate(s) or through the CIS operator?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 24, 

Question 17.
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80 SECURITIES AND EXCHANGE COMMISSION

Principle 25 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. 

Key Questions 

Legal Form/Investors’ Rights 

1. Does the regulatory system provide for requirements as to the legal form and structure 

of CIS that delineates the interests of participants and their related rights? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 25, 

Question 1.

2. Does the regulatory system provide that the legal form and structure of a CIS, as well 

as the implications thereof for the nature of risks associated with the CIS, be disclosed 

to investors in such a way that they are not dependent upon the discretion of the CIS 

operator?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 25, 

Question 2.

3. Is there a regulatory authority responsible for ensuring that the form and structure 

requirements are observed? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 25, 

Question 3.

4. Does the regulatory system provide that where material changes are made to investor 

rights that do not require prior approval from investors, notice is given to them 

before the changes take effect? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 25, 

Question 4.

5. Does the regulatory system provide that where material changes are made to investor 

rights, notice is given to the relevant regulatory authority? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 25, 

Question 5.

6. Does the regulator have powers aimed at ensuring that any restrictions on type, or 

level, of investment, or borrowing, are being complied with?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 25, 

Question 6.

Separation of Assets/Safekeeping 
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7. Does the regulatory system require adequate segregation of CIS assets from the assets 

of the CIS operator and its managers or other entities? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 25, 

Question 7.

8. Does the regulatory system provide for either of the following requirements governing 

the safekeeping of CIS assets: 

(a) the obligation to entrust the assets to custodians and/or depositaries that are 

in appropriate circumstances independent; or 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 25, 

Question 8(a).

(b) special legal or regulatory safeguards in cases where the functions of 

custodian and/or depositary are performed by the same legal entity as is 

responsible for investment functions (or related entities).

No significant update from SEC staff’s 2014 self-assessment in response to Principle 25, 

Question 8(b).

9. Does the regulatory system provide for adequate protection of client assets from losses 

or insolvency of the CIS operator, and the obligation that, where third party custodians 

are used, client assets are identified as such to any such custodian and equivalent 

protection is afforded to the client assets, including when the custodian has entrusted 

all or some of the assets in its safekeeping to a third party?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 25, 

Question 8(c).

10. Does the regulatory system adequately provide for an orderly winding up of CIS 

business, if needed? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 25, 

Question 9.
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82 SECURITIES AND EXCHANGE COMMISSION

Principle 26 Regulation should require disclosure, as set forth 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. 

Key Questions

1. Does the regulatory system require that all matters material to the valuation of a CIS 

are disclosed to investors and potential investors on a timely basis? 

As a supplement to SEC staff’s 2014 self-assessment in response to Principle 26, Question 1, 

SEC staff notes that a CIS that chooses to utilize swing pricing (as discussed in response to 

Principle 27, Question 7(b), below) must provide an explanation of the CIS’s use of swing 

pricing in its registration statement.

2. Does the regulatory system require that the information referred to in Question 1 

above be disclosed to investors and potential investors in an easy to understand 

format and language having regard to the type of investor? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 2.

3. Does the regulatory system require the use of standard formats for disclosure of 

offering documents and periodic reports to investors?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 3.

4. Does the regulatory system include a general disclosure obligation to allow investors, 

and potential investors, to evaluate the suitability of the CIS for that investor or 

potential investor? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 4.

5. Does the regulatory system specifically require that the offering documents, or other 

publicly available information, include the following: 

(a) The date of issuance of the offering document? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 5(a).

(b) Information concerning the legal constitution of the CIS? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 5(b).
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144 See Form N-1A, Item 1(a)(2), available at https://www.sec.gov/files/formn-1a.pdf. 

(c) The rights of investors in the CIS? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 5(c).

(d) Information on the operator and its principals? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 5(d).

(e) Information on the methodology of asset valuation? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 5(e).

(f) Procedures for purchase, redemption and pricing of units/shares? 

Yes. As noted in SEC staff’s 2014 self-assessment in response to Principle 26, Question 5(f), 

offering documents for open-end CISs, closed-end CISs, and UITs are all required to disclose 

procedures for purchase, redemption, and pricing. Additionally, an ETF, which was not 

specifically addressed in SEC staff’s 2014 self-assessment, must identify on the cover page of 

its prospectus the principal U.S. market upon which the ETF shares are traded.144 

(g) Relevant, audited financial information concerning the CIS? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 5(g).

(h) Information on the custodial arrangements (if any)? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 5(h).

(i) The investment policy(ies) of the CIS? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 5(i).

(j) Information on the risks involved in achieving the investment objectives? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 5(j).
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84 SECURITIES AND EXCHANGE COMMISSION

145 See Form N-1A, Item 3, available at https://www.sec.gov/files/formn-1a.pdf. 

146 See Investment Company Reporting Modernization, Release Nos. 33-10231; 34-79095; IC-32314 (Oct. 

13, 2016), available at https://www.sec.gov/rules/final/2016/33-10231.pdf. See also Form N-1A, Item 21(i). 

147 In response to the additional guidance for Principle 26, Questions 6, 7, and 9, SEC staff notes that during 

the past three years (i.e., 2016-2018) there were 170,257 offering documents filed by CISs.

(k) The appointment of any external administrator or investment managers or 

advisers who have a significant and independent role in relation to the CIS 

(including delegates)? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 5(k).

(l) Fees and charges in relation to the CIS, in a way that enables investors to 

understand their nature, structure and impact on the CIS’ performance? 

Yes. As noted in SEC staff’s 2014 self-assessment in response to Principle 26, Question 5(l), 

there are specific requirements that the CIS offering document include the fees and charges 

of an open-end CIS, closed-end CIS, or UIT in a way that enables investors to understand their 

nature, structure, and impact on the CIS’s performance. An ETF, which was not specifically 

addressed in SEC staff’s 2014 self-assessment, must also disclose that investors may pay 

brokerage commissions on their purchases and sales of ETF shares.145 

Additionally, while an open-end CIS was already required to disclose certain fee information 

in its Statement of Additional Information (SAI), an open-end CIS must now also disclose in its 

SAI income and fees from securities lending, and the fees paid to securities lending agents in 

the prior fiscal year.146

6. Does the regulatory authority have the power to hold back, or intervene, with regard 

to offering documents? For example, are there regulatory actions available in the 

event that the information is inaccurate, misleading or false, or does not satisfy the 

filing/approval requirements? 

Yes. As noted in SEC staff’s 2014 self-assessment in response to Principle 26, Question 6, 

various regulations authorize the SEC to, among other things, hold back or intervene in an 

offering if an offering document is found to be unsatisfactory.147 

Pursuant to those regulations, during the past three years (i.e., 2016-2018), sanctions were 

imposed in 25 SEC actions against CIS operators and others involved in the preparation of 

CIS disclosure documents or advertisements. These sanctions pertained to misstatements or 

misrepresentations in CIS registration statements, shareholder reports, other periodic filings, 

and advertisements. Please also see the response to Principle 24, Question 7 for information 

regarding the number of offering documents filed by CISs during the past three years. 

Please also see the response to Principle 24, Question 7 for information regarding the 

number of offering documents filed by CISs during the past three years. 
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148 See Securities Act Section 17(a); Exchange Act Section 10(b).

149 See Fair Access to Investment Research Act of 2017, Pub. L. 115-66, 131 Stat. 1196 (2017), available at 

https://www.congress.gov/115/plaws/publ66/PLAW-115publ66.pdf.

150 See Covered Investment Fund Research Reports, Release Nos. 33-10580, 34-84710, IC-33311 (Nov. 30, 

2018), available at https://www.sec.gov/rules/final/2018/33-10580.pdf; See also Investment Company Act Rule 

139b.

7. Does the regulatory system cover advertising material outside of the offering 

documents? In particular, does it prohibit inaccurate, false or misleading advertising? 

Are there regulatory actions available to the regulator with regard to advertising 

material outside of the offering document?

Yes. As noted in SEC staff’s 2014 self-assessment in response to Principle 26, Question 7, a 

CIS may use brochures or advertisements and may market through various media, such as 

television, radio, internet, billboards, and newspapers, and all marketing materials are subject 

to the anti-fraud provisions of the federal securities laws and are prohibited from containing 

material misstatements or omissions.148 Where appropriate, the SEC brings actions seeking 

to impose sanctions to address violations of these provisions. As noted in Principle 26, 

Question 6 above, in the last three years (i.e., 2016-2018), the SEC has brought 25 

enforcement actions imposing sanctions against CIS operators and others involved in the 

preparation of CIS disclosure documents or advertisements.

Pursuant to recently enacted legislation,149 the SEC adopted rules that permit a broker dealer 

that is not affiliated with a CIS to publish or distribute research reports about that CIS 

(covered investment fund research reports) in reliance on Rule 139b of the Securities Act.150 

Rule 139b imposes conditions that include restrictions on the issuers to which the research 

may relate, as well as requirements that such reports be published in the regular course of 

business. These conditions vary depending on whether a research report covers a specific 

issuer or a substantial number of issuers in an industry or sub-industry. There are heightened 

requirements for issuer specific research reports (a research report covering a specific CIS), as 

compared to industry research reports (covering a substantial number of CISs). The antifraud 

provisions of the federal securities laws, as well as certain “standardized” performance 

information requirements, apply to covered investment fund research reports. 

8. Does the regulatory system require that the offering documents be kept up to date to 

take account of any material changes affecting the CIS? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 8.

9. Does the regulatory system require a report to be prepared in respect of a CIS’s 

activities either on an annual, semi-annual or other periodic basis? 

Please note that the response below updates the response from SEC staff’s 2014 selfassessment in response to Principle 26, Question 9 regarding Form N-SAR and Form N-Q and 
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86 SECURITIES AND EXCHANGE COMMISSION

151 See Investment Company Reporting Modernization, Release Nos. 10231, 34-79095, IC-32314 (Oct. 13, 

2016), available at https://www.sec.gov/rules/final/2016/33-10231.pdf.

152 See Money Market Fund Reform, Release No. IC-29132 (Feb. 23, 2010), available at 

https://www.sec.gov/rules/final/2010/ic-29132.pdf.

153 See Investment Company Reporting Modernization, Release Nos. 33-10231; 34-79095; IC-32314 (Oct. 

13, 2016), available at https://www.sec.gov/rules/final/2016/33-10231.pdf; Amendments to the Timing 

Requirements for Filing Reports on Form N-PORT Release No. IC-33384 (Feb. 27, 2019), available at 

https://www.sec.gov/rules/interim/2019/ic-33384.pdf. 

154 See Optional Internet Availability of Investment Company Shareholder Reports, Release No. 33-10506 

(Jun. 5, 2018), https://www.sec.gov/rules/final/2018/33-10506.pdf; Investment Company Act Rule 30e-3.

adds material about Form N-MFP.

Yes. As noted in SEC staff’s 2014 self-assessment in response to Principle 26, Question 9,

rules under the Investment Company Act required a CIS to file with the SEC a semi-annual 

report on Form N-SAR, which contained information that could be used by the SEC to aid in 

monitoring a CIS’s operations and to obtain necessary compliance information. In 2016, and 

as previously noted (see e.g., response to Principle 24, Question 6(a)), the SEC issued a final 

rule that rescinded Form N-SAR and, adopted Form N-CEN, which instead requires a CIS to 

file an annual, rather than semi-annual report.151 Money market funds are required to file 

Form N-MFP to publicly report monthly portfolio holdings information.152

SEC staff’s 2014 self-assessment in response to Principle 26, Question 9 also noted that the 

Investment Company Act required open-end and closed-end CISs to file a quarterly report on 

Form N-Q that generally disclosed the composition of a CIS’s portfolio on a delayed basis. In 

2016, the SEC issued a final rule that rescinded Form N-Q and adopted Form N-PORT, which 

open-end and closed-ends CISs must use to report portfolio holdings information and 

information related to liquidity, derivatives, securities lending, purchases and redemptions, 

and counterparty exposure. Form N-PORT is filed quarterly.153 As noted previously, the SEC 

made these changes to, among other things, improve the information that the SEC receives 

from investment companies and assist the SEC, in its role as primary regulator of investment 

companies, to better fulfil its mission of protecting investors, maintaining fair, orderly and 

efficient markets, and facilitating capital formation.

10. Does the regulatory system require the timely distribution of periodic reports? 

Yes. As noted in SEC staff’s self-assessment in response to Principle 26, Question 10, section 

30(e) of the Investment Company Act and Rule 30e-1 thereunder require CISs to transmit 

reports to shareholders (i.e., annual and semi-annual reports) within sixty days after the close 

of the period for which each report is made.

In 2018, the SEC adopted Rule 30e-3, which will permit (beginning January 1, 2021) a CIS to 

satisfy its obligation to transmit the annual and semi-annual shareholder reports by making 

them publicly accessible on a website, free of charge, and generally, sending shareholders a 

paper notice of each report’s availability by mail.154
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11. Does the regulatory system require that the accounts of a CIS be prepared in 

accordance with high quality, internationally acceptable accounting standards? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 11.

12. Does the regulator have powers to ensure that the stated investment policy or 

trading strategy, the authorized investments that the CIS is able to undertake, or any 

policy required by regulation is being followed? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 26, 

Question 12.
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88 SECURITIES AND EXCHANGE COMMISSION

155 See Investment Company Act Sections 2(a)(41) and 22 and Rules 2a-4 and 22c-1.

156 See Investment Company Reporting Modernization, Release Nos. 33-10231, 34-79095, IC-32314 (Oct. 

13, 2016), available at https://www.sec.gov/rules/final/2016/33-10231.pdf. 

157 See Form N-CEN, Item B.20; see also Investment Company Reporting Modernization, Release Nos. 33-

10231, 34-79095, IC-32314 (Oct. 13, 2016), available at https://www.sec.gov/rules/final/2016/33-10231.pdf.

Principle 27 Regulation should ensure that there is a proper and disclosed basis for 

asset valuation and the pricing and the redemption of units in a 

collective investment scheme. 

Key Questions 

Asset Valuation 

1. Are there specific regulatory requirements in respect of the valuation of CIS assets? 

Yes. The regulations relating to the valuation of CIS portfolio securities are included in the 

Investment Company Act and SEC rules adopted thereunder.155 As noted in SEC staff’s 2014 

self-assessment in response to Principle 27, Question 1, in general, these regulations provide 

that a CIS must value securities for which market quotations are readily available at their 

current market value and other securities and assets at fair value as determined in good faith 

by the board of directors of the CIS.

As previously mentioned (see e.g., response to Principle 6, Question 1(a)(i), since SEC staff’s 

2014 self-assessment, the SEC adopted Form N-CEN (and rescinded Form N-SAR).156 In 

general, while a CIS had already been required to disclose any material change in valuation 

methodologies, Form N-CEN also requires a CIS to report the asset type (category of asset 

class called for in Form N-PORT, such as, for example, short-term investment vehicles, 

repurchase agreements, equity, debt, or commodities) and type of investment affected by the 

material change.157

2. Are there regulatory requirements that the NAV of CIS be calculated: 

(a) On a regular basis? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 27, 

Question 2(a).

(b) Each day that CIS units are purchased or redeemed?

[This is a new question for the 2020 FSAP]

Yes. Section 22(c) of the Investment Company Act and Rule 22c-1 thereunder provide that 

shares in an open-end CIS or UIT generally may be purchased and redeemed only at a price 

based on the current NAV of such security, which is next computed after receipt of a tender 

of such security for redemption or of an order to purchase or sell such security. In addition, 

Rule 22c-1 requires that an open-end CIS compute its NAV at least once daily from Monday 

through Friday. 

(c) In accordance with high-quality, accepted accounting standards used on a 
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158 See Money Market Fund Reform, Release Nos. 33-9616, IA-3879; IC-31166; (Jul. 23, 2014), available at 

https://www.sec.gov/rules/final/2014/33-9616.pdf; Amendments to Form PF, Release Nos. 33-9616, IA-3879, IC31166 (July 23, 2014), available at https://www.sec.gov/rules/final/2014/33-9616.pdf. 

consistent basis? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 27, 

Questions 1 and 2(b). 

3. Are there specific regulatory requirements in respect of the fair valuation of assets 

where market prices are not available? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 27, 

Question 3.

4. Are there specific regulatory requirements where amortized cost accounting is 

permitted?

[This is a new question for the 2020 FSAP]

Yes. Money market funds that qualify as “government money market funds” and “retail 

money market funds” are permitted to use the amortized cost method and/or penny 

rounding method of pricing to seek to maintain a stable share price.158 A government money 

market fund is defined as any money market fund that invests 99.5% or more of its total 

assets in cash, government securities, and/or repurchase agreements that are collateralized 

solely by government securities or cash and meet certain other regulatory requirements with 

respect to value and custody. A retail money market fund is defined as a money market fund 

that has policies and procedures reasonably designed to limit all beneficial owners of the 

money market fund to natural persons. Additionally, all other U.S. registered investment 

companies may use amortized cost to value debt securities with remaining maturities of 60 

days or less so long as the investment company’s directors, in good faith, determine that the 

fair value of the debt securities is their amortized cost value, unless the particular 

circumstances warrant otherwise.

5. Are third parties (e.g., independent auditors) required to check the valuations of CIS 

assets?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 27, 

Question 4.

6. Where MMFs display a stable NAV, does the regulatory system include measures that 

are designed to reduce the specific risks associated with their stable NAV feature and 

reinforce their resilience and their ability to face significant redemptions?

[This is a new question for the 2020 FSAP]

Yes. Retail money market funds can maintain a stable NAV and are subject to liquidity fees 
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90 SECURITIES AND EXCHANGE COMMISSION

159 Id. 

160 A CIS’s swing pricing policies and procedures must provide that the CIS is required to adjust its NAV 

once the level of net purchases or net redemptions from the CIS has exceeded a set, specified percentage of the 

CIS’s net asset value known as the “swing threshold.”

and redemption gates.159 Government money market funds can also maintain a stable NAV 

but are not subject to the fees and gates provisions, although they can voluntarily opt into 

them. 

Under these requirements, if a money market fund’s level of “weekly liquid assets” falls below 

30 percent of its total assets, the fund’s board is allowed to impose a liquidity fee of up to 

two percent on all redemptions or temporarily suspend redemptions (gate) subject to certain 

limitations. If the money market fund’s level of “weekly liquid assets” falls below 10 percent, 

the fund must impose a liquidity fee of one percent on all redemptions, unless its board 

determines that not doing so is in the best interest of the fund. 

In addition, all money market funds are subject to disclosure and reporting requirements 

regarding asset liquidity, shareholder inflows and outflows, portfolio holdings, and the 

imposition of fees and gates, among other issues. Money market funds are also generally 

subject to enhanced portfolio diversification and stress testing requirements relative to other 

funds.

Pricing and Redemption Issues 

7. Does the regulatory system:

(a) Require the basis upon which investors may redeem units/shares to be made 

clear in the constituent documents and/or the prospectus? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 27, 

Question 5(a).

(b) Provide for specific regulatory requirements in respect of the pricing upon 

redemption or subscription of units/shares in a CIS? 

Yes. As noted in SEC staff’s 2014 self-assessment in response to Principle 27, Question 5(b), 

Investment Company Act Rule 22c-1 requires that sales and redemptions must be effected at 

the current NAV next computed after receipt of an order to purchase or sell, and Investment 

Company Act section 23 generally prohibits a closed-end CIS from selling its common stock 

at a price below current NAV.

Subsequent to SEC staff’s 2014 self-assessment, the SEC amended Rule 22c-1, which now also 

permits open-end CISs (other than ETFs or money market funds) to use swing pricing (i.e., 

adjusting a CIS’s net asset value to pass on to purchasing or redeeming shareholders certain 

of the costs associated with their trading activity to protect existing shareholders from 

dilution). The ability to use swing pricing is subject to certain disclosure and reporting 

requirements, policies, and procedures specifying how the CIS’s “swing threshold”160 is 
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161 See Investment Company Swing Pricing, Release Nos. 33-10234, IC-32316 (Oct. 13, 2016), available at 

https://www.sec.gov/rules/final/2016/33-10234.pdf.

162 Under the 2014 Money Market Fund Reforms, as of April 2016, money market funds are required to 

disclose on the fund’s website the fund’s market-based price per share as of the end of the prior business day. 

See Money Market Fund Reform, Release Nos. 33-9616, IA-3879; IC-31166; (Jul. 23, 2014), available at 

https://www.sec.gov/rules/final/2014/33-9616.pdf; Amendments to Form PF, Release Nos. 33-9616, IA-3879, IC31166 (Jul. 23, 2014), available at https://www.sec.gov/rules/final/2014/33-9616.pdf.

determined and to board approval of the policies and procedures and threshold (and any 

changes thereto).161

8. Does regulation ensure that the valuations made are fair and reliable? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 27, 

Question 6.

9. Does regulation require the price of the CIS be disclosed or published on a regular 

basis to investors or prospective investors? 

As noted in SEC staff’s 2014 self-assessment in response to Principle 27, Question 7, while the 

federal securities laws do not require that the prices of a CIS be disclosed or published on a 

regular basis to investors other than in semi-annual reports, the price of a CIS is generally 

available in financial publications and websites, and it may also be available on the CIS’s or 

CIS operator’s website.162 The response further noted that financial publications generally 

publish pricing information for open-end CISs on a daily basis and for closed-end CISs on a 

weekly basis. 

Additionally, and not noted in SEC staff’s 2014 self-assessment, Item 8 of Form N-2 requires 

closed-end CISs to disclose certain historical share price data for exchange traded common 

stock they issue and financial publications also generally publish pricing information for 

exchange-traded closed-end CISs on a daily basis. Moreover, an ETF is required to disclose 

certain pricing information on its website, e.g., information relating to the ETF’s NAV and its 

market closing prices. In addition, the applicable exchange on which the closed-end CIS and 

ETF are listed may also require additional pricing information. 

10. Are there regulatory requirements, rules of practice, and/or rules addressing pricing 

errors? Are the relevant regulatory authorities able to enforce these rules? 

Yes. In general, and as noted in SEC staff’s 2014 self-assessment in response to Principle 27, 

Question 8, there are industry practices which exist for addressing pricing errors, and the SEC 

can bring an enforcement action if there is a violation of federal securities law regarding 

pricing errors. The response further noted that a CIS typically would not report pricing errors 

to the SEC unless the error is required to be reflected in its financial statements filed with the 

SEC. Since then, however, (and as previously noted) the SEC adopted Form N-CEN, which 

requires, among other things, that an open-end CIS indicate whether, during the reporting 
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92 SECURITIES AND EXCHANGE COMMISSION

163 See Investment Company Reporting Modernization, Release Nos. 33-10231, 34-79095, IC-32314 (Oct. 

13, 2016), available at https://www.sec.gov/rules/final/2016/33-10231.pdf; See also Form N-CEN, Item B.22. 

164 See In the Matter of Pacific Investment Management Company LLC, Release No. IC-32376 (Dec. 1, 2016), 

(settled action), available at https://www.sec.gov/litigation/admin/2016/ia-4577.pdf; In the Matter of Calvert 

Investment Management, Inc., Release No. IC-32321 (Oct. 18, 2016), (settled action), available at 

https://www.sec.gov/litigation/admin/2016/ia-4554.pdf.

165 Please also see SEC staff’s self-assessment in response to Principle 27, Question 7(b) regarding rules 

applicable to redemptions and subscriptions. 

period, it made any payments, regardless of the source of the payment, to shareholders or 

reprocessed shareholder accounts as a result of an NAV error.163

The SEC has brought enforcement actions against CIS operators for violating, or causing a CIS 

to violate, SEC statutes, rules, and regulations: (i) prohibiting a CIS from selling, redeeming or 

purchasing redeemable securities except at a price based on the current net asset value of 

such security; (ii) prohibiting a CIS from postponing the date of payment or satisfaction upon 

redemption for more than seven days; and (iii) requiring policies and procedures reasonably 

designed to prevent such violations164. 

11. Does the regulatory system address the general or exceptional circumstances in which 

there may be suspension, or deferral, of: routine valuation and pricing; or of regular 

redemption, of CIS units or shares? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 27, 

Question 9.

12. Does the regulator have the power to ensure compliance with the rules applicable to 

asset valuation, pricing and suspension of the redemption and subscriptions? 

Yes. As a supplement to SEC staff’s 2014 self-assessment in response to Principle 27, 

Question 10, SEC staff notes that the SEC has the power to ensure compliance with the rules 

applicable to suspension of redemptions and subscriptions, in addition to asset valuation and 

pricing, through examinations of its registrants and through enforcement actions.165 OCIE 

typically reviews redemptions and redemption procedures during its examinations of CISs, 

CIS operators, and third-party administrators that perform certain operational and 

administrative functions for CISs.

OCIE has also conducted risk-targeted examinations focused on the conditions and 

responsive compliance controls of multiple CISs relating to liquidity risk, and redemptions. 

OCIE may also review certain CIS’s policies and procedures related to liquidity risk 

management. 

The SEC also enforces the statute and the rules thereunder applicable to asset valuation, 

pricing, and suspension of redemptions and subscriptions. For example, the SEC brought an 

enforcement action against a CIS operator for overstating the value of certain portfolio 
PRINCIPLE 27 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 93

166 See In the Matter of Pacific Investment Management Company LLC, Release No. IC-32376 (Dec. 1, 2016), 

(settled action), available at https://www.sec.gov/litigation/admin/2016/ia-4577.pdf. 

securities, which caused the CIS to overstate its net asset value. The SEC charged the CIS 

operator with making materially misleading statements to the board of trustees for the CIS, 

for policies and procedures failures around pricing of securities, and for causing the CIS to 

execute transactions in redeemable securities at prices not based on the current net asset 

value. The CIS operator settled to the SEC charges, agreed to retain an independent 

compliance consultant to review policies and procedures around pricing and valuation, to pay 

$18.3 million in civil monetary penalties, and to disgorge $1.3 million of ill-gotten gain plus 

$198,179.04 in prejudgment interest.166 The SEC also has brought other enforcement actions 

related to inappropriate valuation and described in SEC staff’s 2014 self-assessment in 

response to Principle 27, Question 10.

13. Does the regulatory system require that the regulator: 

(a) Be kept informed of any suspension or deferral of redemption rights? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 27, 

Question 11(a).

(b) Have the authority to address situations where the CIS operator: is failing to 

honour redemptions; or is imposing a suspension of redemptions in a manner 

that is not consistent with the CIS constitutive documents and prospectus, or 

the contractual relationship between the CIS participants and the CIS 

operator; or is otherwise deemed to be in violation of national law? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 27, 

Question 11(b).
UNITED STATES PRINCIPLE 28

94 SECURITIES AND EXCHANGE COMMISSION

Principle 28 Regulation should ensure that hedge funds and/or hedge funds 

managers/advisers are subject to appropriate oversight.

Key Questions

Registration/Authorization of Hedge Fund Managers/Advisers and/or, where relevant, the 

Hedge Fund

1. Does the regulatory system set standards for:

(a) The registration/authorization and the regulation of those who wish to 

operate hedge funds (managers/advisers)? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 28, 

Question 1(a).

(b) And/or the registration of the fund? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 28, 

Question 1(b).

2. Does the regulatory system specify the information contemplated by Key Issue 2 that 

must be provided to the regulator at the time of the registration/authorization?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 28, 

Question 2.

Standards for Internal Organization and Operational Conduct

3. Does the regulatory system set (in view of the risk posed) standards for internal 

organization and operational conduct to be observed, on an on-going basis, by the 

hedge fund manager/adviser, including appropriate risk management and protection, 

and segregation of client money and assets?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 28, 

Question 3.

Conflicts of Interest and Other Conduct of Business Rules

4. Does the regulatory system set standards for hedge fund managers/advisers to 

appropriately manage conflicts of interest, and provide full disclosure and transparency 

to the regulator and investors (including potential investors) about such conflicts and 

how they manage them?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 28, 

Question 4.

Disclosure to the Regulator and to Investors

5. Is the regulator able to obtain from hedge fund managers/advisers appropriate 

information about their operations and about the funds that they manage that allow it 

to assess the risks that hedge funds pose to systemic stability? 
PRINCIPLE 28 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 95

167 See Risk-Based Examination Initiatives Focused on Registered Investment Companies, OCIE Risk Alert 

(Nov. 8, 2018), available at https://www.sec.gov/files/OCIE%20Risk%20Alert%20-%20RIC%20Initiatives_0.pdf. 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 28, 

Question 5.

6. Does the regulatory system, in view of the risks posed, set standards for the proper 

disclosure by hedge fund managers/advisers, or by the hedge fund, to investors?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 28, 

Question 6.

Prudential regulation

7. Are hedge fund managers/advisers, which are required to register, subject to 

appropriate ongoing prudential requirements that reflect the risks they pose?

[Self-contained answer; no need to consult SEC staff’s 2014 self-assessment]

FSOC may subject certain nonbank financial companies to oversight by the Federal Reserve 

and additional prudential standards if it determines that they could pose a threat to the 

financial stability of the U.S. To date, FSOC has not determined that any hedge funds or 

hedge fund advisers should be subject to Federal Reserve oversight or additional prudential 

standards. Additionally, FSOC recently proposed interpretative guidance that would 

implement an activities-based approach to its monitoring activities, including leveraging the

expertise of existing regulators in pursuing the implementation of actions to address 

potential risks. SEC staff also notes that Form PF, which is required to be filed by SECregistered investment advisers with at least $150 million in private fund assets under 

management, provides data that is useful to FSOC and the SEC, in part, in monitoring hedge 

funds.

Supervision and enforcement

8.

(a) Does the regulatory system provide for ongoing supervision of the hedge 

fund managers/advisers which are required to register? 

(b) Does the regulator have the power to access and inspect the hedge fund 

managers/advisers and their records and/or the hedge funds?

(c) Does the regulator have the authority to enforce against wrongdoers?

Yes. As noted in SEC staff’s 2014 self-assessment in response to Principle 28, Question 8, in 

general, the SEC’s supervision of hedge fund managers is primarily performed by OCIE 

through a risk-based examination process, with emphasis placed on the highest risk firms and 

activities at any point in time.

For example, in 2018, OCIE launched a series of examinations related to hedge fund advisers 

that focused, in part, on the side-by-side management of mutual funds and hedge funds.167 
UNITED STATES PRINCIPLE 28

96 SECURITIES AND EXCHANGE COMMISSION

168 See, e.g., SEC v. Goldsky Asset Management, LLC and Kenneth Grace, Action No. 18-civ-08870 (S.D.N.Y.) 

(filed Sept. 28, 2018), (settled action), available at https://www.sec.gov/litigation/litreleases/2018/lr24291.htm; In 

the Matter of Cecil Gregory Earls and Thomas R. Caggiano, Release No. 33-Release No. 10546 (Sept. 14, 2018), 

(settled action), available at https://www.sec.gov/litigation/admin/2018/33-10546.pdf; In the Matter of VSS Fund 

Management LLC and Jeffrey T. Stevenson, Release No. IA-5001 (Sept. 7, 2018), (settled action), available at 

https://www.sec.gov/litigation/admin/2018/ia-5001.pdf; In the Matter of Lyxor Asset Management, Inc., Release 

No. IA-4932 (Jun. 4, 2018), (settled action), available at https://www.sec.gov/litigation/admin/2018/ia-4932.pdf; In 

the Matter of Aberon Capital Management, LLC and Joseph Krigsfeld, Release No. IA-4914 (May 24, 2018), 

(settled action), available at https://www.sec.gov/litigation/admin/2018/ia-4914.pdf.

169 See, e.g. In the Matter of Corinthian Capital Group, LLC, Peter B. Van Raalte and David G. Tahan, Release 

No. IA-5229 (May 6, 2019), (settled action), available at https://www.sec.gov/litigation/admin/2019/ia-5229.pdf; 

SEC v. Abraaj Investment Management Limited, and Arif Naqvi, Action No. 19-civ-03244 (S.D.N.Y.) (filed Apr. 11, 

2019), available at https://www.sec.gov/litigation/litreleases/2019/lr24449.htm; SEC v. Michael B. Rothenberg, et 

al., Action No. 18-civ-05080 (N.D.Cal.) (filed Aug. 20, 2018), available at 

https://www.sec.gov/litigation/litreleases/2018/lr24367.htm. 

170 See, e.g., In the Matter of Mutual Coin Fund LLC and Usman Majeed, Release No. 33-10624 (Apr. 1, 

2019), (settled action), available at https://www.sec.gov/litigation/admin/2019/33-10624.pdf; In the Matter of 

CoinAlpha Advisors LLC, Release No. 33-10582 (Dec. 7, 2018), (settled action), available at 

https://www.sec.gov/litigation/admin/2018/33-10582.pdf; Crypto Asset Management, LP and Timothy Enneking, 

Release No. 33-10544 (Sep. 11, 2018), (settled action), available at https://www.sec.gov/litigation/admin/2018/33-

10544.pdf.

171 See, e.g., In the Matter of Cushing Asset Management, L.P., Release No. IC-33226 (Sep. 14, 2018), 

(settled action), available at https://www.sec.gov/litigation/admin/2018/ic-33226.pdf; In the Matter of Ophrys, 

LLC, Rel. No. IA-5041 (Sep. 21, 2018), (settled action), available at https://www.sec.gov/litigation/admin/2018/ia5041.pdf.

172 See, e.g., SEC v. Premium Point Investments LP, et al., 18-civ-04145 (S.D.N.Y.) (filed May 9, 2018), 

available at https://www.sec.gov/litigation/litreleases/2018/lr24138.htm).

173 See, e.g., NB Alternatives Advisers LLC, Release No. IA-5079 (Dec. 17, 2018), (settled action), available at 

https://www.sec.gov/litigation/admin/2018/ia-5079.pdf).

One focus of the initiative is to examine hedge fund advisers that provide advice to both 

mutual funds and hedge funds, particularly when managed pursuant to similar strategies 

and/or by the same portfolio managers, which may present certain risks to retail investors. 

For more information on OCIE’s examinations of investment advisers, including examination 

coverage, please see the response to Principle 24, Question 8. 

The SEC has broad authority to bring enforcement actions against hedge funds and/or hedge 

fund managers who violate the federal securities laws. The SEC has brought numerous recent 

enforcement actions against hedge fund advisers for a variety of misconduct, including false 

and misleading statements,168 misappropriation or misuse of fund assets,169 unregistered 

fund offerings,

170 prohibited transactions,171 improper valuation of fund assets,172 and 

misallocation of fees and expenses.173 

9. Subject to appropriate confidentiality safeguards and national law restrictions, from the 

point of view of supervision and enforcement, does the regulator have the power to: 

(a) Collect where necessary relevant information from hedge fund 

managers/advisers and/or hedge funds (and through cooperation with other 

domestic regulators from hedge fund counterparties) also on behalf of a 

foreign regulator? 
PRINCIPLE 28 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 97

No significant update from SEC staff’s 2014 self-assessment in response to Principle 28, 

Question 9(a).

(b) Exchange information on a timely and ongoing basis, as deemed appropriate, 

with other relevant regulators on internationally active hedge funds that may 

pose systemic or other significant risks? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 28, 

Question 9(b).

10. Is the securities' regulator able to obtain from the hedge fund operator/adviser – if 

necessary working with other regulators – non-public reporting of information on the 

hedge funds’ exposure to counterparties, (which may include prime brokers, banks or 

OTC derivative counterparties)? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 28, 

Question 10.
UNITED STATES PRINCIPLE 29

98 SECURITIES AND EXCHANGE COMMISSION

Principle 29 Regulation should provide for minimum entry standards for market 

intermediaries.

Key Questions (please answer with respect to market intermediaries that are direct 

participants in trading venues, providers of direct electronic access to such venues and/or 

first tier direct electronic access clients, and operators of trading venues)

Given the scope of coverage of market intermediaries set forth by the IMF for Principles 29-

32 (“market intermediaries that are direct participants in trading venues, providers of direct 

electronic access to such venues and/or first tier direct electronic access clients, and 

operators of trading venues”), SEC staff’s responses to these Principles are generally focused 

on updates to the relevant market access and trading venue rules that apply to market 

intermediaries. These updates discuss market intermediaries that are subject to either: (i) 

Exchange Act Rule 15c3-5 – Risk Management Controls for Brokers or Dealers with Market 

Access; or (ii) Regulation ATS. As described in more detail below, these updates apply to 

broker-dealers subject to Rule 15c3-5 or alternative trading systems subject to Regulation 

ATS, and not, for example, investment advisers. 

• Rule 15c3-5 applies to broker-dealers with access to trading securities on an 

exchange or ATS as a result of being an exchange member, an ATS subscriber, or an 

ATS operator with non-broker-dealer subscribers. Rule 15c3-5 (Risk Management 

Controls for Brokers or Dealers with Market Access) was adopted in 2010 and 

described in detail in response to Principle 6, Question 1 and Principle 31, Question 7 

in SEC staff’s 2014 self-assessment. There have been no significant updates to the 

Market Access Rule since that time. 

• Under Regulation ATS, an entity that falls within the definition of an exchange may 

register as an exchange, or as a broker-dealer and comply with Regulation ATS. If the 

entity chooses to register as an exchange, it must meet all requisite statutory and 

regulatory obligations discussed above applicable to exchanges. If an entity chooses 

to be an ATS, it must register as a broker-dealer, fulfil all of the registration 

requirements (as described in SEC staff’s response to Principle 9, Question 1(a) in its 

2014 self-assessment), be a member of a national securities association (e.g., FINRA), 

and comply with certain reporting and record-keeping requirements set forth under 

Regulation ATS. Further requirements relating to Regulation ATS are described in 

response to Principle 33 in SEC staff’s 2014 self-assessment. Since then, the SEC has 

adopted a number of amendments relating to Regulation ATS, which are described in 

more detail in response to Principle 33.

In the questions that follow, SEC staff has provided significant updates regarding the market 

intermediaries that are subject to Rule 15c3-5 and Regulation ATS to the extent it is relevant 

to the key question. The requirements under Rule 15c3-5 and Regulation ATS apply to 

broker-dealers, which are subject to the broker-dealer licensing requirements described in 

SEC staff’s 2014 self-assessment in response to Principle 29, Question 1. 

In the case of first tier direct access clients, the registered broker-dealer providing direct 

access is required under Rule 15c3-5 to establish, document, and maintain a system of risk 
PRINCIPLE 29 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 99

management controls and supervisory procedures that, among other things, are reasonably 

designed to: (i) systematically limit the financial exposure of the broker or dealer that could 

arise as a result of market access, and (ii) ensure compliance with all regulatory requirements 

that are applicable in connection with market access. Accordingly, any updated information 

in SEC staff’s response is limited to intermediaries that are registered broker-dealers.

Authorization

1. Does the jurisdiction require that, as a condition of operating a securities business, the 

market intermediaries (as defined above) are licensed?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 29, 

Question 1. 

2. Are there minimum standards or criteria that all applicants for licensing must meet 

before a licence is granted (or denied) that are clear and publicly available, which:

(a) Are fair and equitable for similarly situated market intermediaries?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 29, 

Question 2(a).

(b) Are consistently applied?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 29, 

Question 2(b).

(c) Include an initial capital requirement, as applicable?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 29, 

Question 2(c).

(d) Include a comprehensive assessment of the applicant and all those in a position 

to control, or materially influence, the applicant, which requires a 

demonstration of appropriate knowledge, business conduct, resources, skills, 

ethical attitude (including a consideration of past conduct)?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 29, 

Question 2(d).

(e) Include an assessment of the sufficiency of internal organization and risk 

management and supervisory systems in place, including relevant written 

policies and procedures, which enable ongoing monitoring as to whether the 

minimum standards are still met?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 29, 

Question 2(e).
UNITED STATES PRINCIPLE 29

100 SECURITIES AND EXCHANGE COMMISSION

3. Does the regulator, or the SRO subject to the regulator’s oversight, have in place 

processes and resources to effectively carry out a review of applications for licence?

Yes. To the extent these processes apply to broker-dealers that provide market access or 

operate an ATS, there is no significant update from SEC staff’s 2014 self-assessment in 

response to Principle 29, Question 3. Below is updated information on the examination 

program.

OCIE may conduct inspections of FINRA’s membership application program regarding 

whether FINRA has appropriately granted membership only to firms that meet all of the 

applicable requirements and to help ensure FINRA has not granted membership to firms that

are statutorily disqualified from membership. This type of review would have previously been 

done through district office inspections as noted in SEC staff’s 2014 self-assessment. 

See response to Principle 33, Question 1, below, for information on filings made under 

Regulation ATS.

Authority of Regulator

4. Does the relevant authority have the power to:

(a) Refuse licensing, subject only to administrative or judicial review, if 

authorization requirements have not been met?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 29, 

Question 4(a).

(b) Withdraw, suspend or apply a condition to a licence where a change in control 

or other change results in a failure to meet relevant requirements on an

ongoing basis?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 29, 

Question 4(b).

(c) Take effective steps to prevent the employment of persons (or seek the removal 

of persons) who have committed securities violations or who are otherwise 

unsuitable, so that they cannot continue to engage in intermediary activities, 

even if these persons are not separately licensed market intermediaries, if they 

can have a material influence on the firm? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 29, 

Question 4(c).

Ongoing Requirements

5. Are market intermediaries required: to update periodically relevant information with 

respect to their licence; and to report immediately to the regulator (or licensing 
PRINCIPLE 29 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 101

authority) material changes in the circumstances affecting the conditions of the 

licence?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 29, 

Question 5.

6. Is the following relevant information about licensed market intermediaries available to 

the public:

(a) The existence of a licence, its category and status?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 29, 

Question 6(a).

(b) The scope of permitted activities and the identity of senior management and 

names of other authorized individuals who act in the name of the intermediary?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 29, 

Question 6(b).

Investment Advisers

7. Does the regulatory scheme for investment advisers require that, as applicable:

(a) If an investment adviser deals on behalf of clients, the capital and other 

operational controls (explained in Principles 29 to 32) applicable to other 

market intermediaries also should apply to the adviser?

Please note that this question is not applicable to broker-dealers that provide market access 

or operate an ATS.

(b) If the investment adviser does not deal but is permitted to have custody of 

client assets, regulation provides for the protection of client assets, including 

segregation and periodic or risk-based inspections (either by the regulator or 

an independent third party) and capital and organizational requirements as 

explained under Principles 29 to 32?

Please note that this question is not applicable to broker-dealers that provide market access 

or operate an ATS.

(c) In the case of both (a) and (b), as well as investment advisers who manage client 

portfolios without dealing on behalf of clients or holding client assets, does 

regulation impose relevant requirements that cover recordkeeping, disclosure 

and conflicts of interest as explained in Principle 31?

Please note that this question is not applicable to broker-dealers that provide market access 

or operate an ATS.
UNITED STATES PRINCIPLE 29

102 SECURITIES AND EXCHANGE COMMISSION

174 See Section 15F(a) of the Exchange Act. The term “security-based swap dealer” includes persons who 

engage in specified dealing and market-making activities involving security-based swaps. The SEC and CFTC, in 

consultation with the Federal Reserve, adopted new rules and interpretive guidance to further define the term 

“security-based swap dealer” and other related terms. See Exchange Act Rules 3a71-1 and 3a71-2.

175 See Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants, 

Release No. 34-75611 (Aug. 5, 2015), available at https://www.sec.gov/rules/final/2015/34-75611.pdf.

176 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major 

Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, Release No. 34-

86175 (Jun. 21, 2019), available at https://www.sec.gov/rules/final/2019/34-86175.pdf.

177 See Form SBSE, available at https://www.sec.gov/files/form-sbse.pdf. 

Derivatives Market Intermediaries

8. In jurisdictions where DMIs are treated separately from market intermediaries, as 

explained in the Scope Section, does the regulatory system require that DMIs be 

subject to registration or licensing, recognizing that in certain limited circumstances 

full application of requirements and standards may not be appropriate for certain types 

of entities? 

[This is a new question for the 2020 FSAP]

Please note that the following information applies to security-based swap dealers only in 

their capacity as such, and does not apply where such entities deal in other derivatives 

products or in their capacity as a broker-dealer that provides market access or operates an 

ATS.

Yes. Section 15F of the Exchange Act prohibits any person from acting as a security-based 

swap dealer (SBSD) without being registered with the SEC.174 In 2015, the SEC adopted rules 

and forms to establish a registration process for these entities.175 Although the rules are 

currently in effect, the compliance date for SBSD registration is 18 months after the later of: 

(i) the effective date of final rules establishing recordkeeping and reporting requirements for 

SBSDs or (ii) the effective date of final rules that the SEC adopts addressing the cross-border 

application of certain security-based swap requirements.176

The registration rules for SBSDs provide a process by which SBSDs may apply for registration 

with the SEC. 

• Form “Application for Registration of Security-based Swap Dealers and Major 

Security-based Swap Participants” (Form SBSE). Registration form for stand-alone 

security-based swap dealers. Similar to Form BD, Form SBSE requests extensive 

information about the background of the applicant, including the type of business in 

which it proposes to engage, the identity of the applicant’s direct and indirect owners, 

and other control persons including executive officers, and whether the applicant or 

any of its control affiliates has been subject to certain criminal prosecutions, 

regulatory actions, or civil actions;177 
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SECURITIES AND EXCHANGE COMMISSION 103

178 See Form SBSE-A, available at https://www.sec.gov/files/formsbse-a.pdf. 

179 See Form SBSE-BD, available at https://www.sec.gov/files/formsbse-bd.pdf. 

• Form “Application for Registration of Security-based Swap Dealers and Major 

Security-based Swap Participants that are Registered or Registering with the 

Commodity Futures Trading Commission as a Swap Dealer or Major Swap Participant” 

(Form SBSE-A). Registration form for security-based swap dealers already registered 

with the CFTC as a swap dealer;178 and 

• Form “Application for Registration of Security-based Swap Dealers and Major 

Security-based Swap Participants that are Registered Broker-dealers” (Form SBSE-BD). 

Registration form for security-based swap dealers already registered with the 

Commission as a broker-dealer.179 

Based on the information provided in a completed application, the SEC will either grant 

registration or begin proceedings to determine whether it should deny registration. SBSDs 

have an ongoing requirement to promptly update their Forms SBSE, SBSE-A, or SBSE-BD, as 

applicable, when the information on the form becomes inaccurate.
UNITED STATES PRINCIPLE 30

104 SECURITIES AND EXCHANGE COMMISSION

180 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major 

Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, Release No. 34-

86175 (Jun. 21, 2019), available at https://www.sec.gov/rules/final/2019/34-86175.pdf. 

Principle 30 There should be initial and ongoing capital and other prudential 

requirements for market intermediaries that reflect the risks that the 

intermediaries undertake.

Key Questions (please answer with respect to market intermediaries that are direct 

participants in trading venues, providers of direct electronic access to such venues and/or 

first tier direct electronic access clients, and operators of trading venues)

Please see applicable SEC staff response regarding the scope for Principle 29, above. 

1. Are there initial and ongoing minimum capital requirements for market intermediaries? 

Are there also liquidity standards? Do the capital and liquidity standards address 

solvency?

As noted above in SEC staff responses to Principles 6 and 29, on June 21, 2019, the 

Commission adopted rules that, among other things, increase the minimum net capital 

requirements for broker-dealers that use internal models to compute net capital (ANC 

broker-dealers).180 For example, under these rules, ANC broker-dealers will be subject to: (i) 

minimum tentative net capital requirements (tentative net capital equals net capital before 

deducting market and credit risk charges) of $5 billion and (ii) a minimum net capital 

requirement that is the greater of a fixed-dollar amount of $1 billion and an amount equal to 

2% of the firm’s exposures to its SBS customers, plus the existing ratio-based minimum net 

capital requirements in Rule 15c3-1 (either the 15-to-1 aggregate indebtedness ratio or the 

2% of customer debit items ratio).

The SEC also increased the early warning notification requirement that requires an ANC 

broker-dealer to provide notification to the SEC if the firm’s tentative net capital falls below 

$6 billion. With respect to applying credit risk charges, the SEC also modified the existing 

portfolio concentration charge for ANC broker-dealers so that firms must take a capital 

charge equal to the aggregate amount of uncollateralized current exposures across all 

counterparties arising from derivatives transactions that exceed 10% of the firm’s tentative 

net capital (a reduction from 50% of the firm’s tentative net capital). The 10% cap was 

designed to limit the amount of a firm’s capital base that comprises unsecured receivables. 

These assets generally are illiquid and cannot be readily converted to cash, particularly in a 

time of market stress. Permitting additional unsecured receivables to be allowable assets for 

capital purposes could substantially impair the firm’s liquidity and ability to withstand a 

financial shock. In 2015, FINRA also published Regulatory Notice 15-33 

(http://www.finra.org/sites/default/files/Regulatory-Notice_15-33.pdf) which provides 

guidance on liquidity risk management practices directed to firms that hold inventory 

positions or clear and carry customer transactions. In the notice, FINRA noted that it expects 

that each firm would, among other things, rigorously evaluate its liquidity needs related to 
PRINCIPLE 30 UNITED STATES

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181 See SIPC, 2018 Annual Report (Apr. 30, 2019), available at https://www.sipc.org/media/annualreports/2018-annual-report.pdf. 

182 SIPC (Securities Investor Protection Corporation) was created under SIPA (Securities Investor Protection 

Act of 1970) as a non-profit membership corporation. SIPA affords certain protections against loss to customers 

resulting from broker-dealer failures.

both market wide stress and idiosyncratic stresses; develop contingency plans for addressing 

those risks so that the firm will have sufficient liquidity to operate after the stress occurs while 

continuing to protect all customer assets; and conduct stress tests and other reviews to 

evaluate the effectiveness of the contingency plans.

2. Are the capital adequacy requirements structured to result in capital addressed to the 

full range of risks to which market intermediaries are subject (e.g., market, credit, 

liquidity and operational risks)? 

Yes. As discussed in SEC staff’s 2014 self-assessment in response to Principle 30, Question 1 

and Principle 31, Question 1, Exchange Act Rule 15c3-1 (commonly referred to as the Net 

Capital Rule) sets forth many of the capital requirements for broker-dealers. The Net Capital 

Rule, in conjunction with the other broker-dealer financial responsibility rules, has continued 

to facilitate prudent operation of broker-dealers since SEC staff’s 2014 self-assessment. As 

noted above in the response to Principle 30, Question 1, the SEC recently adopted changes to 

rules applicable to ANC broker-dealers that, among other things, increase the minimum net 

capital requirements. However, to the extent these rules apply to broker-dealers that provide 

market access or operate an ATS, there is no significant update from SEC staff’s 2014 selfassessment in response to Principle 30, Question 2. 

In addition, SEC staff would like to note the following updated information regarding recent 

SIPC activity:

According to the 2018 SIPC Annual Report,

181 since its inception in 1971,182 SIPC has initiated 

customer protection proceedings for only 330 broker-dealers, representing less than 1% of 

the approximately 40,000 broker-dealers that have been SIPC members during the last 48 

years. Over the last 10-year period, the annual average number of new cases per year was 

0.8. 

3. Are capital adequacy requirements sensitive to the quantum of risks undertaken; that 

is, does required capital increase as risk increases (e.g., in the event of large market 

moves)?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 30, 

Question 3.

4. Are capital standards designed to allow an intermediary to absorb some losses, and to 

wind down its business over a relatively short period without loss to its clients or 

disrupting the orderly functioning of the markets?
UNITED STATES PRINCIPLE 30

106 SECURITIES AND EXCHANGE COMMISSION

No significant update from SEC staff’s 2014 self-assessment in response to Principle 30, 

Question 4. 

5. Are relevant market intermediaries required to maintain records such that capital levels 

can be readily determined at any time? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 30, 

Question 5. 

6. Are the detail, format, frequency and timeliness of reporting to the regulator, and/or 

the SRO, sufficient to reveal a significant deterioration in the capital adequacy position 

of market intermediaries?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 30, 

Question 6.

7. Is the financial position of the intermediary subject to audit by independent auditors 

to provide additional assurance that the financial position reflects the risk that the 

market intermediary undertakes? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 30, 

Question 7.

8. Does the regulator:

(a) Regularly review market intermediaries’ capital levels? 

To the extent these rules apply to broker-dealers that provide market access or operate an 

ATS, there is no significant update from SEC staff’s 2014 self-assessment in response to 

Principle 30, Question 8(a). With regard to examinations, as an update to SEC staff’s 2014 

self-assessment, OCIE continues to uses a risk-based approach for selecting which firms, 

areas, and issues to examine and draws on a variety of resources, including its staff’s 

specialized knowledge, risk analytics, and advanced technology to target its resources most 

efficiently on the areas that pose the highest risk to investors, the markets, or capital 

formation. 

Similarly, FINRA’s Member Supervision Department is responsible for conducting routine firm 

examinations and for cause reviews. The Member Supervision program is risk-based with 

regard to both the frequency of examination as well as the scope of the examination. All 

firms are monitored on an ongoing basis and are assessed formally on an annual basis to 

determine which firms pose higher risk and warrant a firm examination. 

(b) Take appropriate action when these reviews indicate material deficiencies? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 30, 

Question 8(b).
PRINCIPLE 30 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 107

9.

(a) Does the regulator have specific authority to impose: restrictions on a market 

intermediary’s regulated business activities; and more stringent capital 

monitoring and/or reporting requirements, if a market intermediary’s capital 

deteriorates so as to endanger its capacity to fulfil its obligations or when it 

falls below minimum requirements?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 30, 

Question 9(a).

(b) Is there evidence that the regulator exercises this authority? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 30, 

Question 9(b).

10. Does the prudential framework address risks from outside the regulated entity, for 

example, from unlicensed affiliates and off-balance sheet affiliates?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 30, 

Question 10.
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108 SECURITIES AND EXCHANGE COMMISSION

Principle 31 Market intermediaries should be required to establish an internal 

function that delivers compliance with standards for internal 

organization and operational conduct, with the aim of protecting the 

interests of clients and their assets and ensuring proper management 

of risk, through which management of the intermediary accepts 

primary responsibility for these matters.

Key Questions (please answer with respect to market intermediaries that are direct 

participants in trading venues, providers of direct electronic access to such venues and/or 

first tier direct electronic access clients, and operators of trading venues)

Please see applicable SEC staff response regarding the scope for Principle 29 above. 

Management and Supervision

1. With regards to a market intermediary’s internal organization, does the regulatory 

framework require the following to be considered:

(a) An appropriate management and organization structure, including in relation 

to activities that have been outsourced?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 1(a).

(b) Adequate internal controls?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 1(b).

(c) Management that is required to bear primary responsibility for ensuring the 

maintenance of appropriate standards of conduct and adherence to proper 

procedures by the whole firm?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 1(c).

2. Does the regulatory framework require market intermediaries: to provide all relevant 

information about the business in a timely, readily accessible way; and to regularly 

report to management? Is such information subject to procedures intended to maintain 

its security, availability, reliability and integrity?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 2.

3. Does the regulatory framework require a market intermediary to be subject to an 

objective, periodic evaluation of its internal controls and risk management processes? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 
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SECURITIES AND EXCHANGE COMMISSION 109

183 See Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap 

Participants, Release No. 34-77617 (Apr. 14, 2016), available at https://www.sec.gov/rules/final/2016/34-

Question 3.

Organizational requirements

4. Does the regulatory framework include the assessment of a market intermediary’s 

compliance function, taking into account the market intermediary’s size and business? 

When the regulator becomes aware of deficiencies are steps taken to require market 

intermediaries to improve their compliance function?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 4.

5. Does the regulatory framework require a market intermediary to establish and maintain 

appropriate systems of client protection, risk management and internal and operational 

controls, including policies, procedures, and controls relating to all aspects of its dayto-day business intended reasonably to ensure: 

(a) The integrity of the firm’s dealing practices, including the treatment of all clients 

in a fair, honest and professional manner?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 5(a).

(b) Appropriate segregation of key duties and functions, particularly those duties 

and functions which, when performed by the same individual, may result in 

undetected errors, or may be susceptible to abuses, which expose the firm, or 

its clients, to inappropriate risks?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 5 (b).

6. With respect to DMIs specifically:

Please note that the following questions apply to security-based swap dealers only in their 

capacity as such, and do not apply to other derivatives products or to broker-dealers that 

provide market access or operate an ATS. 

(a) Does the regulatory framework require DMIs to be subject to business conduct 

standards, tailored, as appropriate, for the OTC derivatives market? 

[This is a new question for the 2020 FSAP]

Yes. In 2016, pursuant to Section 15F of the Securities Exchange Act of 1934, the SEC 

adopted Rules 15Fh-1 through 15Fh-6, which impose business conduct standards on 

SBSDs.183 Although the rules are now effective, compliance is not required until entities are 
UNITED STATES PRINCIPLE 31

110 SECURITIES AND EXCHANGE COMMISSION

77617.pdf. See also Commission Statement on Certain Provisions of Business Conduct Standards for SecurityBased Swap Dealers and Major Security-Based Swap Participants, Release No. 34-84511 (Oct. 31, 2018), available 

at https://www.sec.gov/rules/policy/2018/34-84511.pdf. 

184 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major 

Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, Release No. 34-

86175 (Jun. 21, 2019), available at https://www.sec.gov/rules/final/2019/34-86175.pdf. 

required to register as SBSDs.

The rules require SBSDs to comply with a range of provisions designed to enhance 

transparency, facilitate informed customer decision-making, and heighten standards of 

professional conduct. For example, SBSDs are required to deal fairly with potential 

counterparties by communicating in a fair and balanced manner, disclosing material 

information about the security-based swap, including material risks, characteristics, incentives 

and conflicts of interest, and adhering to other professional standards of conduct. Additional 

requirements apply for dealings with special entities, which include municipalities, pension 

plans, endowments, and similar entities. 

(b) Does the regulatory framework require DMIs to have risk management systems 

and organization to properly identify and manage their OTC derivatives related 

business risks? 

[This is a new question for the 2020 FSAP]

Yes. Exchange Act Rule 15Fh-3(h) requires SBSDs to establish and maintain a system to 

supervise, and to diligently supervise, its business and the activities of its associated persons. 

Additionally, Exchange Act Rule 15Fk-1 requires SBSDs to designate a Chief Compliance 

Officer (CCO) on its registration form. The CCO must report directly to the board of directors 

or the senior officer of the SBSD and is responsible for a number of duties, including review 

of the SBSD’s compliance with applicable business conduct requirements; taking reasonable

steps to resolve material conflicts of interest; and preparing and signing an annual 

compliance report detailing the SBSD’s policies and procedures, the SBSD’s assessment of 

their effectiveness, areas for improvement, material non-compliance matters identified, and a 

description of the resources set aside for compliance. Although these rules are now 

effective, compliance is not required until entities are required to register as SBSDs.

In addition, the SEC has adopted rules establishing capital and margin requirements for 

SBSDs for which there is not a prudential regulator (non-bank SBSDs).184 Non-bank SBSDs 

also registered as broker-dealers (other than registered OTC derivatives dealers) will be 

subject to the pre-existing requirements in the capital rules that apply to broker-dealers, as 

amended to account for security-based swap and swap activities of broker-dealers. All other 

non-bank SBSDs will be subject to similar capital requirements in new Rule 18a-1 under the 

Exchange Act. For more information on the capital rules that apply to broker-dealers, please 

see SEC staff’s 2014 self-assessment in response to Principle 30.

Non-bank SBSDs also will be required to calculate both variation margin and initial margin in 

each account of a counterparty as of the close of business each day. Variation margin will be 
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SECURITIES AND EXCHANGE COMMISSION 111

185 See 15 U.S.C. § 78o-10(f).

186 See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based 

Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers, Release No. 34-

71958 (Apr. 17, 2014), available at https://www.sec.gov/rules/proposed/2014/34-71958.pdf.

calculated by marking the position to market and initial margin will be calculated by applying 

standardized haircuts or a margin model. Non-bank SBSDs will be required to collect initial 

margin and/or variation margin from counterparties to non-cleared security-based swap 

transactions if the margin calculations result in a requirement for the counterparty to post 

margin. Non-bank SBSDs will be required to deliver variation margin if the margin 

calculations result in a requirement to post collateral, but will not be required to deliver initial 

margin to counterparties (though the rules will not prohibit the parties from agreeing to 

exchange initial margin). The margin requirements have exceptions under which a non-bank 

SBSD need not collect variation and/or initial margin nor deliver variation margin under 

certain circumstances. Compliance with these new capital and margin rules will be required 

when entities are required to register as SBSDs.

As noted in the response to Principle 31, Question 12, below, the SEC also has adopted rules 

establishing segregation requirements for SBSDs. 

Finally, Section 15F(f) of the Exchange Act requires SBSDs to make such reports as the SEC 

requires, including reports regarding such firms’ transactions, positions, and financial 

condition.185 The SEC has proposed rules to establish a reporting and notification program 

for SBSDs that would be modelled on the reporting rules that apply to broker-dealers.186

(c) Does the regulatory framework require DMIs to design supervisory policies and 

procedures to manage their OTC derivatives operations and the activities of 

their representatives?

[This is a new question for the 2020 FSAP]

Yes. Rule 15Fh-3(h) requires SBSDs to establish and maintain a system to supervise, and 

diligently supervise, the security-based swap business in which the SBSD is engaged and the 

activities of its associated persons. The system must be reasonably designed to prevent 

violations of applicable federal securities laws and the rules relating to its business as an 

SBSD. Rule 15Fh-3(h) further requires that this system adhere to a number of specific 

requirements, including procedures:

• for supervisory review of transactions;

• for supervisory review of incoming and outgoing written correspondence with 

counterparties or potential counterparties and internal written communications 

relating to the SBSD’s business involving SBS; for periodic review of the SBS business

(at least annually) that is reasonably designed to assist in detecting and preventing 

violations of federal securities laws and rules; 

• to conduct a reasonable investigation regarding the good character, business repute, 
UNITED STATES PRINCIPLE 31

112 SECURITIES AND EXCHANGE COMMISSION

187 See Trade Acknowledgment and Verification of Security-Based Swap Transactions, Release No. 34-78011 

(Jun. 8, 2016), available at https://www.sec.gov/rules/final/2016/34-78011.pdf.

qualifications, and experience of any potential associated person of the SBSD prior to 

that person’s association with the firm; 

• to consider whether to permit an associated person to establish or maintain a 

securities or commodities account or a trading relationship in the name of, or for the 

benefit of, such associated person at another firm, and if permitted, procedures to 

supervise the associated person’s trading at such other firm; 

• to maintain a description of the supervisory system;

• to prohibit an associated person who performs a supervisory function from 

supervising his or her own activities or reporting to, or having his or her 

compensation or continued employment determined by, a person or persons he or 

she is supervising, subject to certain exceptions based on firm size and organization; 

• reasonably designed to prevent the supervisory system from being compromised due 

to conflicts of interest; and

• reasonably designed to comply with the duties set forth in section 15F(j) of the 

Exchange Act.

Although these rules are now effective, compliance is not required until entities are required 

to register as SBSDs.

(d) Does the regulatory framework require DMIs to retain OTC derivatives 

transaction records and be able to provide them in a timely, organized and 

readable manner? Does the record retention period for OTC derivatives 

transactions apply for a specified period after the transactions’ termination, 

maturity or assignment?

[This is a new question for the 2020 FSAP]

Yes. The SEC has adopted rules requiring SBSDs to exchange trade acknowledgements and 

verifications with their SBS counterparties within prescribed deadlines.187 Pursuant to 

Exchange Act Rule 15Fi-2, an SBSD must provide a trade acknowledgment through electronic 

means disclosing all the terms of a security-based swap transaction to its counterparty 

promptly, but in any event no later than the end of the first business day following the day of 

execution. Rule 15Fi-2 also requires an SBSD to establish, maintain, and enforce written 

policies and procedures that are reasonably designed to obtain prompt verification of the 

terms of a trade acknowledgment, and to promptly verify the accuracy of, or otherwise 

dispute with its counterparty, the terms of a trade acknowledgment it receives. Although 

these rules are now effective, compliance is not required until entities are required to register 

as SBSDs.
PRINCIPLE 31 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 113

188 See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based 

Swap Participants, and Broker-Dealers; Capital Rule for Certain Security-Based Swap Dealers, Exchange Act,

Release No. 34-71958 (Apr. 17, 2014), available at https://www.sec.gov/rules/proposed/2014/34-71958.pdf. The 

broker-dealer recordkeeping and reporting rules are described in the response to Principle 31, Question 10, 

below, and in SEC staff’s 2014 self-assessment in response to Principle 31, Questions 2 and 13. 

Furthermore, the SEC has proposed recordkeeping and reporting requirements for SBSDs 

that are based on the broker-dealer recordkeeping and reporting rules.188 These proposed 

rules would require, among other things, SBSDs to maintain for at least six years (the first two 

years in an easily accessible place) the SBSD’s ledgers of each security-based swap, including 

the reference security, index or obligor; the unique transaction identifier; whether the 

security-based swap is cleared; and, if cleared, identification of the clearing agency. The 

proposed rules also would require SBSDs to maintain for at least three years (the first two 

years in an easily accessible place) the SBSD’s memoranda of each purchase or sale of a 

security-based swap for the account of the SBSD (including the price; type of security-based 

swap; reference security, index or obligor; date and time of execution; effective date; 

termination or maturity date; notional amount; unique transaction identifier; and unique 

counterparty identifier), each security-based swap trade acknowledgement and verification, 

and records of each security-based swap transaction that is not verified within five business 

days of execution. 

7. Taking into account Principle 8, does the regulatory framework require a market 

intermediary:

(a) To endeavour to address a conflict of interest arising between its interests and 

those of its clients, or between its clients? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 6(a).

(b) Where the potential for conflicts arises: 

(i) to have mechanisms in place to manage conflicts of interests that seek 

to ensure an unbiased decision making process and fair treatment of 

all its clients; and

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 6(b)(i).

(ii) consider further steps if the mechanisms identified in (a) prove 

inadequate, which may include disclosure of the conflict, internal rules 

of confidentiality, and declining to act where a conflict cannot be 

resolved?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 6(b)(ii).
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114 SECURITIES AND EXCHANGE COMMISSION

8. If DEA is allowed, does the regulatory framework require market intermediaries to use 

controls, including automated pre-trade controls, which can limit or prevent a DEA 

client from placing an order that exceeds the market intermediary’s existing position 

or credit limits?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 7.

Protection of clients

9. If a market intermediary has control of, or is otherwise responsible for, assets belonging 

to a client which it is required to safeguard, are there regulations that require proper 

protection for them (for example, segregation and identification of those assets) by the 

market intermediary? Do these measures facilitate the transfer of positions and assist 

in the orderly winding up in the event of financial insolvency and the return of client 

assets?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 8.

10. Does the regulatory framework require market intermediaries to maintain accurate and 

up-to-date records and accounts of client assets that readily establish the precise 

nature, amount, location and ownership status of client assets and the clients for whom 

the client assets are held? Does the regulatory framework require that the records be 

maintained in such a way that they may be used as an audit trail?

[This is a new question for the 2020 FSAP]

Yes. The regulatory framework requires broker-dealers, including those with market access 

and operators of ATSs, to maintain accurate and up-to-date records and accounts of client 

assets that readily establish the precise nature, amount, location and ownership status of 

client assets and the clients for whom the client assets are held. Rule 17a-3 requires brokerdealers to “make and keep current” the records required by the rule, and later references a 

broker-dealer’s responsibility that “books and records be accurately maintained and 

preserved” in accordance with the recordkeeping rules. The records that Rule 17a-3 requires 

broker-dealers to make and keep include records pertaining to client assets, including:

• Blotters containing an itemized daily record of all purchases and sales of securities, all 

receipts and deliveries of securities, all receipts and disbursements of cash, and all 

other debits and credits. These records must show the account for which each such 

transaction was effected, the name and amount of securities, the unit and aggregate 

purchase or sale price (if any), the trade date, and the name or other designation of 

the person from whom purchased or received or to whom sold or delivered.

• A securities record or ledger reflecting separately for each security as of the clearance 

dates all “long” or “short” positions carried by the broker-dealer for the account of its 

customers showing the location of all securities long and the offsetting position to all 

securities short, including long security count differences and short security count 
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SECURITIES AND EXCHANGE COMMISSION 115

differences classified by the date of the physical count and verification in which they 

were discovered, and in all cases the name or designation of the account in which 

each position is carried.

• The SEC also subjects broker-dealers to its Customer Protection Rule, which requires 

that every broker-dealer obtain and maintain possession and control of customer 

securities, and maintain a separate customer reserve account that contains (at least) 

the net dollar amount of cash the broker-dealer owes to its customers.

• In addition, the Quarterly Count Rule requires a broker-dealer that maintains custody 

of securities (e.g., customer securities), on a quarterly basis, to physically examine and 

count the securities it holds, account for the securities that are subject to its control 

or direction but are not in its physical possession (e.g., securities held at a control 

location), verify the locations of securities under certain circumstances, and compare 

the results of the count and verification with its records. 

• The regulatory framework requires that the records be maintained in such a way that 

they may be used as an audit trail. Rule 17a-4 requires the records required by Rule 

17a-3 to be maintained for a period of years. For example, the blotters and securities 

record or ledger referenced above must be maintained for 6 years, the first 2 years in 

an easily accessible place.

In addition to the recordkeeping rules provided under Rule 17a-3, Regulation ATS also 

requires ATSs to make and keep certain records related to trading on the ATS and the ATS’s 

subscribers. These ATS recordkeeping requirements are designed to help facilitate the 

construction and maintenance of an audit trail and to permit surveillance and examination to

help ensure fair and orderly markets.

11. Where client assets are to be held or placed in a foreign jurisdiction and will be subject 

to the client asset protection and/or insolvency regimes of that foreign jurisdiction and 

not the home jurisdiction, does the regulatory framework require the intermediary to 

inform the clients of that fact? Does the regulatory framework require market 

intermediaries to provide any required disclosures of the relevant client asset 

protection regime(s) and arrangements and the consequent risks involved in writing, 

which is prepared in clear, plain, concise and understandable language and that avoids 

the use of legal or financial jargon that is not commonly understood?

[This is a new question for the 2020 FSAP]

Securities held outside of a broker-dealer are considered outside the broker-dealer’s 

possession or control. However, securities that are in the custody of a foreign depository, 

foreign clearing agency, or foreign custodian bank are deemed to be in the broker-dealer’s 

possession or control if the broker-dealer designates such foreign location to the SEC, and as 

a result, subject to the U.S. regulatory regime, including the customer protection rule (Rule 

15c3-3 under the Exchange Act) described in more detail in SEC staff’s 2014 self-assessment 

in response to Principle 30, Question 4. Other foreign locations are also deemed to be in the 

broker-dealer’s possession or control upon application to the SEC if the SEC finds and 
UNITED STATES PRINCIPLE 31

116 SECURITIES AND EXCHANGE COMMISSION

189 See e.g., Rule 17a-13 under the Exchange Act and FINRA Rule 4522.

190 See 15 U.S.C. § 78o-5.

191 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major 

Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, Release No. 34-

86175 (Jun. 21, 2019), available at https://www.sec.gov/rules/final/2019/34-86175.pdf. 

192 The broker-dealer segregation rules are described in SEC staff’s 2014 self-assessment in response to 

Principle 31, Question 8.

designates the foreign location to be adequate for the protection of customer securities. 

Further, SEC and FINRA rules require broker-dealers to make periodic counts, examinations, 

and verifications of their securities positions.189 For example, among other things FINRA Rule 

4522 requires that a carrying or clearing firm must receive position statements as frequently 

as good business practice requires, but no less than once per month, with respect to 

securities held by clearing corporations, other organizations or custodians. 

12. With respect to DMIs specifically, for centrally cleared OTC derivatives transactions, 

does the regulatory framework require DMIs to segregate collateral belonging to 

clients from their own proprietary assets and employ an account structure that enables 

the efficient identification and segregation of positions and collateral belonging to DMI 

clients?

[This is a new question for the 2020 FSAP]

Please note that the following question applies to security-based swap dealers only in their 

capacity as such, and does not apply to other derivatives products or to broker-dealers that 

provide market access or operate an ATS. 

Yes. Section 3E of the Exchange Act requires SBSDs to treat and deal with all customer 

money, securities, and property received to margin, guarantee, or secure a centrally cleared 

SBS as belonging to the customer.190 The SEC has also adopted rules to establish 

segregation requirements for all SBSDs.191 These segregation rules are modelled on the 

segregation rules that apply to broker-dealers.192 Compliance with these segregation rules 

will be required when entities are required to register as SBSDs.

13. Does the regulatory framework require market intermediaries to provide for an efficient 

and effective mechanism to address investor complaints?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 9.

14. Does the regulatory framework require market intermediaries to identify, and verify, 

the client’s identity using reliable, independent data, including persons who beneficially 

own or control securities?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 10.
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SECURITIES AND EXCHANGE COMMISSION 117

193 See FINRA Rule 2111.

194 The concept of suitability appears in specific SRO rules such as FINRA Rule 2111 and has been 

interpreted as an obligation under the anti-fraud provisions of the federal securities laws. For information 

regarding the suitability requirements, see SEC staff’s 2014 self-assessment in response to Principle 31, Questions 

11 and 18.

195 See Regulation Best Interest: The Broker-Dealer Standard of Conduct, Release No. 34-86031 (Jun. 5, 

2019), available at https://www.sec.gov/rules/final/2019/34-86031.pdf. 

196 See Press Release, SEC Adopts Rules and Interpretations to Enhance Protections and Preserve Choice for 

Retail Investors in Their Relationships With Financial Professionals (Jun. 5, 2019), available at 

https://www.sec.gov/news/press-release/2019-89. 

15. Does the regulatory framework require market intermediaries to obtain and retain 

information from a client about their circumstances and investment objectives relevant 

to the services to be provided?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 11.

16. Does the regulatory framework require a market intermediary to “know its customer” 

before providing specific advice to a client? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 12.

17. Does the regulatory system require that intermediaries, as defined in IOSCO’s Report 

on Suitability Requirements with respect to the Distribution of Complex Financial 

Products adopt and apply appropriate policies and procedures to distinguish between 

retail and non-retail customers when distributing complex financial products? 

[This is a new question for the 2020 FSAP]

Yes. Broker-dealers generally have an obligation to recommend only those securities or 

investment strategies involving securities that are suitable for their customers.193 The 

concept of suitability appears in specific SRO rules and has been interpreted by the courts as 

an obligation under the anti-fraud provisions of the federal securities laws.194 , 

On June 5, 2019, the Commission adopted Regulation Best Interest, which requires brokerdealers to act in the best interest of a retail customer when making a recommendation of any 

securities transaction or investment strategy involving securities to a retail customer.195 

Regulation Best Interest will enhance the broker-dealer standard of conduct beyond existing 

suitability obligations and make it clear that a broker-dealer may not put its financial interests 

ahead of the interests of a retail customer when making recommendations.196 The 

Commission also adopted on June 5, 2019 a new Form CRS Relationship Summary, which will 

require registered investment advisers and broker-dealers to provide retail investors with 

simple, easy-to-understand information about the nature of their relationship with their 
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118 SECURITIES AND EXCHANGE COMMISSION

197 See Form CRS Relationship Summary; Amendment to Form ADV, Release Nos. 34-86032; IA-5247 (Jun. 

5, 2019), available at https://www.sec.gov/rules/final/2019/34-86032.pdf. Also on June 5, 2019, the Commission 

adopted two separate interpretations under the Investment Advisers Act of 1940. See Commission Interpretation 

Regarding Standard of Conduct for Investment Adviser, Release No. IA-5248 (Jun. 5, 2019), available at 

https://www.sec.gov/rules/interp/2019/ia-5248.pdf; Commission Interpretation Regarding the Solely Incidental 

Prong of the Broker-Dealer Exclusion from the Definition of Investment Adviser, Release No. IA-5249 (Jun. 5, 

2019), available at https://www.sec.gov/rules/interp/2019/ia-5249.pdf. 

198 See Regulation Best Interest: The Broker-Dealer Standard of Conduct, Release No. 34-86031 (Jun. 5, 

2019), available at https://www.sec.gov/rules/final/2019/34-86031.pdf. 

financial professional.197 Individually and collectively, these actions are designed to (i) 

enhance and clarify the standards of conduct applicable to broker-dealers and investment 

advisers, (ii) help retail investors better understand and compare the services offered and 

make an informed choice of the relationship best suited to their needs and circumstances, 

and (iii) foster greater consistency in the level of protections provided by each regime. We 

note, however, that suitability and Regulation Best Interest apply only to recommendations 

by the broker-dealer and its associated persons and would not apply in the absence of a 

recommendation, for instance where a broker-dealer provides market access or otherwise 

operates an ATS.

18. Does the regulatory framework require market intermediaries to keep records 

containing the above information for a reasonable number of years? Is the market 

intermediary required to maintain those books and records in such a way that allows 

the supervisor to be able to find all the relevant facts relating to a particular transaction?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 13. Please also see response to Principle 31, Question 17, above, regarding 

Regulation Best Interest and the new Form CRS Relationship Summary. For example, 

Regulation Best Interest, among other things, adopted amendments to Exchange Act Rules 

17a-3 and 17a-4 to establish new record-making and recordkeeping requirements for brokerdealers with respect to certain information collected from or provided to retail customers. In 

general, these amendments would require, for each retail customer to whom a 

recommendation of any securities transaction or investment strategy involving securities is or 

will be provided, a record of all information collected from and provided to the retail 

customer pursuant to Regulation Best Interest, as well as the identity of each natural person 

who is an associated person of a broker or dealer, if any, responsible for the account.

198 The 

new Form CRS Relationship Summary is also subject to the Commission’s recordkeeping 

requirements. As noted above, the amendments adopted to Exchange Act Rules 17a-3 and 

17a-4 will require broker-dealers (i) to create a record of the date on which each relationship 

summary was provided to each retail investor, including any relationship summary provided 

before such retail investor opens an account, and (ii) to maintain and preserve a copy of each 

version of the relationship summary as well as any other records required to made. Brokerdealers will be required to maintain these records in an easily accessible place until six years 

after such record or relationship summary is created. These records will facilitate the 

Commission’s ability to inspect for and enforce compliance with the relationship summary 
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199 See Form CRS Relationship Summary; Amendment to Form ADV, Release Nos. 34-86032; IA-5247 (Jun. 

5, 2019), available at https://www.sec.gov/rules/final/2019/34-86032.pdf.

200 See Regulation Best Interest: The Broker-Dealer Standard of Conduct, Release No. 34-86031 (Jun. 5, 

2019), available at https://www.sec.gov/rules/final/2019/34-86031.pdf. 

201 See Form CRS Relationship Summary; Amendment to Form ADV (Jun. 5, 2019), available at 

https://www.sec.gov/rules/final/2019/34-86032.pdf.

requirements.199

19. Does the regulatory framework require market intermediaries to provide to the client 

a written contract of engagement or account agreement, or a written form of the 

general and specific conditions of doing business through the market intermediary?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 14.

20. Does the regulatory framework require a market intermediary to disclose, or make 

available, information to its client so that the client can make an informed investment 

decision?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 15. Please also see SEC staff’s response to Principle 31, Question 17, above,

regarding Regulation Best Interest and the new Form CRS Relationship Summary. For 

example, the disclosure obligation in Regulation Best Interest requires broker-dealers to 

make full and fair disclosure of all material facts relating to the scope and terms of the 

relationship with a retail customer, including the capacity in which they are acting with 

respect to a recommendation. The capacity disclosure requirement is designed to improve 

awareness among retail customers of the capacity in which their firm and/or financial 

professional acts when it makes recommendations so that a retail customer can more easily 

identify and understand their relationship.200 Similarly, Form CRS is designed to (i) reduce 

retail investor confusion in the marketplace for brokerage and investment advisory services,

(ii) assist retail investors with the process of deciding whether to engage, or to continue to 

engage, a particular firm or financial professional, and whether to establish, or to continue to 

maintain, an investment advisory or brokerage relationship.201

21. Does the regulatory framework require market intermediaries to provide a client with 

statements of account (including details on the client assets held for or on behalf of 

such a client) on a regular basis (at least annually) and reasonably promptly upon 

request? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 16.

22. Does the regulatory framework require market intermediaries to provide a client with 

information about any fees and commissions associated with the client’s transactions?
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120 SECURITIES AND EXCHANGE COMMISSION

202 See Regulation Best Interest: The Broker-Dealer Standard of Conduct, Release No. 34-86031 (Jun. 5, 

2019), available at https://www.sec.gov/rules/final/2019/34-86031.pdf. 

203 See Form CRS Relationship Summary; Amendment to Form ADV, Release Nos. 34-86032; IA-5247 (Jun. 

5, 2019), available at https://www.sec.gov/rules/final/2019/34-86032.pdf.

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 17. Please also see SEC staff’s responses to Principle 31, Questions 17 and 20,

above, regarding Regulation Best Interest and Form CRS Relationship Summary. 

For example, Regulation Best Interest includes a disclosure obligation, requiring brokerdealers to disclose material facts about the relationship and recommendations, including 

specific disclosures about the capacity in which the broker is acting, fees, the type and scope 

of services provided, conflicts, limitations on services and products, and whether the brokerdealer provides monitoring services.202 

In addition, under the new Form CRS Relationship Summary, a firm will be required to deliver 

a relationship summary to retail investors at the beginning of their relationship that 

summarizes information about services, fees and costs, conflicts of interest, legal standard of 

conduct, and whether or not the firm and its financial professionals have disciplinary history. 

For example, a Firm will need to summarize how its financial professionals are compensated 

(including cash and non-cash compensation) and the conflicts of interest those payments 

create. For example, the firm must, to the extent applicable, disclose whether financial 

professionals are compensated based on factors such as: the amount of client assets they 

service; the time and complexity required to meet a client’s needs; the product sold (i.e., 

differential compensation); product sales commissions; or revenue the firm earns from the 

financial professional’s advisory services or recommendations.203

23. Does the regulatory regime require that disclosures of key information regarding 

collective investment schemes (CIS) to retail investors in their distribution prior to the 

point of sale be clear, accurate and not misleading to the target investor?

[This is a new question for the 2020 FSAP]

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 17. Please also see SEC staff’s responses to Principle 31, Questions 17, 20, and 22

above, regarding Regulation Best Interest and Form CRS Relationship Summary. 

For example, under Regulation Best Interest, the Commission stated that, with regard to 

mutual fund transactions and holdings, a broker-dealer might disclose broadly that it is 

compensated by funds out of product fees or by the funds’ sponsors, and that such 

compensation gives it an incentive to recommend certain products over other products for 

which the broker-dealer receives less compensation; later, when a broker-dealer recommends 

a particular fund, it could provide more specific detail about compensation arrangements, for 

example revenue sharing associated with the fund family. In the alternative, so long as the 

material facts regarding the conflicts associated with a recommendation of a mutual fund 

were disclosed at the outset of the relationship, no further disclosure need be made at the 

time of recommendation; the rules are not requiring that information regarding conflicts be 
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204 See, e.g., In the Matter of ITG Inc. and AlterNet Securities, Inc., Release No. 34-84548 (Nov. 7, 2018) 

(settled action against ITG and its affiliate for charges arising from ITG’s misstatements and omissions about the 

operation of the firm’s dark pool and ITG’s failure to establish adequate safeguards and procedures to protect 

subscribers’ confidential trading information), available at https://www.sec.gov/litigation/admin/2018/33-

10572.pdf; In the Matter of Citigroup Global Markets, Inc. and Citi Order Routing and Execution, LLC, Release No. 

34-84124 (Sept. 14, 2018) (settled action against Citigroup Global Markets Inc. for misleading users of a dark pool 

operated by one of its affiliates), available at https://www.sec.gov/litigation/admin/2018/33-10545.pdf.; In the 

Matter of Credit Suisse Securities (USA) LLC, Release No. 34-84314 (Sept. 28, 2018) (settled action involving 

material misrepresentations and omissions made in connection with Credit Suisse’s now-closed Retail Execution 

Services business’ handling of certain customer orders), available at 

https://www.sec.gov/litigation/admin/2018/33-10565.pdf.; In the Matter of Merrill Lynch, Pierce, Fenner & Smith 

Incorporated, Release No. IA-4944 (Jun. 19, 2018) (settled action against Merrill Lynch for misleading customers 

about how it handled their orders), available at https://www.sec.gov/litigation/admin/2018/33-10507.pdf.; In the 

Matter of Citadel Securities LLC, Release No. 34-79790 (Jan. 13, 2017) (settled action against Citadel for making 

misleading statements about the way a business unit that handled retail customer orders from other brokerage 

firms priced trades); available at https://www.sec.gov/litigation/admin/2017/33-10280.pdf.; In the Matter of 

Deutsche Bank Securities Inc., Release No. IA-4590 (Dec. 16, 2016) (settled action against Deutsche Bank for 

making misleading statements to clients about the performance of a core feature of its automated order router 

that primarily sent client orders to dark pools), available at https://www.sec.gov/litigation/admin/2016/33-

10272.pdf. In 2018, the SEC also instituted an action against New York Stock Exchange and two affiliated 

disclosed on a recommendation-by-recommendation basis.

In addition, under the new Form CRS Relationship Summary, a firm will be required to deliver 

a relationship summary to retail investors at the beginning of their relationship that provides

simple, easy-to-understand information about the nature of their relationship with their 

financial professional. The relationship summary will have a standardized question-andanswer format to promote comparison by retail investors in a way that is distinct from 

existing disclosures. The relationship summary will permit the use of layered disclosure so 

that investors can more easily access additional information from the firm about these topics. 

A firm will deliver the relationship summary to existing retail investor clients and customers 

before or at the time firms open a new account that is different from the retail investor’s 

existing account. By way of example, a firm will deliver the relationship summary when they, 

among other things, recommend or provide a new service or investment outside of a formal 

account (e.g., variable annuities or a first-time purchase of a direct-sold mutual fund through 

a “check and application” process). 

24. Does the regulatory framework require market intermediaries to act with due care and 

diligence in the best interests of its clients and their assets and in a way that helps 

preserve the integrity of the market?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 31, 

Question 18. Please also see SEC staff’s responses to Principle 31, Questions 17, 20 and 23, 

above, regarding Regulation Best Interest and Form CRS Relationship Summary. 

With regard to Enforcement activity, the SEC brought recent actions against market 

intermediaries whose conduct posed a risk to market integrity or who treated customers 

unfairly by making misrepresentations about their practices such as customer order routing 

or treatment of confidential customer information.204 
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122 SECURITIES AND EXCHANGE COMMISSION

exchanges for various regulatory failures. See In the Matter of New York Stock Exchange, LLC., Release No. 34-

82808 (Mar. 6, 2018) (settled action), available at https://www.sec.gov/litigation/admin/2018/33-10463.pdf. This 

2018 action included the first charged violation of Regulation SCI, which is designed to strengthen the 

technology infrastructure and integrity of the U.S. securities markets. Id.

205 The National Examination Program Examination Priorities for 2019, available at 

https://www.sec.gov/files/OCIE%202019%20Priorities.pdf.

25. Can the regulator demonstrate that it has in place a supervision program, including 

internal processes that seek to monitor compliance by market intermediaries with these 

requirements?

To the extent these rules apply to broker-dealers that provide market access or operate an 

ATS, there is no significant update from SEC staff’s 2014 self-assessment in response to 

Principle 31, Question 19. 

For a discussion of the SEC’s examination program, including its examination authority and 

process, please see SEC staff’s 2014 self-assessment in response to Principle 31, Question 19. 

As an update to that response, OCIE has a risk-based examination approach with respect to 

the firms selected for examination, the areas of the firm examined, and the issues covered. 

Many of OCIE’s exams focus on one or more of the following areas: internal controls, financial 

operations, supervision and sales practices, and anti-money laundering. Additional focus 

areas are highlighted in OCIE’s annual examination priorities.205

OCIE continues to leverage data analysis to identify potentially problematic activities and 

firms, as well as to determine how best to scope those examinations of those activities and 

firms. OCIE also uses a risk-based strategy to set examination priorities that incorporate an 

analysis of the causes of investor harm and indicia of entity-level and market risk. For 

additional information on OCIE’s risk-based approach, see SEC staff’s 2014-self assessment in 

response to Principle 12, Question 1(b).

The chart below reflects OCIE’s examinations in FY 2016, 2017, and 2018:

FY16 FY17 FY18

Broker-Dealers 543 325 329

Transfer Agents 50 57 48

Clearing Agencies 7 14 12

The following chart reflects FINRA’s examinations for the prior three years.

FY16 FY17 FY18

Broker-Dealers 8,530 8,309 6,863
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206 SEC FY 2018 Annual Performance Report, available at 

https://www.sec.gov/files/secfy20congbudgjust_0.pdf.

207 See The National Examination Program Examination Priorities for 2019, available at 

https://www.sec.gov/files/OCIE%202019%20Priorities.pdf

208 Id.

209 Id. 

In FY18, 48% of registered broker-dealers were examined by the SEC or a SRO.206

The chart below reflects the total number of OCIE’s examinations that resulted from tips, 

complaints, and referrals:

FY16 FY17 FY18

191 177 211

Recent thematic reviews for market intermediaries include: 

• Senior Investors.

207 In 2019, OCIE is conducting examinations that review how 

broker-dealers oversee their interactions with senior investors, including their ability 

to identify financial exploitation of seniors.

• Best Execution.

208 OCIE recently conducted focused reviews of broker-dealers’ fixed 

income best execution obligations.

• Cybersecurity.

209 OCIE has launched several cybersecurity initiatives over the last 

several years to assess cyber risk at regulated entities. In 2019, OCIE will continue to 

prioritize cybersecurity in each of its five examination programs.
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124 SECURITIES AND EXCHANGE COMMISSION

Principle 32 There should be procedures for dealing with the failure of a market 

intermediary in order to minimize damage and loss to investors and to 

contain systemic risk.

Key Questions (please answer with respect to market intermediaries that are direct 

participants in trading venues, providers of direct electronic access to such venues and/or 

first tier direct electronic access clients, and operators of trading venues)

1. Does the regulator have clear plans for dealing with the eventuality of a firm’s failure, 

including a combination of activities: to restrain conduct; to ensure assets are properly 

managed; and to provide information to the market, as necessary?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 32, 

Question 1.

2. Are there early warning systems or other mechanisms in place to give the regulator 

notice of a potential default by a market intermediary, and time to address the problem 

and take corrective actions?

To the extent these rules apply to broker-dealers that provide market access or operate an 

ATS, there is no significant update from SEC staff’s 2014 self-assessment in response to 

Principle 32, Question 2. With regard to examinations, as an update to SEC staff’s 2014 selfassessment, OCIE continues to uses a risk-based approach for selecting which firms, areas, 

and issues to examine and draws on a variety of resources, including its staff’s specialized 

knowledge, risk analytics, and advanced technology to target its resources most efficiently on 

the areas that pose the highest risk to investors, the markets, or capital formation.

3. Does the regulator have the power to take appropriate actions: In particular, can it:

(a) Restrict activities of the market intermediary with a view to minimizing damage 

and loss to investors?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 32, 

Question 3(a).

(b) Require the market intermediary to take specific actions, for example, moving 

client accounts to another market intermediary?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 32, 

Question 3(b).

(c) Request appointment of a monitor, receiver, curator or other administrator, or, 

in the absence of such power, can the regulator apply to the relevant authorities 

to take possession or control of the assets held by the market intermediary or 

by a third party on behalf of the intermediary?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 32, 

Question 3(c).
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210 See SIPC, 2018 Annual Report (Apr. 30, 2019), available at https://www.sipc.org/media/annualreports/2018-annual-report.pdf. 

211 Id.

212 See In the Matter of Wedbush Securities Inc., Release No. IA-4852 (Feb. 5, 2018) (settled action), 

available at https://www.sec.gov/litigation/admin/2018/34-82630.pdf; In the Matter of Morgan Stanley & Co. LLC, 

Release No. 34-79606 (Dec. 20, 2016) (settled action), available at https://www.sec.gov/litigation/admin/2016/34-

79606.pdf; In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional 

Clearing Corp., Release No. 34-78141 (Jun. 23, 2016) (settled action), available at 

https://www.sec.gov/litigation/admin/2016/34-78141.pdf.

(d) Apply other available measures intended to minimize client, counterparty and 

systemic risk in the event of intermediary failure, such as, client and settlement 

insurance schemes, or guarantee funds?

Yes. There is no significant update from SEC staff’s 2014 self-assessment in response to 

Principle 32, Question 3(d). Please see below for updated information relating to SIPC, which 

was described in SEC staff’s 2014 self-assessment. 

SIPC maintains a SIPC Fund. Generally, if a broker-dealer fails and is not able to meet its 

obligations to customers, then customer property held by the broker-dealer is returned to 

customers on a pro rata basis. If sufficient funds are not available at the firm to satisfy 

customer net equity claims, SIPC supplements the distribution, up to a ceiling of $500,000 per 

customer, including a maximum of $250,000 for cash claims. 

The SIPC Fund is funded by assessments from SIPC’s members. Assessments in 2018 were 

$291,940,037.210 SIPC currently assesses each member at the rate of .15% of net operating 

revenues from the broker-dealer’s securities business. In addition, if the need arises, the SEC 

has the authority to lend SIPC up to $2.5 billion, which the SEC, in turn, would borrow from 

the U.S. Treasury. SIPC’s 2018 Annual Report states that “[o]f the approximately 770,400 

claims satisfied in completed or substantially completed cases as of December 31, 2018, a 

total of 356 were for cash and securities whose value was greater than the limits of protection 

afforded by SIPA. The 356 claims, a net decrease of three during 2018, represent less than 

one percent of all claims satisfied. The unsatisfied portion of claims, $49.7 million, decreased 

by $0.8 million in 2018. These remaining claims represent less than one percent of the total 

value of securities and cash distributed for accounts of customers in those cases.”211

4. Can the regulator demonstrate that it has the power and practical ability to take these 

actions against a market intermediary?

The SEC has demonstrated its power and practical ability to take action where warranted 

against market intermediaries. For example, the SEC has charged broker-dealers for 

violations of the Customer Protection Rule, which is designed to safeguard the cash and 

securities of customers so that customer assets can be promptly returned if firms fail.212 In 

addition, the Commission instituted an action against Merrill Lynch in 2016 for violations of 
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126 SECURITIES AND EXCHANGE COMMISSION

213 See In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Release No. IA-4536 (Sept. 26, 

2016) (settled action), available at https://www.sec.gov/litigation/admin/2016/34-78929.pdf.

the Market Access Rule that caused disruptive market events that created systemic risk and 

posed a risk of harm to investors.213

5. Do the regulator’s processes and procedures for addressing financial disruption include 

communication and cooperation with other regulators, both domestic and foreign, 

where appropriate, and is there evidence that contact arrangements are in place, and 

that such cooperation occurs?

To the extent these rules apply to broker-dealers that provide market access or operate an 

ATS, there is no significant update from SEC staff’s 2014 self-assessment in response to 

Principle 32, Question 5.
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214 See Regulation of NMS Stock Alternative Trading Systems, Release No. 34-83663 (Jul. 18, 2018), 

https://www.sec.gov/rules/final/2018/34-83663.pdf (adopting release). See also Regulation of NMS Stock 

Alternative Trading Systems, Release No. 34-84541 (Nov. 6, 2018), available at 

https://www.sec.gov/rules/final/2018/34-84541.pdf (making certain technical corrections to the adopting release).

215 See Regulation of NMS Stock Alternative Trading Systems, Release No. 34-83663 (Jul. 18, 2018), 

available at https://www.sec.gov/rules/final/2018/34-83663.pdf (explaining, for example, that these disclosures 

will help market participants compare and evaluate NMS Stock ATSs and make better informed decisions about 

where to route their orders to achieve their trading or investment objectives, enhance execution quality, and 

improve efficiency and capital allocation). 

Principle 33 The establishment of trading systems including securities exchanges 

should be subject to regulatory authorization and oversight.

Key Questions

Exchanges or Trading Systems subject to Regulation

1. Does the establishment of an exchange or trading system require authorization?

Yes. In the United States, exchanges and ATSs are subject to extensive regulation, including a 

registration regime. Since SEC staff’s 2014 self-assessment, the SEC has implemented key 

updates regarding Regulation ATS. 

Alternative Trading Systems (ATSs)

In July 2018, the SEC adopted amendments to enhance operational transparency and 

regulatory oversight of ATSs that trade stocks listed on a national securities exchange (NMS 

stocks), including “dark pools.”214

The amendments require an ATS that trades NMS stocks (NMS stock ATS) to file detailed 

public disclosures on new Form ATS-N. These disclosures include information regarding the 

manner in which the ATS operates, including, among other things, order types, execution and 

priority rules, segmentation of order flow, trading functionalities, fees, market data, and 

procedures related to the protection of subscriber confidentiality and fair access, as 

applicable. In addition, the Form ATS-N requires information about the ATS-related activities 

of the broker-dealer operator and its affiliates, including their trading on the ATS. 

In addition, the amendments make Form ATS-N disclosures publicly available on the SEC’s 

website, which will allow market participants to make better-informed decisions about 

whether to do business with an ATS, as well as the order handling decisions made by their 

broker.215

The amendments also provide a process for the SEC to review Form ATS-N filings and, after 

notice and opportunity for hearing and upon certain findings, declare Form ATS-N filings 

ineffective. 

Finally, additional data concerning ATS trading activity is available as a result of FINRA rules. 

Under FINRA Rules 6110 and 6610, FINRA publishes aggregate trade data for OTC 
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128 SECURITIES AND EXCHANGE COMMISSION

216 See FINRA Rules 6110 and 6610. Aggregate weekly data concerning trades executed on ATSs in NMS 

stocks in Tier 1 of the NMS Plan to Address Extraordinary Market Volatility is published on a two-week delayed 

basis, and aggregate information on trades executed on ATSs in all other NMS stocks and all OTC Equity 

Securities subject to FINRA trade reporting requirements on a four-week delayed basis. Aggregate weekly data 

concerning trades executed outside of ATSs is published on a similar schedule, along with aggregate monthly 

data published on a one-month delay. In addition, FINRA publishes monthly aggregate ATS block trading 

statistics for transactions in NMS stocks on a one-month delay. See FINRA Rule 6110(c)(2). 

217 See https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm.

218 See Regulation Systems Compliance and Integrity, Release No. 34-73639 (Nov. 19, 2014), available at 

https://www.sec.gov/rules/final/2014/34-73639.pdf.

transactions in equity securities, including aggregate data for transactions executed on ATSs 

and aggregate data for transactions executed outside of ATSs.216

2. Are there criteria for the authorization of exchange and trading system operators that:

(a) Require analysis and authorization of the market by a competent authority? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 33, 

Question 2(a) with regard to exchanges or security-based swap execution facilities (SB SEFs). 

With regard to ATSs, the SEC adopted amendments to enhance operational transparency and 

regulatory oversight as noted in Principle 33, Question 1 above. These amendments require 

that an NMS stock ATS file new Form ATS-N. The disclosures are publicly available on the 

SEC’s website.217

(b) Seek evidence of operational or other competence of the operator of an 

exchange or trading system?

Yes. Since SEC staff’s 2014 self-assessment, the SEC has updated its oversight of SRO 

systems capacity, including through the adoption of Regulation SCI. Please see the 

discussion of Regulation SCI in response to Principle 6, Question 1(a)(i) for additional 

information and the description below. There is otherwise no significant update from SEC 

staff’s 2014 self-assessment in response to Principle 33, Question 2(b).

Regulation SCI

Since SEC staff’s 2014 self-assessment, specifically in November 2014, the SEC adopted 

Regulation SCI.218 Regulation SCI imposes requirements on certain key market participants 

intended to reduce the occurrence of systems issues, improve resiliency when systems 

problems do occur, and enhance the SEC’s oversight and enforcement of securities market 

technology infrastructure. Under the regulation, “SCI entities,” a term which includes SROs 

(including stock and options exchanges, registered clearing agencies, FINRA and the MSRB), 

ATSs that trade NMS and non-NMS stocks exceeding specified volume thresholds, certain 

disseminators of consolidated market data (plan processors), and certain exempt clearing 

agencies must establish written policies and procedures reasonably designed to ensure that 

their systems have levels of capacity, integrity, resiliency, availability, and security adequate to 

maintain their operational capability and promote the maintenance of fair and orderly 
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219 See Standards for Covered Clearing Agencies, Release No. 34-78961 (Sept. 28, 2016), available at 

https://www.sec.gov/rules/final/2016/34-78961.pdf. 

markets. Under the regulation, these entities are required to take corrective action with 

regards to SCI events (defined to include systems disruptions, systems compliance issues, and 

systems intrusions) and notify the SEC of such events. SCI entities must also submit quarterly 

reports to the SEC regarding material changes to their SCI systems. 

(c) Require the operator of an exchange or trading system that assumes principal, 

settlement, guarantee or performance risk, to comply with prudential and other 

requirements designed to reduce the risk of non-completion of transactions 

(e.g., mandatory margin assessment and collection, capital or financial 

resources, member contributions, guaranty fund, credit or position limits)? 

As noted in response to Principle 6, Question 1(a)(i), above, exchanges and trading systems 

generally do not assume principal, settlement, guarantee or performance risk. Instead, the 

clearance and settlement of securities transactions generally occurs through several 

registered CCPs and a registered CSD, which operate separately from exchanges or trading 

systems and are registered with the SEC as clearing agencies under the Exchange Act. 

Since the SEC staff’s 2014 self-assessment, the SEC amended Rule 17Ad-22 by adopting Rule 

17Ad-22(e) under the Exchange Act. Rule 17Ad-22(e) built on the existing framework for 

clearing agencies by establishing new requirements for certain clearing agencies referred to 

as “covered clearing agencies,” which are defined as: (i) a clearing agency that is designated 

systemically important by the FSOC pursuant to the Dodd-Frank Act and for which the 

Commission is the supervisory agency; or (ii) a clearing agency involved in activities with a 

more complex risk profile, unless the CFTC is the clearing agency’s supervisory agency.219 In 

developing Rule 17Ad–22(e), the Commission considered, among other things, the relevant 

international standards, i.e., the Principles for Financial Market Infrastructures adopted by 

CPMI and IOSCO in April 2012. The covered clearing agency standards are described in more 

detail below in the response to Principle 37, Question 1(a).

Additionally, as an update to SEC staff’s 2014 self-assessment in response to Principle 33, 

Question 2(c) in regard to the ongoing monitoring of clearing agencies, OCIE expects a 

clearing agency to respond in writing and address all issues and findings identified in the 

course of an examination. SEC staff may also re-examine certain areas to examine the 

adequacy of the clearing agency’s corrective actions.

(d) Permit the regulator to impose ongoing conditions (as appropriate) on the 

operator of an authorized exchange or regulated trading system, such as the 

obligation to establish: rules; policies; and procedures, to prevent fraudulent 

behaviour, treat all members or participants fairly, and have the capacity to 

carry out the market’s and the competent authority’s obligations? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 33, 

Question 2(d).
UNITED STATES PRINCIPLE 33

130 SECURITIES AND EXCHANGE COMMISSION

220 See Consolidated Audit Trail, Release No. 34-67457 (Jul. 18, 2012), available at 

https://www.sec.gov/rules/final/2012/34-67457.pdf. 

Supervision

3. Does regulation require an assessment of:

(a) The reliability of all arrangements made by the operator for the monitoring, 

surveillance and supervision of an exchange or trading system and its members 

or participants to ensure fairness, efficiency, transparency and investor 

protection, as well as compliance with securities legislation? The market’s 

dispute resolution and appeal procedures or arrangements as appropriate, its 

technical systems standards and procedures related to operational failure, 

information on its recordkeeping system, reports of suspected breaches of law, 

arrangements for holding client funds and securities, if applicable, and 

information on how trades are cleared and settled?

Yes. In addition to the response to Principle 33, Question 3 in SEC staff’s 2014 selfassessment, the SEC has implemented a number of changes to its rules.

• As noted in response to Principle 6, Question 1(a)(i) and Principle 33, Question 1, 

above, in November 2014, the SEC adopted Regulation SCI, which requires certain 

entities including all SROs to establish written policies and procedures reasonably 

designed to ensure that their systems have levels of capacity, integrity, resiliency, 

availability, and security adequate to maintain their operational capability and 

promote the maintenance of fair and orderly markets. 

• As noted in response to Principle 6, Question 1(a)(i), above, in July 2012, the SEC 

adopted Rule 613 to create a comprehensive CAT that would allow regulators to 

efficiently and accurately track all activity throughout the U.S. markets in NMS 

securities.220 

• As described above, Regulation ATS requires an NMS stock ATS to file detailed public 

disclosures about its operations (see response to Principle 33, Question 1, above, for 

more information).

With respect to TCP and SRO examinations, see response to Principle 6, Question 4 and 

Principle 9, Questions 3(a)(i)-(ii). 

(b) Whether the trading venue has in place suitable trading control mechanisms 

(such as trading halts, volatility interruptions, limit-up/limit-down controls and 

other trading limitations) to deal with volatile market conditions?

[This is a new question for the 2020 FSAP]
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221 See Joint Industry Plan; Order Approving the Eighteenth Amendment to the National Market System 

Plan To Address Extraordinary Market Volatility by Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA 

Exchange, Inc., Cboe EDGX Exchange, Inc., Chicago Stock Exchange, Inc., Financial Industry Regulatory Authority, 

Inc., Investors Exchange LLC, NASDAQ BX, Inc., NASDAQ PHLX LLC, The Nasdaq Stock Market LLC, NYSE National, 

Inc., New York Stock Exchange LLC, NYSE American LLC, and NYSE Arca, Inc., Release No. 34-85623 (Apr. 11, 

2019), available at https://www.sec.gov/rules/sro/nms/2019/34-85623.pdf. . 

Yes. As noted in response to Principle 6, Question 1(a)(i), above, in April 2019, the SEC 

approved an amendment to make permanent the LULD Plan.221 Please see the discussion 

above for more information. 

(c) Assistance available to the regulator, in circumstances of potential trading 

disruption on the system?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 33, 

Question 3(b).

(d) Whether the relevant market authority (i.e., the regulator or relevant SRO), the 

outsourcing market, and its auditors, have: access to the books and records of 

service providers relating to an exchange’s outsourced activities; and the ability 

to obtain promptly, upon request, other information concerning activities that 

are relevant to regulatory oversight?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 33, 

Question 3(c).

Securities and Commodity Derivatives and Market Participants

4. With respect to securities and commodity derivatives and market participants:

(a) Is the regulator informed of the types of financial products to be traded, and 

does it approve the rules governing the admission of the securities to trading 

or listing? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 33, 

Question 4(a).

(b) Where applicable, does the regulator, or the market, take product design and 

trading conditions into account in order to admit a product for trading?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 33, 

Question 4(b).

(c) Does the regulatory framework provide for fair access to the exchange, or 

trading system, through oversight of the related rules for participation?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 33, 

Question 4(c).
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132 SECURITIES AND EXCHANGE COMMISSION

222 See Disclosure of Order Handling Information, Release No. 34-84528 (Nov. 2, 2018), available at 

https://www.sec.gov/rules/final/2018/34-84528.pdf (adopting release). See also Disclosure of Order Handling 

Information, Release No. 34-85715 (Apr. 24, 2019), available at https://www.sec.gov/rules/final/2019/34-

85714.pdf (extending the compliance date for certain requirements).

223 Id. 

Fairness of Order Execution Procedures

5. With respect to order execution procedures:

(a) Are order routing procedures clearly disclosed to regulators and to market 

participants, applied fairly, and not inconsistent with relevant securities 

regulation (e.g., requirements with respect to precedence of client orders and 

prohibition of front running or trading ahead of customers)? 

Yes. In addition to the information provided in SEC staff’s 2014 self-assessment in response 

to Principle 33, Question 5(a), the SEC adopted amendments to Regulation ATS, which require 

the disclosure by NMS stock ATSs of information relating to ATS operations, as well as order 

types, execution and priority rules, among other things (see response to Principle 33, 

Question 1, above, for more information). 

In addition, in 2018, the SEC adopted amendments to Regulation NMS to require additional 

disclosures by broker-dealers to customers regarding the handling of their orders.222 Rule 

606(b)(3) under Regulation NMS will require broker-dealers to provide a customer, upon 

request, a report on the broker-dealer’s handling of the customer’s NMS stock orders 

submitted on a not held basis for the prior six months, divided into separate sections for a 

customer’s directed orders and non-directed orders. This report will provide a more detailed, 

standardized, baseline set of disclosures that will help customers that submit not held orders 

to better understand how their orders are routed and handled by their broker-dealers. This 

report will help customers more effectively assess the impact of their broker-dealers’ order 

routing decisions on the quality of their executions, including the risks of information leakage 

and potential conflicts of interest.

As a part of the rule changes, the Commission also amended the existing Rule 606(b)(1) 

customer-specific reports to apply to orders in NMS stock that are submitted on a held basis. 

In addition, the Rule 606(b)(1) customer-specific reports will apply to orders in NMS stock 

that are submitted on a not held basis and for which the broker-dealer is not required to 

provide the customer a report under Rule 606(b)(3). The amendment is enhancing the 

existing requirement under Rule 606 that broker-dealers provide public quarterly reports on 

their routing of certain orders. For example, broker-dealers will be required to report routing 

information that includes a description of the terms of any payment for order flow.223

(b) Are execution rules disclosed to the regulator and to market participants, and 

consistently applied to all participants?

Yes. In addition to the information provided in SEC staff’s 2014 self-assessment in response to 

Principle 33, Question 5(b), under the new amendments to Regulation ATS, information on the 
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224 See Joint Industry Plan; Order Approving the National Market System Plan Governing the Consolidated 

Audit Trail, Release No. 34-79318 (Nov. 15, 2016), available at https://www.sec.gov/rules/sro/nms/2016/34-

79318.pdf. 

Form ATS-N is made publicly available on the SEC’s website, which allows market participants 

to make better-informed decisions about whether to do business with the an ATS, as well as 

the order handling decisions made by their broker (see response to Principle 33, Question 1, 

above, for more information). 

In addition, the new order disclosure rules described in response to Principle 33, Question 5(a) 

above require broker-dealers to provide customers information regarding certain orders. 

(c) Where applicable, does the regulator review the trade matching or execution 

algorithm of automated trading systems for fairness?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 33, 

Question 5(c).

(d) Do all system users have equal opportunity to connect, and maintain the 

connection to, the electronic trading system and are differences in order 

execution response times disclosed by the system operator?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 33, 

Question 5(d).

(e) Are there in place effective systems and controls reasonably designed to enable 

the management of risk with regard to fair and orderly trading including, in 

particular, automated pre-trade controls that enable intermediaries to 

implement appropriate risk limits? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 33, 

Question 5(e).

Operational Information

6. With respect to trading information:

(a) Do similarly situated market participants have equitable access to market rules 

and operating procedures? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 33, 

Question 6(a).

(b) Are adequate records (i.e., audit trails) available to reconstruct trading activity 

within a reasonable time?

Yes. In addition to the information provided in SEC staff’s 2014 self-assessment in response 

Principle 33, Question 6(b), the SEC approved the CAT NMS Plan in 2016.224 The CAT NMS 
UNITED STATES PRINCIPLE 33

134 SECURITIES AND EXCHANGE COMMISSION

225 See Regulation SBSR – Reporting and Dissemination of Security-Based Swap Information, Release No. 

34-74244 (Feb. 11, 2015), available at https://www.sec.gov/rules/final/2015/34-74244.pdf. 

Plan requires that the plan processor chosen by the SROs build a central repository that will 

receive, consolidate, and retain the trade and order data reported as part of the CAT. The 

CAT NMS Plan applies to NMS securities, including options, as well as to over-the-counter 

equity securities. At the various stages in the lifecycle of an order—e.g., origination, routing, 

modification, cancellation, and execution—the SROs and broker-dealers must submit certain 

information about the order to the central repository.

The CAT NMS Plan provides that the SROs and the SEC will have access to the data contained 

in the central repository for regulatory and oversight purposes. The CAT NMS plan requires 

CAT data be stored in a way that allows regulators to perform complex queries, such as 

reconstructing market events and the status of order books at various time intervals. 

Regulators will have access to CAT data through both an online targeted query tool and userdefined direct queries and bulk extracts.

The CAT NMS Plan also establishes data security requirements regarding connectivity and 

data transfer, encryption, storage, access, breach management, and protection of personally 

identifiable information. For example, all CAT data must be encrypted both at-rest and inflight and all data centers housing CAT systems must be certified by a qualified and 

unaffiliated third-party auditor.

As required by Rule 613, the CAT NMS Plan contains a framework for eliminating rules and 

systems that would be rendered duplicative by the CAT, including identification of such rules 

and systems. (See also response to Principle 6, Question 1(a)(i) for additional information on 

the CAT NMS Plan).

(c) Is the system capable of disclosing the types of information that it is designed 

to make available, and, conversely, of providing safeguards to preserve the 

confidentiality of other information, the disclosure of which is not intended?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 33, 

Question 6(c).

(d) Does the market provide member intermediaries with access to relevant preand post-trade information (on a real-time basis) to enable these 

intermediaries to implement appropriate monitoring and risk management 

controls? 

Yes. In addition to the information provided in SEC staff’s 2014 self-assessment in response 

to Principle 33, Question 6(d), the Commission finalized Regulation SBSR – Reporting and 

Dissemination of Security-Based Swap Information (Regulation SBSR) under the Exchange Act 

in 2015.225 Regulation SBSR sets forth the information that must be reported and publicly 

disseminated for each security-based swap transaction, assigns the reporting duties for 

security-based swap transactions, requires SDRs registered with the SEC to establish and 
PRINCIPLE 33 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 135

226 See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Release No. 

34-78321 (Jul. 14, 2016), available at https://www.sec.gov/rules/final/2016/34-78321.pdf. 

maintain policies and procedures for carrying out their duties under Regulation SBSR, and 

addresses the application of Regulation SBSR to certain cross-border transactions. 

In July 2016, the SEC adopted amendments and guidance to Regulation SBSR designed to 

increase transparency in the security-based swap market.226 Among other things, these rules:

• assign the reporting duties for platform-executed security-based swaps that will be 

submitted to clearing and for security-based swaps resulting from the clearing 

process;

• establish regulatory reporting and public dissemination requirements for certain 

cross-border security-based swaps; and 

• prohibit registered swap data repositories (SDRs) from imposing fees or usage 

restrictions on the portions of security-based swap transaction data that Regulation 

SBSR requires them to publicly disseminate.
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136 SECURITIES AND EXCHANGE COMMISSION

Principle 34 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.

Key Questions

1. Does the regulatory system: 

(a) Include a program whereby the regulator or an SRO, which is subject to oversight 

by the regulator: 

(i) monitors day-to-day trading activity on the exchange or trading system 

(through a market surveillance program);

(ii) monitors conduct of market intermediaries (through examinations of 

business operations); and

(iii) collects and analyzes the information gathered through these activities?

Yes. In addition to the information provided in SEC staff’s 2014 self-assessment in response to 

Principle 34, Question 1(a)(i)-(iii) and as noted in response to Principle 6, Question 1(a)(i) and 

Principle 33, Question 6(b), above, the Commission approved the CAT NMS Plan, which 

requires the SROs to build a central repository that receives, consolidates, and retains trade 

and order data. 

Since SEC staff’s 2014 self-assessment, the SEC also adopted Regulation SCI to address 

systems capacity and integrity. For additional information on Regulation SCI, see response to 

Principle 6, Question 1(a)(i) and Principle 33, Question 2(b) above.

(b) Include regulatory oversight mechanisms to verify compliance by the exchange, 

or trading system, with its statutory or administrative responsibilities, particularly 

as they relate to the integrity of the markets, market surveillance, the monitoring 

of risks and the ability to respond to such risks? 

Yes. In addition to the information provided in SEC staff’s 2014 self-assessment in response to 

Principle 34, Question 1(b), the SEC adopted Regulation SCI to address systems capacity and 

integrity. For additional information on Regulation SCI, see response to Principle 6, Question 

1(a)(i) and Principle 33, Question 2(b) above. 

Additional information about SEC staff’s oversight of exchanges and trading platforms, as well 

as data about recent exams conducted by SEC staff, is below. 

Oversight of Exchanges and Trading Platforms

SEC staff has the authority to inspect exchanges and ATSs pursuant to its authority to conduct 

SRO inspections and broker-dealer examinations. OCIE further reviews trading systems 

through examinations of broker-dealers that operate as an ATS or as an Electronic 

Communications Network (ECN). Subject to the SEC’s oversight, SROs have the frontline 

responsibility for overseeing daily trading activities and regulatory compliance on the 

exchanges. FINRA also has SRO obligations to oversee its members, including those members 
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SECURITIES AND EXCHANGE COMMISSION 137

227 FINRA’s 2018 Regulatory and Examination Priorities Letter, available at 

https://www.finra.org/industry/2018-regulatory-and-examination-priorities-letter. 

that operate ATSs. Additionally, as discussed in response to Principle 6, Question 4 and 

Principle 9, Question 3(a)(ii), TCP conducts examinations of exchanges and certain ATSs.

With respect to surveillance, OCIE examiners conduct examinations of SROs and may review 

SROs’ surveillance programs during examinations. When inspecting an SRO’s surveillance 

program, SEC staff’s objectives are to examine whether (i) the parameters of SRO automated 

surveillance systems are appropriately designed to generate alerts that identify potential 

instances of noncompliance with SRO rules and federal securities laws and (ii) the systems are 

effectively detecting such activity. OCIE begins by reviewing applicable SRO rules, a 

description of the parameters for the surveillance systems designed to monitor the markets for 

compliance with these rules, and logs of the alerts that these systems generated. OCIE staff 

then reviews this information to examine whether the system is appropriately designed to 

identify noncompliance and whether it is functioning as designed. If a surveillance pattern or 

surveillance program is believed to be ineffective, the examination team will inform the SRO 

during the exit conference of any issues and note it as a risk in the examination report. If the 

examination team identifies a potentially serious violation of the federal securities laws or of 

the SROs own procedures or if the problem persists at the SRO, the examination team may 

refer the matter to Enforcement. 

In addition, in 2018, FINRA addressed ATS surveillance in its annual Regulatory and 

Examination Priorities Letter.227 As registered broker-dealers and FINRA members, alternative 

trading systems are required to maintain supervisory systems that are reasonably designed to 

achieve compliance with applicable securities laws, regulations and FINRA rules, including, for 

example, rules on disruptive or manipulative quoting and trading activity. FINRA will review 

alternative trading systems’ supervisory systems in the context of reviews opened as a result of 

surveillance alerts related to potential manipulative activity occurring on or through an 

alternative trading system.

Scope of Examinations

See response to Principle 9, Question 3(a)(i)-(ii) for an overview of the scope of OCIE’s 

examinations of exchanges.

Surveillance

The SROs use a number of automated surveillance techniques to monitor trading activity on 

the exchange(s) for which they provide regulatory oversight. These include techniques 

designed to detect various types of manipulative trading. Surveillance information gathered 

by each SRO is routinely shared with the SEC and between SROs for effective detection of 

possible breaches of the securities laws.

Surveillance of Equities Markets 
UNITED STATES PRINCIPLE 34

138 SECURITIES AND EXCHANGE COMMISSION

FINRA has entered into Regulatory Service Agreements (RSAs) with all U.S. equity exchanges 

that allow it to operate a cross market equity surveillance program that will cover 100% of the 

U.S. exchange-listed equity market as of the third quarter in 2019 (FINRA currently covers 

more than 99% of the U.S. exchange-listed equity market). FINRA also conducts cross market 

surveillance for approximately 50% of the U.S. options market. Employing advanced 

technology, these programs collect and integrate trading data across exchanges and the overthe-counter market (including ATS activity) to detect potentially manipulative trading activity 

and violations of market compliance rules. In essence, FINRA’s view is of one large, virtual 

market, instead of a disjointed patchwork of individual markets.

Surveillance of Options Markets

SROs that operate options markets also are responsible for monitoring trading activity on their 

exchanges. FINRA conducts surveillance, investigations, and examinations through RSAs and 

17d-2 Agreements with certain options exchanges.

Cboe Exchange, Inc. (Cboe Options) is the largest U.S. options exchange. Cboe Options is a 

hybrid market, consisting of both floor-based and electronic trading activity. In 2017, CBOE 

Holdings, Inc., the former parent of Cboe Options and Cboe C2 Exchange, Inc. (C2 Options), a 

fully electronic options market, acquired BATS Global Markets, Inc. In addition to Cboe 

Options and C2 Options, the new parent company, Cboe Global Markets, Inc. also operates the 

four legacy BATS Global Markets’ electronic exchanges, which were renamed Cboe BYX 

Exchange, Inc. (BYX Equities), Cboe BZX Exchange, Inc. (BZX Equities and BZX Options), Cboe 

EDGA Exchange, Inc. (EDGA Equities), and Cboe EDGX Exchange, Inc. (EDGX Equities and EDGX 

Options). Each Exchange operates as a separate SRO with its own set of rules. Cboe monitors 

trading activity on its hybrid marketplace and the electronic C2 exchange, as well as on Cboe 

BZX Exchange, Inc. and Cboe EDGX Exchange, Inc.

Frequency of Examinations 

The chart below reflects OCIE’s Market Oversight examinations in FY 2016, 2017, and 2018. 

(Market Oversight inspections include inspections of exchanges conducted by OCIE’s BrokerDealer and Exchange Group, as well as programmatic inspections and oversight exams of FINRA 

conducted by OCIE’s FSIO Group):

Fiscal Year Number of Examinations

2016 68

2017 115

2018 186

The chart below reflects the frequency of TCP examinations of SCI entities, which include 

exchanges and certain ATS:

Fiscal Year Number of Examinations

2016 61

2017 70
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228 See Regulation of NMS Stock Alternative Trading Systems, Release No. 34-83663 (Jul. 18, 2018), 

https://www.sec.gov/rules/final/2018/34-83663.pdf (adopting release). See also Regulation of NMS Stock 

Alternative Trading Systems, Release No. 34-84541 (Nov. 6, 2018), available at 

https://www.sec.gov/rules/final/2018/34-84541.pdf (making certain technical corrections to the adopting release).

2018 67

(c) Provide the regulator with adequate access to all pre-trade and post-trade 

information available to market participants?

Yes. Since SEC staff’s 2014 self-assessment, the SEC has adopted a number of rules and 

amendments that apply to pre-trade and post-trade information. 

• The SEC approved the CAT NMS Plan, which requires a central repository to be built 

that will receive, consolidate, and retain trade and order data reported as part of the 

CAT (see response to Principle 6, Question 1(a)(i) and Principle 33, Question 6(b). 

• The SEC adopted Regulation SBSR, which sets forth the information that must be 

reported and publicly disseminated for each SBS transaction (see response to Principle 

33, Question 6(d), above, for additional information on Regulation SBSR).

2. Does the regulatory framework require that amendments to the rules or requirements 

of the exchange, or trading system, must be provided to, or approved by, the regulator?

Yes. In addition to the information provided in SEC staff’s 2014 self-assessment in response to 

Principle 34, Question 2, the SEC adopted amendments to Regulation ATS that requires NMS 

stock ATSs to file detailed public disclosures, including information on how the ATS operates. 

The amendments to Regulation ATS also require a NMS Stock ATS to notify the Commission of 

any changes in its operations by filing an amendment to its Form ATS initial operation report. 

Those ATSs must publicly disclose a brief summary of a material amendment upon filing, and 

after the Commission has had an opportunity to review the amendment, the material 

amendment would be made public.

228 For additional information on Regulation ATS, see 

response to Principle 33, Question 1 above.

3. When the regulator determines that the exchange, or trading system, is unable to 

comply with the conditions of its approval, or with securities law or regulation, is there 

a mechanism that permits the regulator to: 

(a) Re-examine the exchange, or trading system, and impose a range of actions, 

such as restrictions or conditions on the market operator?

(b) Withdraw the exchange, or trading system, authorization? 

Yes. In addition to the information provided under Principle 34, Questions 3(a) and (b) in SEC 

staff’s 2014 self-assessment, the SEC has adopted amendments to Regulation ATS, which 

requires certain ATSs to file Form ATS-N containing detailed information about the ATS’s 

operations. The amendments provide a process for the SEC to review these filings, and, after 

notice and opportunity for hearing and upon certain findings, declare Form ATS-N filings 

ineffective (see the response to Principle 33, Question 1, and Principle 34, Question 2, above,
UNITED STATES PRINCIPLE 34

140 SECURITIES AND EXCHANGE COMMISSION

for additional information on Regulation ATS).
PRINCIPLE 35 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 141

Principle 35 Regulation should promote transparency of trading.

Key Questions

1. Does the regulatory framework include: 

(a) Requirements or arrangements for providing pre-trade (e.g., posting of orders) 

information to market participants?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 35, 

Question 1(a).

(b) Requirements or arrangements for providing post-trade information (e.g., last 

sale price and volume of transaction) to market participants on a timely basis? 

Yes. In addition to the information provided in the SEC staff’s 2014 self-assessment under 

Principle 35, Question 1(b), in connection with SBS, the SEC also adopted Regulation SBSR, 

which sets out specific information that must be reported in connection with SBS transactions 

(see response to Principle 33, Question 6(d) above for additional information on Regulation 

SBSR). 

(c) Requirements or arrangements that information on completed transactions be 

provided on an equitable basis to all market participants?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 35, 

Question 1(c).

2. Where derogation from the objective of real-time transparency is permitted:

(a) Are the conditions clearly defined?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 35, 

Question 2(a).

(b) Does the market authority (being either, or both, the exchange operator and 

the regulator) have access to the complete information to be able to assess the 

need for derogation and, if necessary, to prescribe alternatives?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 35, 

Question 2(b).

(c) Does the regulator have access to adequate information to monitor the 

development of dark trading and dark orders?

In addition to the information provided in SEC staff’s 2014 self-assessment in response to 

Principle 35, Question 2(c), the SEC approved the CAT NMS Plan, which requires the collection 

and consolidation of trade and order data (see response to Principle 6, Question 1(a)(i) and 
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142 SECURITIES AND EXCHANGE COMMISSION

229 See FINRA Rule 6200, 6300A, 6300B and 6600 Series.

230 FINRA Rules 6160, 6170, 6480, and 6720 permit an ATS that trades both debt securities reported to 

FINRA’s TRACE and equity securities reported to a FINRA equity reporting facility to use two MPIDs, rather than a 

single unique MPID, if each MPID is used exclusively for either debt or equity securities. See Self-Regulatory 

Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 

Proposed Rule Change Relating to Reporting and Market Participant Identifier Requirements for Alternative

Trading Systems, Release No. 34-71911, File No. SR–FINRA–2014–017 (Apr. 9, 2014), available at 

http://www.finra.org/sites/default/files/RuleFiling/p486184.pdf.

231 See FINRA Rules 6110 and 6610. Aggregate weekly data concerning trades executed on ATSs in NMS 

stocks in Tier 1 of the NMS Plan to Address Extraordinary Market Volatility is published on a two-week delayed 

basis, and aggregate information on trades executed on ATSs in all other NMS stocks and all OTC Equity 

Securities subject to FINRA trade reporting requirements on a four-week delayed basis. Aggregate weekly data 

concerning trades executed outside of ATSs is published on a similar schedule, along with aggregate monthly 

data published on a one-month delay. In addition, FINRA publishes monthly aggregate ATS block trading 

statistics for transactions in NMS stocks on a one-month delay. See FINRA Rule 6110(c)(2). 

Principle 33, Questions 6(b), above, for additional information on the CAT NMS Plan). In 

addition, the amendments to Regulation ATS require certain ATSs to file detailed disclosures 

with the SEC on Form ATS-N (see response to Principle 33, Question 1, above, for additional 

information on Regulation ATS). 

Additional data concerning ATS and other OTC trading activity is available pursuant to FINRA 

rules. Under FINRA reporting rules, broker-dealers, including broker-dealers operating ATSs, 

are required to report OTC transactions in NMS stocks and OTC equity securities to FINRA.229 

Each individual ATS is required to use a unique market participant identifier (MPID), which can 

be used only for activity on the ATS, for reporting trades to FINRA.230 FINRA aggregates the 

reported volume and trade count information for equity securities and makes it publicly 

available on its website.231

(d) Do transparent orders have priority over dark orders? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 35, 

Question 2(d).

(e) Do dark pools, and transparent markets that offer dark orders, provide market 

participants with sufficient information so that they are able to understand the 

manner in which their orders are handled and executed?

In addition to the information provided in SEC staff’s 2014 self-assessment in response to 

Principle 35, Question 2(e), the SEC approved amendments to Regulation ATS that requires 

certain ATSs to file detailed disclosures with the SEC on Form ATS-N. The form is made 

publicly available on the SEC’s website and allows market participants to make betterinformed decisions about whether to do business with an ATS, as well as the order handling 

decisions by a broker-dealer. For additional information on Regulation ATS, see response to 

Principle 33, Question 1, above. 
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SECURITIES AND EXCHANGE COMMISSION 143

Principle 36 Regulation should be designed to detect and deter manipulation and 

other unfair trading practices.

Key Questions

1. Does the regulatory system prohibit the following with respect to products admitted 

to trading on authorized exchanges and regulated trading systems:

(a) Market or price manipulation (or attempts at market or price manipulation)?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 36, 

Question 1(a). 

(b) Misleading information? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 36, 

Question 1(b).

(c) Insider trading?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 36, 

Question 1(c).

(d) Front running?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 36, 

Question 1(d).

(e) Other fraudulent or deceptive conduct and market abuses? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 36, 

Question 1(e).

2. Does the regulatory approach to detect and deter such conduct include an effective 

and appropriate combination of mechanisms drawn from the following:

(a) Direct surveillance, inspection, reporting, such as, for example:

(i) securities listing, or product design requirements (where applicable);

(ii) position limits;

(iii) audit trail requirements;

(iv) quotation display rules;

(v) order handling rules;

(vi) settlement price rules;

(vii) market halts, complemented by enforcement of the law and trading 

rules; or

(viii) power to obtain information on a market participant’s positions in 

related OTC commodity derivatives and the underlying physical 
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144 SECURITIES AND EXCHANGE COMMISSION

commodity markets.

[2(a)(viii) is a new item for the 2020 FSAP]

No significant update from SEC staff’s 2014 self-assessment in response to Principle 36, 

Question 2(a)(i), (ii), (iii), (iv), (v), (vi), (vii) and (vii). Please note that question (viii) is not 

applicable to the SEC. 

(b) Effective, proportionate and dissuasive sanctions for violations? In the case of 

exchange-traded commodity derivatives markets, does the relevant market 

authority have and use effective sanctioning powers to discipline its members 

or other authorized market participants and does it have powers to take action 

against non-members of the market or other market participants?

[The second question is new for the 2020 FSAP]

No significant update from SEC staff’s 2014 self-assessment in response to Principle 36, 

Question 2(b). Please note that the question related to commodity derivatives markets is not 

applicable to the SEC. 

3. Are there arrangements in place for:

(a) The continuous collection and analysis of information concerning trading 

activities?

(b) Providing the results of such analysis to market and regulatory officials in a 

position to take remedial action if necessary? 

(c) Monitoring the conduct of market intermediaries participating in the market(s)?

(d) Triggering further inquiry as to suspicious transactions or patterns of trading?

Yes. In addition to the information provided in SEC staff’s 2014 self-assessment in response 

to Principle 36, Question 3, the SEC approved the CAT NMS Plan. As described above in 

response to Principle 6, Question 1(a)(i) and Principle 33, Question 6(b), the CAT NMS Plan 

calls for a plan processor chosen by the SROs to build a central repository to retain trade and 

order data reported as part of the CAT. 

See also response to Principle 9, Question 3(a)(i)-(iii), above, for additional information on the 

oversight of SROs. 

4. If there is potential for domestic cross-market trading, are there: 

(a) inspection; 

(b) assistance; and

(c) information-sharing, requirements or arrangements in place to monitor and/or 

address domestic cross-market trading abuses?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 36, 

Question 2(b). 

5. If there are foreign linkages, substantial foreign participation, or cross listings, are there 
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SECURITIES AND EXCHANGE COMMISSION 145

cooperation arrangements with relevant foreign regulators, and/or markets, that 

address manipulation, or other abusive trading practices?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 36, 

Question 5. 

6. Regarding market authorities responsible for the supervision of commodity derivatives 

markets only: 

(a) Does the market authority have authority to access information on a routine 

and non-routine basis for regulated commodity derivatives markets as well as 

the power to obtain information on a market participant’s positions in related 

OTC commodity derivatives and the underlying physical commodity markets?

[This is a new question for the 2020 FSAP]

(b) Does the market authority collect information on a routine and regular basis on 

relevant on-exchange commodity derivatives transactions and does it have the 

capability to aggregate position holder information promptly in order to 

identify positions under common ownership and control? Reference should be 

made to the commodity derivatives principles for the type of information 

required

[This is a new question for the 2020 FSAP]

(c) In respect of OTC commodity derivatives transactions and positions, has the 

market authority considered what information it should collect on a routine 

basis and what it should collect on an “as needed” basis

[This is a new question for the 2020 FSAP]

Please note that these questions related to commodity derivatives markets are not applicable 

to the SEC. 

7. Does the market authority have the organizational and technical capabilities to monitor 

effectively the trading venues it supervises, including the ability to identify market 

abuse and activities that may impact the fairness and orderliness of trading on such 

venues?

[This is a new question for the 2020 FSAP]

Yes. See SEC staff’s 2014 self-assessment response to Principle 36, Question 3 describing the 

arrangements in place for oversight of the securities markets. In addition, as described in

response to Principle 6, Question 1(a)(i) and Principle 33, Question 6(b), the SEC approved the 

CAT NMS Plan which requires the plan processor to build a central repository that will receive, 

consolidate, and retain trade and order data reported as part of the CAT. The CAT NMS Plan 

provides that the SROs and the SEC will have access to the data contained in the central 

repository for regulatory and oversight purposes. 

Principle 36: Additional Question Related to 36.2 and 36.3 above, for 2019 Assessment

**

• Information on administrative/ civil sanctions imposed during the last three 

years on major misconducts, such as market manipulation and insider trading.
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146 SECURITIES AND EXCHANGE COMMISSION

232 See https://www.sec.gov/files/2017-03/secstats2016.pdf; https://www.sec.gov/files/enforcement-annualreport-2017.pdf; see also https://www.sec.gov/files/enforcement-annual-report-2018.pdf. 

233 See https://www.justice.gov. 

234 See SEC v. Iat Hong, et al., Litigation Release No. 23711 (Dec. 27, 2016), available at 

https://www.sec.gov/litigation/litreleases/2016/lr23711.htm; Litigation Release No. 23826 (May 9, 2017), available 

at https://www.sec.gov/litigation/litreleases/2017/lr23826.htm. 

235 See Department of Justice Press Release 16-353 (Dec. 27, 2016), available at 

https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-arrest-macau-resident-and-unsealingcharges-against. 

236 See SEC v. Lek Securities Corp. et al., Litigation Release No. 23776 (Mar. 10, 2017), available at 

https://www.sec.gov/litigation/litreleases/2017/lr23776.htm. 

• Information on criminal sanctions imposed for major offenses, such as insider 

trading and market manipulation.

During the last three years (2016-2018), the SEC and US criminal authorities filed enforcement 

actions and obtained sanctions to address major misconducts, such as market manipulation 

and insider trading. Examples of cases in this area are described below. For additional 

information regarding major SEC Enforcement cases in 2016-2018, please refer to the 

Enforcement’s Annual Reports for 2017 and 2018, and the Select SEC and Market Data for 

Fiscal Year 2016, each of which can be found on the SEC’s website.232 For additional 

information regarding criminal cases in 2016-2018, please refer to the website for the 

Department of Justice.233

• In 2016, the SEC charged three overseas traders with fraudulently trading on hacked 

nonpublic market-moving information stolen from two prominent New York-based 

law firms, illegally profiting by nearly $3 million. The SEC’s complaint alleged that the 

traders executed a deceptive scheme to hack into the networks of the law firms and 

steal confidential information pertaining to firm clients that were considering mergers 

or acquisitions. After the defendants defaulted in the litigation, the court imposed 

sanctions against them including disgorgement of ill-gotten gains, prejudgment 

interest, and penalties equal to three times the amount of their respective ill-gotten 

gains.234 The US Attorney’s Office for the Southern District of New York filed related 

charges which, if proven could result in maximum sentences of 5-20 years 

imprisonment.235

• In 2017, the SEC filed an enforcement action against a trading firm based outside of 

the U.S., alleging it manipulated the U.S. markets hundreds of thousands of times, 

and charged a New York-based brokerage firm and its CEO for allegedly facilitating 

the fraud. After filing its complaint, the SEC obtained an emergency court order 

freezing the trading firm’s assets held in its account at the brokerage firm as well as 

freezing and repatriating funds that the trading firm had transferred overseas.236
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237 See Litigation Release No. 23878 (Jul. 12, 2017), available at 

https://www.sec.gov/litigation/litreleases/2017/lr23878.htm; See also SEC Press Release No. 2017-124 (Jul. 12, 

2017), available at https://www.sec.gov/news/press-release/2017-124. 

238 See SEC v. Elite Stock Research, Inc. et al. (Nov. 15, 2018), available at https://www.sec.gov/news/pressrelease/2018-262; See also Former Broker-Dealer Pleads Guilty to Stock Manipulation (Dec. 14, 2018), available at 

https://www.justice.gov/usao-edny/pr/former-broker-dealer-pleads-guilty-stock-manipulation.

239 See SEC v. Robert O. Carr and Katherine M. Hanratty, Action No. 3:18-cv-01135 (D. Conn.) (filed Sept. 28, 

2018), (partially settled action), available at https://www.sec.gov/litigation/litreleases/2018/lr24191.htm; See also 

Litigation Release No. 24306 (Oct. 5, 2018), available at 

https://www.sec.gov/litigation/litreleases/2018/lr24306.htm. 

240 Litigation Release No. 24178 (Jun. 29, 2018), available at 

https://www.sec.gov/litigation/litreleases/2018/lr24178.htm. 

241 See Department of Justice Press Release 18-338 (Oct. 3, 2018), available at 

https://www.justice.gov/usao-sdny/pr/manhattan-hair-salon-owner-pleads-guilty-insider-trading; See also 

• In 2017, the SEC brought fraud charges against thirteen individuals allegedly involved 

in two Long Island, New York-based cold calling scams that defrauded more than one 

hundred elderly or unsophisticated victims out of more than $10 million through 

high-pressure sales tactics and misrepresentations about penny stocks.237 Later, in 

2018, the SEC filed additional charges, alleging that the CEO of an issuer, a boiler 

room and four related individuals engaged in a manipulation of the issuer’s stock. The 

SEC sought sanctions in the cases, including permanent injunctions, disgorgement of 

ill-gotten gains with interest, civil penalties, and penny stock bars, as well as officerand-director bars against three of the individuals. The U.S. Attorney’s Office in the 

Eastern District of New York filed parallel criminal charges against sixteen participants 

in the fraud, eleven of whom pled guilty and await sentencing.238

• In 2018, the SEC brought an insider trading action against the CEO of a payment 

processing company, alleging that he shared confidential information about the 

potential acquisition of the company with his girlfriend and provided her with $1 

million to purchase the company’s stock. The SEC alleged that after the acquisition, 

the girlfriend sold the shares, realizing profits of more than $250,000. The SEC settled 

with the girlfriend, obtaining sanctions including an injunction, disgorgement of illgotten gain plus interest, and penalties. The SEC also partially settled with the CEO, 

obtaining an injunction and penalties with the court to determine whether to impose 

an officer-and-director bar at a later date. 239

• In 2018, the SEC charged a credit ratings agency employee with allegedly tipping two 

friends about an acquisition he learned about through his work as a ratings analyst. 

The SEC also charged the two friends with allegedly trading on the illicit tips, which 

reaped them combined profits of nearly $300,000. In its action, the SEC sought 

disgorgement of ill-gotten gains, prejudgment interest, penalties, and injunctive 

relief.240 In a parallel action, the U.S. Attorney's Office for the Southern District of 

New York filed an action seeking criminal sanctions against the three SEC defendants. 

Two of the defendants have pleaded guilty and one defendant was convicted 

following a jury trial.241 While their precise sentencing will be determined by a court, 
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148 SECURITIES AND EXCHANGE COMMISSION

Department of Justice Press Release 19-104 (Mar. 29, 2019), available at https://www.justice.gov/usaosdny/pr/manhattan-jeweler-pleads-guilty-insider-trading; See also Department of Justice Press Release 19-132 

(Apr. 26, 2019), available at https://www.justice.gov/usao-sdny/pr/former-sp-analyst-convicted-insider-tradingschemes. 

242 See Three Men Arrested And Charged With Trading On Inside Information Misappropriated From A 

Credit Rating Agency, available at https://www.justice.gov/usao-sdny/pr/three-men-arrested-and-chargedtrading-inside-information-misappropriated-credit-rating. 

the charges filed could carry a maximum sentence of five years in prison and a 

maximum fine of $250,000, or twice the gross gain or loss from the offense for the 

charge of conspiracy to commit securities fraud, and a maximum sentence of 20 years 

in prison and a maximum fine of $5 million, or twice the gross gain or loss from the 

offense for the charge of securities fraud.242
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UNITED STATES PRINCIPLE 37

150 SECURITIES AND EXCHANGE COMMISSION

Principle 37 Regulation should aim to ensure the proper management of large 

exposures, default risk and market disruption.

Key Questions 

Monitoring of Large Exposures

1. Does the market authority have a mechanism in place that is intended to monitor and 

evaluate continuously the risk of open positions, or credit exposures, that are 

sufficiently large to expose a risk to the market, or to a clearing firm, that includes:

(a) Qualitative or quantitative, trigger levels appropriate to the market for the 

purpose of identifying large exposures (as defined by the market authority), 

continuous monitoring, and an evaluative process?

Yes. In addition to the information provided in SEC staff’s 2014 self-assessment response 

under Principle 37, Question 1(a), the SEC adopted new requirements for certain clearing 

agencies referred to as covered clearing agencies and described above in the response to 

Principle 33, Question 2(c). 

New Rule 17Ad-22(e) contains several provisions that govern how a CCP must measure and 

assess its liquidity and credit exposures to each clearing member and to any CCPs with which 

it has established a link. In particular, a CCP must have policies and procedures reasonably 

designed to do the following:

• maintain a sound risk management framework for comprehensively managing its 

risks including legal, credit, liquidity, operational, general business, investment, and 

custody; 

• effectively identify, measure, monitor, and manage its credit exposures to participants 

and the credit exposures arising from payment, clearing, and settlement processes; 

• cover its credit exposures to its participants by establishing a risk-based margin 

system. This system should be monitored by management on an ongoing basis and

regularly reviewed, tested, and verified; 

• effectively measure, monitor, and manage liquidity risks including those related to 

settlement and funding flows on an ongoing and timely basis, and to its use of 

intraday liquidity; and 

• effectively measure, monitor, and manage risks related to any link it has with one or 

more other clearing agencies, financial market utilities, or trading markets.

(b) Access to information, if needed, on the size and beneficial ownership of 

positions held by direct customers of market intermediaries? 

No significant update from SEC staff’s 2014 self-assessment in response to Principle 37, 

Question 1(b). 
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SECURITIES AND EXCHANGE COMMISSION 151

(c) The power to take appropriate action against a market participant that does 

not provide relevant information needed to evaluate an exposure (e.g., require 

liquidation of positions, increase margin requirements and/or revoke trading 

privileges)?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 37, 

Question 1(c). 

(d) The general power to take appropriate action, such as to compel market 

participants carrying, or controlling, large positions to reduce their exposures 

or to post increased margin?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 37, 

Question 1(d). 

2. Do arrangements, whether formal or informal, exist to enable markets and regulators 

to share information on large exposures of common market participants, or on related 

products:

(a) In the domestic jurisdiction? 

Yes. In addition to the information provided in SEC staff’s 2014 self-assessment response in 

response to Principle 37, Question 2, in 2018, the SEC and CFTC approved a MOU to help 

ensure continued coordination and information sharing between the two agencies. The MOU 

updated and enhanced the MOU described in SEC staff’s 2014 self-assessment to adapt to 

market conditions and promote efficiency in rulemaking, regulatory oversight, and 

enforcement. For example, the new MOU specifically addresses the regulatory regime for 

swaps and security-based swaps. The MOU continues the permanent regulatory liaison 

between the agencies and facilitates discussion and coordination of regulatory action, 

information exchange and data sharing regarding issues of common regulatory interest. 

(b) In other relevant jurisdictions?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 37, 

Question 2(a).

3. With respect to exchange-traded physical commodity derivatives markets, do relevant 

market authorities (i) require the reporting of large trader positions for the relevant onexchange commodity derivatives contracts and (ii) publish the aggregate exposures of 

different classes of large traders, especially commercial and non-commercial 

participants, within the bounds of maintaining trader confidence?

[This is a new question for the 2020 FSAP]

Please note that the questions related to commodity derivatives markets are not applicable to 

the SEC. 
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152 SECURITIES AND EXCHANGE COMMISSION

Default Procedures – Transparency and Effectiveness 

4. Does a market authority make its default procedures available to market participants, 

including, specifically, information concerning:

(a) The general circumstances in which action may be taken?

(b) Who may take it?

(c) The scope of actions which may be taken.

No significant update from SEC staff’s 2014 self-assessment in response to Principle 37, 

Question 3 with regard to broker-dealers. With regard to clearing agencies, in addition to 

the requirements described in SEC staff’s 2014 self-assessment regarding clearing agencies, 

the SEC adopted new rules related to covered clearing agencies as described in more detail 

above in response to Principle 6, Question 1(a)(i) and Principle 37, Question 1(a). Specifically, 

Rule 17Ad-22(e)(13) provides that a covered clearing agency must establish, implement, 

maintain and enforce written policies and procedures reasonably designed to ensure the 

covered clearing agency has the authority and operational capacity to take timely action to 

contain losses and liquidity demands and continue to meet its obligations by, at a minimum, 

requiring the covered clearing agency's participants and, when practicable, other 

stakeholders to participate in the testing and review of its default procedures, including any 

close-out procedures, at least annually and following material changes thereto. 

5. Do default procedures, and/or national law, permit markets, and/or the clearing and 

settlement system(s), to promptly isolate the problem of a failing firm by addressing its 

open proprietary positions, and positions it holds on behalf of customers; or otherwise 

protect customer funds and assets, from an intermediary’s default under national law?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 37, 

Question 4 with regard to broker-dealers. With regard to clearing agencies, in addition to 

the requirements described in SEC staff’s 2014 self-assessment regarding clearing agencies 

which are still in effect, the SEC has adopted new rules related to covered clearing agencies, 

including Rule 17Ad-22(e)(13) as described in more detail above under Principle 6, Question 

1(a)(i) and Principle 37, Questions 1(a) and 4. 

6. Is there a mechanism by which market authorities for related products can consult with 

each other in order to minimize the adverse effects of market disruptions?

No significant update from SEC staff’s 2014 self-assessment in response to Principle 37, 

Question 5. 

Short Selling on Equity Markets

7. Does the relevant market authority provide for:

(a) Controls which are appropriate to the equity market in question and that have 

as their goal: to reduce or minimize the potential risks that could affect the 

orderly and efficient functioning and stability of equity markets including, at a 

minimum, a strict settlement of failed trades? 
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243 See https://www.sec.gov/news/press-release/2017-68-0. 

244 See Securities Transaction Settlement Cycle, Release No. 34-80295 (Mar. 22, 2017), available at 

https://www.sec.gov/rules/final/2017/34-80295.pdf. 

(b) A reporting regime that provides timely short selling information to the market 

or, as a minimum requirement, to market authorities? 

(c) As part of an effective compliance and enforcement system (assessed under 

Principle 11): (i) measures that promote settlement discipline, including regular 

monitoring by the market authority of settlement failures; and (ii) surveillance 

of short selling activities. Any deficiency here should also be taken into account 

in the assessment of Principle 11.

(d) Appropriate exceptions for certain types of transactions for efficient market 

functioning and development (such as, but not limited to, bona fide hedging, 

market making and arbitrage activities)?

Yes. In addition to the information provided in SEC staff’s 2014 self-assessment response under 

Principle 37, Question 6, in March 2017, the SEC amended its rules to shorten the standard 

settlement cycle for most broker-dealer securities transactions by one business day (from T+3 

to T+2).243 Broker-dealers were required to comply with the amended rule by September 5, 

2017. In connection with that amendment, the SEC also issued guidance clarifying the effect 

of the rule amendment on certain aspects of Regulation SHO. The SEC stated that the move 

to a T+2 standard settlement cycle reduced by one business day the time in which a clearing 

firm has to close out a fail to deliver position. Specifically, the Commission noted that, for a 

fail to deliver position resulting from a short sale the time frame was reduced from T+4 to T+3, 

and for a fail to deliver position resulting from a long sale or bona fide market making activity 

the time frame was reduced from T+6 to T+5 for broker-dealers.244 

Addressing Risks in the Commodity Derivatives Markets

8. Regarding authorities responsible for the supervision of exchange-traded physical 

commodity derivatives markets (e.g., either the market, a governmental regulator or an 

SRO) (“commodity derivatives market authorities)):

(a) Does the relevant market authority have and use formal position management 

powers, including the power to set ex-ante position limits, particularly in the 

delivery month?

[This is a new question for the 2020 FSAP]

(b) Does the relevant market authority have the powers to employ additional 

measures, as appropriate to address market disruption or the perceived threat 

of such disruption?

[This is a new question for the 2020 FSAP]

Please note that the questions related to commodity derivatives markets are not applicable to 

the SEC. 

Transactions in OTC Derivatives Markets 

9. Are standardized OTC derivatives contracts with a suitable degree of liquidity required 
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154 SECURITIES AND EXCHANGE COMMISSION

245 See Section 3C(a) of the Exchange Act, 15 U.S.C. 78c-3(a). Pursuant to an “end-user exception,” an SBS 

is not required to be cleared if one of the counterparties is not a financial entity, is using SBS to hedge or 

mitigate commercial risk and notifies the SEC how it generally meets its financial obligations associated with 

entering into non-cleared SBS. See Section 3C(g) of the Exchange Act, 15 U.S.C. 78c-3(g).

246 See Section 3C(h) of the Exchange Act, 15 U.S.C. 78c-3(h). 

247 See Section 3D of the Exchange Act, 15 U.S.C. 78c-4. The 14 Core Principles for SB SEFs are set out in 

Section 3D(d) of the Exchange Act.

248 See Registration and Regulation of Securities-Based Swap Execution Facilities, Release No. 34-63825 

(Feb. 2, 2011) (SB SEF Proposing Release), available at https://www.sec.gov/rules/proposed/2011/34-63825.pdf. 

See also https://www.sec.gov/news/press/2011/2011-35.htm. 

249 See 15 U.S.C. 78c-3(a)-(b) Pursuant to an “end-user exception,” an SBS is not required to be cleared if 

one of the counterparties is not a financial entity, is using SBS to hedge or mitigate commercial risk and notifies 

the SEC how it generally meets its financial obligations associated with entering into non-cleared SBS. See 

Section 3C(g) of the Exchange Act, 15 U.S.C. 78c-3(g). See also End-User Exception to Mandatory Clearing of 

to be traded on “exchanges or electronic trading platforms” provided that a flexible 

approach encompassing a range of platforms that would qualify as “exchanges or 

electronic trading platforms” for OTC derivatives is taken? 

[This is a new question for the 2020 FSAP]

Yes. The Dodd-Frank Act requires any SBS that is required to be cleared245 and made 

available to trade on a national securities exchange or a SB SEF246 to be traded on a 

registered trading platform. 

SB SEFs must be registered with the SEC and comply with 14 Core Principles, as well as any 

other rule that the SEC may adopt that apply to SB SEFs.247 The SEC has proposed, but not 

yet adopted, rules on the registration process for SB SEFs and for complying with the 14 Core 

Principles.248 

10. Are the platforms which may qualify as exchanges or electronic trading platforms for 

mandatory OTC derivatives trading appropriately identified as such? 

[This is a new question for the 2020 FSAP] 

Yes. As described in response to Principle 37, Question 9, above, any SBS that becomes 

subject to the mandatory trading requirement must be traded on either a national securities 

exchange or an SB SEF.

11. Are standardized OTC derivatives required to be cleared through CCPs? In particular, 

has the market authority a clear process in place for the determination that a product 

or set of products should be subject to a mandatory clearing obligation?

[This is a new question for the 2020 FSAP]

Yes. An SBS must be cleared through a clearing agency if the SEC determines that the SBS, or 

any group, category, type, or class to which it belongs, must be cleared, unless an exemption 

applies.249 The Exchange Act specifies the process that the SEC must use to determine which 
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SECURITIES AND EXCHANGE COMMISSION 155

Security-Based Swaps, Release No. 34-63556 (Dec. 15, 2010) (proposed rule governing this end-user exception), 

available at https://www.sec.gov/rules/proposed/2010/34-63556fr.pdf.

250 See Section 3C(b) of the Exchange Act, 15 U.S.C. 78c-3(b). 

251 See Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice 

Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable to 

All Self-Regulatory Organizations, Release No. 34-67286 (Jun. 28, 2012), available at 

https://www.sec.gov/rules/final/2012/34-67286.pdf.

SBSs are subject to the mandatory clearing requirement, including identification of factors 

that the SEC must consider when making such a determination.250 

In 2012, the SEC adopted rules to establish a process for submissions for review of SBSs for 

mandatory clearing and the procedure by which the SEC may stay the requirement that an 

SBS is subject to mandatory clearing while the clearing of the SBS is reviewed.251 These rules 

require a clearing agency to file information with the SEC regarding any SBS - or any group, 

category, type, or class of security-based swaps - that a clearing agency plans to accept for 

clearing. The rules also describe the information that must accompany each submission so 

that the SEC will be able to determine whether the security-based swap should be subject to 

mandatory clearing. This information includes quantitative and qualitative information to 

assist the SEC in the assessment of the factors set forth under the Dodd-Frank Act, which the 

SEC is required to take into account in its review of the security-based swap submission.

The rules also specify how the clearing agency must notify its members about the 

submissions it makes, and requires clearing agencies to post their security-based swap 

submissions on their public websites within two business days.

12. Is the determining authority able to consult with foreign authorities to minimize 

inconsistencies among different regulatory standards on non-centrally cleared OTC 

derivatives? 

[This is a new question for the 2020 FSAP]

Yes. As described in more detail in response to Principle 6, Question 3(b), above, the SEC has 

developed arrangements with foreign regulators to facilitate communication and cooperation 

on supervisory issues. SEC staff also participates in IOSCO’s Committee on Derivatives, which 

has developed a global repository of central clearing requirements made by securities and 

derivatives market regulatory authorities. This repository serves allows authorities to share 

information about central clearing requirements with their counterparts in other jurisdictions, 

which may assist authorities in making mandatory clearing determinations that minimize the 

risk of overlap, duplication or gaps in requirements.

13. Are all OTC derivatives transactions not cleared by CCPs subject to appropriate 

margining practices?

[This is a new question for the 2020 FSAP]

Yes. The SEC has adopted rules establishing capital and variation margin and initial margin 
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156 SECURITIES AND EXCHANGE COMMISSION

252 See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major 

Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, Release No. 34-

86175 (Jun. 21, 2019), available at https://www.sec.gov/rules/final/2019/34-86175.pdf. 

253 See Trade Acknowledgment and Verification of Security-Based Swap Transactions, Release No. 34-78011 

(Jun. 8, 2016), available at https://www.sec.gov/rules/final/2016/34-78011.pdf. 

254 See Risk Mitigation Techniques for Uncleared Security-Based Swaps, Release No. 34-84861 (Dec. 19, 

2018), available at https://www.sec.gov/rules/proposed/2018/34-84861.pdf. 

requirements for SBSDs for which there is not a prudential regulator (non-bank SBSDs), which 

are described in the response to Principle 31, Question 6(b), above.252 

Non-bank SBSDs also will be required to monitor the risk of each account, and establish, 

maintain, and document procedures and guidelines for monitoring the risk. Compliance with 

these rules will be required when entities are required to register as SBSDs.

14. Are all financial firms and systemically important non-financial entities that engage in 

non-centrally cleared OTC derivatives required to exchange initial and variation margin 

as appropriate to the counterparty risks posed by such transactions? 

[This is a new question for the 2020 FSAP]

Yes. SEC rules will require non-bank SBSDs and major security-based swap participants for 

which there is no prudential regulator (non-bank MSBSPs) to collect margin collateral from 

counterparties to non-cleared security-based swap transactions to cover current exposure and 

potential future exposure (i.e., variation and initial margin) unless an exception applies. These 

rules are described in more detail in the response to Principle 31, Question 6(b), above.

15. Where required by the authority, do financial entities and systemically important nonfinancial entities that engage in non-centrally cleared OTC derivatives employ risk 

mitigation techniques consistent with the standards set out by IOSCO in the report Risk 

Mitigation Standards for Non-Centrally Cleared OTC Derivatives? 

[This is a new question for the 2020 FSAP]

The SEC has adopted or proposed rules consistent with all of IOSCO’s risk mitigation standards 

for non-centrally cleared OTC derivatives. Below is a brief analysis of each of these risk 

mitigation standards as applied to the SEC’s adopted and proposed rules.

• Standard 1 (Scope of Coverage): Each of the below-described adopted rules253 apply, 

and proposed rules254 would apply, to SEC-registered security-based swap dealers and 

major security-based swap participants (together, SBS Entities). 

• Standard 2 (Trading Relationship Documentation): The SEC has proposed rules that 

would require each SBS Entity to establish, maintain and follow written policies and 

procedures reasonably designed to ensure that it executes written SBS trading 

relationship documentation with each of its counterparties prior to, or 

contemporaneously with, executing an SBS with such counterparty. This 

documentation would be required to include all terms governing the trading 
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SECURITIES AND EXCHANGE COMMISSION 157

relationship.

• Standard 3 (Trade Confirmation): The SEC has adopted rules that require each SBS Entity 

to provide trade acknowledgments disclosing all of the terms of each SBS purchased 

or sold by the SBS Entity. These trade acknowledgments must be provided promptly, 

but in any event by the end of the first business day following execution, and must be 

delivered through electronic means that provide reasonable assurance of delivery and 

a record of transmittal. These rules further require each SBS Entity to establish, 

maintain and enforce written policies and procedures that are reasonably designed to 

obtain prompt verification of the terms of each trade acknowledgment that it provides 

to a counterparty. Each SBS Entity must also promptly verify the accuracy of, or dispute 

with its counterparty, the terms of a trade acknowledgment that it receives from a 

counterparty.

• Standard 4 (Valuation with Counterparties): The SEC has proposed rules that would 

require each SBS Entity’s written trading relationship documentation (referenced above 

in the description of Standard 2) with certain types of counterparties to include written 

documentation of the SBS valuation process. This valuation documentation must 

include the parties’ agreement on the process for determining the value of each SBS at 

any time from execution to termination, maturity or expiration for the purposes of 

complying with applicable SEC margin and risk management requirements. This 

requirement applies to trading relationship documentation between SBS Entities; 

between an SBS Entity and a swap dealer, major swap participant, commodity pool, 

private fund, employee benefit plan, or person predominantly engaged in activities that 

are in the business of banking or that are financial in nature as defined in Section 4(k) 

of the Bank Holding Company Act of 1956; or between an SBS Entity and any other 

counterparty that requests such valuation documentation. 

• Standard 5 (Reconciliation): The SEC has proposed rules that would require each SBS 

Entity to engage in portfolio reconciliation with SBS Entity counterparties, no less 

frequently than each business day (for each portfolio that includes 500 or more SBS), 

weekly (for each portfolio that includes more than 50 but fewer than 500 SBS on a 

business day during any week), or quarterly (for each portfolio that includes no more 

than 50 SBS at any time during the calendar quarter). These proposed rules would 

further require each SBS Entity to establish, maintain and follow written policies and 

procedures reasonably designed to ensure that it engages in portfolio reconciliation 

for all SBS in which its counterparty is not an SBS Entity, no less frequently than 

quarterly (for each portfolio that includes more than 100 SBS at any time during the 

calendar quarter) or annually (for each portfolio that includes no more than 100 SBS at 

any time during the calendar year). 

• Standard 6 (Portfolio Compression): The SEC has proposed rules that would require 

each SBS Entity to establish, maintain and follow written policies and procedures 

regarding portfolio compression. For SBS portfolios with another SBS Entity, the 

proposed rules would require the policies and procedures to be reasonably designed 

to evaluate and, when appropriate, periodically engage in bilateral and multilateral 
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158 SECURITIES AND EXCHANGE COMMISSION

255 See Regulation SBSR-Reporting and Dissemination of Security-Based Swap Information, Release No. 34-

74244 (Feb. 11, 2015), available at https://www.sec.gov/rules/final/2015/34-74244.pdf.

portfolio compression exercises and terminate each fully offsetting SBS with the SBS 

Entity counterparty in a timely fashion. For SBS portfolios with a counterparty that is 

not an SBS Entity, the proposed rules would require the policies and procedures to be 

reasonably designed to periodically terminate fully offsetting SBS and to engage in 

bilateral or multilateral portfolio compression exercises with the counterparty, when 

appropriate and to the extent requested by the counterparty. 

• Standard 7 (Dispute Resolution): The SEC has proposed rules that address SBS Entities’ 

resolution of disputes with their counterparties. For an SBS between SBS Entities, the 

proposed rules would require each SBS Entity to establish, maintain and follow written 

policies and procedures reasonably designed to resolve any valuation discrepancy as 

soon as possible, but in any event within five business days after identification of the 

discrepancy. The proposed rules also would require each SBS Entity to resolve 

immediately any discrepancy in a material term of an SBS with another SBS Entity. For 

an SBS between an SBS Entity and a counterparty that is not an SBS Entity, the proposed 

rules would require the SBS Entity to establish, maintain and follow written procedures 

reasonably designed to resolve any discrepancies in the valuation or material terms of 

an SBS. The proposed rules would not apply to valuation discrepancies of less than 

10% of the higher valuation. Each SBS Entity would be required to notify the SEC and 

any applicable prudential regulator promptly of any SBS valuation dispute in excess of 

$20 million, at either the transaction or portfolio level, if not resolved within three 

business days (if the dispute is with a counterparty that is an SBS Entity) or five business 

days (if the dispute is with a counterparty that is not an SBS Entity).

• Standard 8 (Implementation): The rules described above under Standard 3 will apply to 

SBS Entities as of the registration compliance date applicable to SBS Entities. The 

comment period for the proposed rules described above under Standards 2, 4, 5, 6 and 

7 expired on April 16, 2019, and the SEC is considering comments on those proposals. 

• Standard 9 (Cross-Border Transactions): The SEC has adopted a substituted compliance 

regime for the rules described above under Standard 3. Similarly, the SEC has proposed 

a substituted compliance regime for the proposed rules described above under 

Standards 2, 4, 5, 6 and 7. If granted, substituted compliance would allow an SBS Entity 

that is not a U.S. person to comply with specified foreign requirements to satisfy 

corresponding requirements in SEC rules and related statutes. 

16. Are OTC derivatives contracts required to be reported to TRs? 

[This is a new question for the 2020 FSAP]

Yes. Regulation SBSR255 requires each SBS (including life cycle events, and any adjustments 

due to life cycle events) to be reported to an SEC-registered security-based swap data 

repository. This regulation will come into force after both: (i) security-based swap dealers 

and major security-based swap participants are required to begin registering with the SEC, 
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SECURITIES AND EXCHANGE COMMISSION 159

256 Id.

and (ii) at least one security-based swap data repository that can accept reports in the 

relevant asset class registers with the SEC. Compliance with Regulation SBSR is not yet 

required. 

17. Are transaction-level data on OTC derivatives required to be reported to TRs, including 

at least transaction economics, counterparty information, underlier information, 

operational data and event data? 

[This is a new question for the 2020 FSAP]

Yes. Regulation SBSR256 requires each SBS transaction report to an SEC-registered securitybased swap data repository to include the following information:

1. A unique product identifier, if available, or alternative product identifying information;

2. Date and time, to the second, of execution;

3. Price, including the currency in which the price is expressed and the amount(s) and 

currenc(ies) of any up-front payments;

4. Notional amount(s) and the currenc(ies) in which the notional amount(s) is expressed;

5. If both sides of the SBS include an SEC-registered security-based swap dealer, an 

indication to that effect;

6. Whether the direct counterparties intend that the SBS will be submitted for central 

clearing. If yes, the name of the clearing agency. If no, whether the direct 

counterparties have invoked an end-user exception to mandatory central clearing, as 

well as a description of the settlement terms, including whether the SBS is cash-settled 

or physically settled, and the method for determining the settlement value;

7. If applicable, any flags pertaining to the transaction that are specified in the policies 

and procedures of the security-based swap data repository to which the transaction 

will be reported;

8. Unique identifiers for each counterparty or execution agent for the counterparty, as 

applicable;

9. Unique identifiers for the branch, broker, execution agent, trader and trading desk of 

the direct counterparty on the reporting side, as applicable;

10. If not provided as part of the unique product identifier, terms of any fixed or floating 

rate payments, or otherwise customized or non-standard payment streams, including 

the frequency and contingencies of such payments;
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160 SECURITIES AND EXCHANGE COMMISSION

257 See Exchange Act Rule 13n-4(b)(5).

258 See Exchange Act Section 13(n), 15 U.S.C. 78m(n).

259 See Security-Based Swap Data Repository Registration, Duties, and Core Principles, Release No. 34-

74246 (Feb. 11, 2015), available at https://www.sec.gov/rules/final/2015/34-74246.pdf.

11. For non-centrally cleared transactions and transactions that will not be allocated after 

execution, the title and date of any master agreement, collateral agreement, margin 

agreement, or any other agreement incorporated by reference into the SBS;

12. Any additional data elements included in the agreement between the counterparties 

that are necessary for a person to determine the market value of the transaction; and

13. Unique identifiers of the trading platform on which the SBS was executed and of the 

reporting broker, as applicable.

If the SBS arises from the allocation, termination, novation or assignment of one or more 

existing SBS, the unique transaction identifier(s) of the allocated, terminated, novated or 

assigned SBS(s) must be reported, except for clearing transactions that result from the 

netting or compression of other clearing transactions. Compliance with Regulation SBSR is 

not yet required.

18. Does the market authority have sufficient and timely access to relevant data in order 

to carry out its respective mandate related to OTC derivatives? 

[This is a new question for the 2020 FSAP]

Yes. To be registered, and maintain registration, as a SBSDR, a SBSDR must provide direct 

electronic access to the SEC (or any designee of the SEC, including another registered 

entity).257

19. Do reporting entities and counterparties have appropriate access to their own data 

stored with TRs? 

[This is a new question for the 2020 FSAP]

Yes. The SEC has a robust regulatory regime governing SBSDRs that addresses various 

factors involving access, privacy, operational integrity, and data accuracy and completeness. 

Transaction data is not yet required to be reported to SBSDRs as compliance with Regulation 

SBSR is not yet required. 

Section 763(i) of the Dodd-Frank Act added Section 13(n) to the Exchange Act, which requires 

a SBSDR to register with the SEC and provides that, to be registered and maintain registration 

as a SBSDR, a SBSDR must comply with certain requirements and “core principles” described 

in Section 13(n) and any requirement that the SEC may impose by rule or regulation.258 In 

2015, the SEC adopted Exchange Act Rules 13n-1 through 13n-12 (“SDR rules”), which require 

a SBSDR to register with the SEC and comply with certain “duties and core principles.”259 
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SECURITIES AND EXCHANGE COMMISSION 161

260 See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Release No. 

34-74244 (Feb. 11, 2015), available at https://www.sec.gov/rules/final/2015/34-74244.pdf.

261 See Exchange Act Section 13(n)(3), 15 U.S.C. 78m(n)(3).

262 See Form SDR, Item 33, available at https://www.sec.gov/files/formsdr.pdf (as part of its SEC registration 

application materials, any changes to Form SDR must also be filed with the SEC during and after the registration 

phase).

263 See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Release No. 

34-74244 (Feb. 11, 2015), available at https://www.sec.gov/rules/final/2015/34-74244.pdf.

Among other requirements, the SDR rules require a SBSDR to collect and maintain accurate 

SBS data and make such data available to the SEC and other authorities so that relevant 

authorities will be better able to monitor the buildup and concentration of risk exposure in 

the SBS market. Concurrent with the SEC’s adoption of the SDR rules in 2015, the SEC 

adopted Regulation SBSR,260 which, among other things, provides for the reporting of SBS 

information to registered SBSDRs, and the public dissemination of SBS transaction, volume, 

and pricing information by registered SBSDRs. In addition, Regulation SBSR requires each 

registered SBSDR to register with the SEC as a securities information processor (SIP). 

To be registered with the SEC as a SBSDR and maintain such registration, a SBSDR is required 

(absent an exemption) to comply with the requirements and core principles described in 

Exchange Act Section 13(n), as well as with any requirements that the SEC adopts by rule or 

regulation.261 The SEC will consider the information reflected by the SBSDR applicant on its 

Form SDR, as well as any additional information obtained from the SBSDR applicant. Form 

SDR requires an applicant to provide information regarding, among other things, access to its 

services and data, including instances in which the applicant has prohibited or limited any 

person with respect to access to services offered or data maintained by the applicant; any 

specifications, qualifications, or other criteria that limit, are interpreted to limit, or have the 

effect of limiting access to or use of any SBSDR or SIP services offered or data maintained by 

the SBSDR applicant; any specifications, qualifications, or other criteria required of persons 

who supply SBS information to the SBSDR applicant for collection, maintenance, processing, 

preparing for distribution, and publication by the SBSDR applicant or of persons who seek to 

connect to or link with the SBSDR applicant; and the SBSDR applicant’s policies and 

procedures to review any prohibition or limitation of any person with respect to access to 

services offered or data maintained by the SBSDR applicant and to grant such person access 

to such services or data if such person has been discriminated against unfairly.262 The 

information regarding access to services and data will assist the SEC in determining, among 

other things, whether an SBSDR can comply with Rule 13n–4(c)(1), which relates to the core 

principle for market access to services and data. With respect to Item 33 of Form SDR 

(requiring an SDR to provide information regarding access to services and data, including any 

denials of such access), the SEC noted that due to an SBSDR’s role as a central recordkeeping 

facility for SBSs, upon which the SEC and the public will rely for market-wide SBS data, the 

SEC should be informed of persons who have been granted access to an SBSDR’s services 

and data, as well as instances in which an SBSDR prohibits or limits access to its services.263 
UNITED STATES PRINCIPLE 37

162 SECURITIES AND EXCHANGE COMMISSION

264 See id.; see also Exchange Act Section 11A(b)(5)(A)-(B), 15 U.S.C. 78k–1(b)(5) (A registered SIP must 

promptly file notice with the SEC if it, directly or indirectly, prohibits or limits any person in respect of access to its 

services, which may be subject to review by the SEC. If the SEC finds that (a) such limitation or prohibition is not 

consistent with Exchange Act Section 11A and the rules and regulations thereunder and that such person has 

been discriminated against unfairly or (b) the prohibition or limitation imposes any burden on competition not 

necessary or appropriate, it may set aside the prohibition or limitation and require the SIP to permit such person 

access to its services.).

265 Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Release No. 34-

74244 (Feb. 11, 2015), available at https://www.sec.gov/rules/final/2015/34-74244.pdf.

266 See Exchange Act Rule 13n-6.

267 See Exchange Act Rule 13n-4(c)(1)(iii).

268 See Exchange Act Rule 13n-4(c)(1)(iv).

As Regulation SBSR Rule 909 requires a registered SBSDR to also register as a SIP, Exchange 

Act Section 11A(b)(5) would govern denials of access to all SDRs’ services.264

Overall, this, and other information reflected on the Form SDR, will assist the SEC in 

understanding the basis for registration as well as the SBSDR applicant’s track record in 

providing access to its services and data, technological reliability, and policies and procedures 

to comply with its statutory and regulatory obligations. Furthermore, the information 

requested in Form SDR will enable the SEC to assess whether the SBSDR applicant would be 

able to comply with the federal securities laws and the rules and regulations thereunder, and 

ultimately whether to grant or deny an application for registration.265 With regard to 

appropriate access to data maintained in SBSDRs by reporting entities and counterparties, an 

SBSDR must implement several safeguards regarding access to data stored in the SBSDR. The 

relevant rule requirements are as follows: 

(i) an SBSDR, with respect to those systems that support or are integrally related to 

the performance of its activities, must establish, maintain, and enforce written 

policies and procedures reasonably designed to ensure that its systems provide 

adequate levels of capacity, integrity, resiliency, availability, and security266;

(ii) an SBSDR must establish, monitor on an ongoing basis, and enforce clearly stated 

objective criteria that would permit fair, open, and not unreasonably 

discriminatory access to services offered and data maintained by the SBSDR as 

well as fair, open, and not unreasonably discriminatory participation by market 

participants, market infrastructures, venues from which data can be submitted to 

the SBSDR, and third party service providers that seek to connect to or link with 

the SBSDR267; 

(iii) an SBSDR must establish, maintain, and enforce written policies and procedures 

reasonably designed to review any prohibition or limitation of any person with 

respect to access to services offered, directly or indirectly, or data maintained by 

the SBSDR and to grant such person access to such services or data if such person 

has been discriminated against unfairly268; 
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SECURITIES AND EXCHANGE COMMISSION 163

269 See Exchange Act Rule 13n-4(b).

270 See Exchange Act Rule 13n-5(b)(1)(iii).

271 See Exchange Act Rule 13n-5(b)(2).

272 See Exchange Act Rule 13n-5(b)(3).

273 See Exchange Act Rule 13n-5(b)(6).

274 See Exchange Act Rule 13n-9(b)(1).

(iv) an SBSDR must confirm with both counterparties to the SBS the accuracy of the 

data that is submitted to it269; 

(v) an SBSDR must establish, maintain, and enforce written policies and procedures 

reasonably designed to satisfy itself that the transaction data that has been 

submitted to the SBSDR is complete and accurate270; 

(vi) an SBSDR must establish, maintain, and enforce written policies and procedures 

reasonably designed to calculate positions for all persons with open SBSs for which 

the SBSDR maintains records271; 

(vii) an SBSDR must establish, maintain, and enforce written policies and procedures 

reasonably designed to ensure that the transaction data and positions that it 

maintains are complete and accurate272; 

(viii) an SBSDR must establish procedures and provide facilities reasonably designed to 

effectively resolve disputes over the accuracy of the transaction data and positions 

that are recorded in the SBSDR273; and 

(ix) an SBSDR must establish, maintain, and enforce written policies and procedures 

reasonably designed to protect the privacy of any and all SBS transaction 

information that the SBSDR receives from a security-based swap dealer, 

counterparty, or any registered entity.274
UNITED STATES FREQUENTLY USED ABBREVIATIONS

164 SECURITIES AND EXCHANGE COMMISSION

IV. FREQUENTLY USED ABBREVIATIONS

Applicable Federal Statutes

Abbreviation Complete Name

Advisers Act Investment Advisers Act of 1940

APA Administrative Procedure Act of 1946

Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Exchange Act Securities Exchange Act of 1934

FAST Act Fixing America’s Surface Transportation Act of 2015

FCPA Foreign Corrupt Practices Act of 1977

FOIA Freedom of Information Act of 1966

GLBA Gramm-Leach-Bliley Act of 1999

Investment Company Act Investment Company Act of 1940

JOBS Act Jumpstart Our Business Startups Act of 2012

RFA Regulatory Flexibility Act of 1980

SOX or Sarbanes-Oxley Act Sarbanes-Oxley Act of 2002

Securities Act Securities Act of 1933

SIPA Securities Investor Protection Act of 1970

Trust Indenture Act Trust Indenture Act of 1939
FREQUENTLY USED ABBREVIATIONS UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 165

SEC Divisions, Offices and Analytical Tools

Abbreviation Complete Name

CF Division of Corporation Finance

 OCMT Office of Capital Markets Trends

 ORS Office of Risk and Strategy

DERA Division of Economic and Risk Analysis

 ORA Office of Risk Assessment

 BDRA Broker-Dealer Risk Assessment Model

 CIRA Corporate Issuer Risk Assessment Program

ENF or Enforcement Division of Enforcement

 CRQA Center for Risk and Quantitative Analytics

IM Division of Investment Management

 MAGIC Monitoring and Analytics Graphical User Interface

 REO/Analytics 

Office

Risk and Examinations Office – renamed the Analytics Office

OCIE Office of Compliance, Inspections and Examinations

 ORS Office of Risk and Strategy

 LFM Office of Large Firm Monitoring

 QAU Quantitative Analytics Unit

 RAS Office of Risk Assessment and Surveillance

 RAE Risk Analysis Examination Team

 TCP Technology Control Program

OCR Office of Credit Ratings

OIEA Office of Investor Education and Advocacy

OGC Office of the General Counsel

TM Division of Trading and Markets

 OAR

 OMS

Office of Analytics and Research

Office of Market Supervision

 ORS Office of Risk Supervision

 MIDAS Market Information Data and Analytics System
UNITED STATES FREQUENTLY USED ABBREVIATIONS

166 SECURITIES AND EXCHANGE COMMISSION

SEC Forms

Abbreviation Complete Name

Form ADV Uniform Application for Investment Adviser Registration and Report by 

Exempt Reporting Advisers 

Form ATS-N Regulation of NMS Stock Alternative Trading Systems

Form CRS Form CRS Relationship Summary

Form N-CEN Annual Report for Registered Investment Companies 

Form N-LIQUID Current Report, Open-End Management Investment Company Liquidity

Form N-MFP Monthly Schedule of Portfolio Holdings of Money Market Funds

Form N-PORT Monthly Portfolio Investments Report 

Form PF Reporting Form for Investment Advisers to Private Funds and Certain 

Commodity Pool Operators and Commodity Trading Advisors

Form SBSE Application for Registration of Security-based Swap Dealers and Major 

Security-based Swap Participants 

Form SBSE-A Application for Registration of Security-based Swap Dealers and Major 

Security-based Swap Participants that are Registered or Registering with 

the Commodity Futures Trading Commission as a Swap Dealer or Major 

Swap Participant 

Form SBSE-BD Application for Registration of Security-based Swap Dealers and Major 

Security-based Swap Participants that are Registered Broker-dealers

Form SDR Application or Amendment to Application for Registration or Withdrawal 

from Registration As Security-based Swap Data Repository Under the 

Securities Exchange Act of 1934 
FREQUENTLY USED ABBREVIATIONS UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 167

Other Acronyms

Abbreviation Complete Name

ALJ Administrative Law Judge

AML Anti-Money Laundering

ANC Alternative Net Capital

ANC Broker-Dealer Alternative Net Capital Broker-Dealer

ATS Alternative Trading System

CAT Consolidated Audit Trail

CBOE Chicago Board Options Exchange

CCO Chief Compliance Officer

CCP Central Counterparty

CFPB Consumer Financial Protection Bureau

CFTC Commodity Futures Trading Commission

CIS Collective Investment Scheme

CPMI Committee on Payments and Market Infrastructures

CRA Credit Rating Agency

CSD Central Securities Depository

DOJ Department of Justice

ECN Electronic Communications Network

EDGAR Electronic Data Gathering, Analysis, and Retrieval system

EEA European Economic Area

ETF Exchange-Traded Fund

FASB Financial Accounting Standards Board

FBI Federal Bureau of Investigation

FDIC Federal Deposit Insurance Corporation

Federal Reserve Board of Governors of the Federal Reserve

FHFA Federal Housing Finance Agency

FINRA Financial Industry Regulatory Authority

FY Fiscal Year
UNITED STATES FREQUENTLY USED ABBREVIATIONS

168 SECURITIES AND EXCHANGE COMMISSION

FMU Financial Market Utility

FSB Financial Stability Board

FSOC Financial Stability Oversight Council

ICO Initial Coin Offering

IFRS International Financial Reporting Standards

IOSCO International Organization of Securities Commissions

IOSCO AA IOSCO Administrative Arrangement 

IRS Internal Revenue Service

IT Information Technology

LLC Limited Liability Company

LULD Limit-Up Limit-Down

MIDAS Market Information Data and Analytics System

MMF Money Market Fund

MOU Memorandum of Understanding

MSRB Municipal Securities Rulemaking Board

MSBSP Major Security-Based Swap Participant

NASDAQ National Association of Securities Dealers Automated Quotations

NAV Net Asset Value

NCUA National Credit Union Administration

NEP National Examination Program

NMS National Market System

NRSRO Nationally Recognized Statistical Rating Organization

NYSE New York Stock Exchange

OCC Office of the Comptroller of the Currency

OFR Office of Financial Research

OMB Office of Management and Budget

OTC Over-the-Counter

PCAOB Public Company Accounting Oversight Board

PFMI. Principles for Financial Market Infrastructures

PII Personally Identifying Information
FREQUENTLY USED ABBREVIATIONS UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 169

RSA Regulatory Service Agreement

SAI Statement of Additional Information

SALI SEC Action Lookup for Individuals

SAR Suspicious Activity Report

SBS Security-Based Swaps

SBSD Security-Based Swap Dealer

SBS Entities SBSDs and MSBSPs, collectively

SB SEF Security-Based Swap Execution Facility

SCI Systems Compliance and Integrity

SDR Swap Data Repository

SEC Securities and Exchange Commission

SIPC Securities Investor Protection Corporation

SIP Securities Information Processor

SRO Self-Regulatory Organization

TCP Technology Control Program

TCR Tip, Complaint, or Referral

Treasury U.S. Department of the Treasury

UIT Unit Investment Trust

VaR Value-at-Risk
UNITED STATES FREQUENTLY USED ABBREVIATIONS

170 SECURITIES AND EXCHANGE COMMISSION

Select Rules and Regulations

Abbreviation Complete Name

Regulation A Exemption from Registration for Public Offerings

Regulation ATS Regulation of NMS Stock Alternative Trading Systems

Regulation Best Interest Regulation Best Interest - The Broker-Dealer Standard of Conduct

Regulation NMS Regulation National Market System

Regulation SBSR Reporting and Dissemination of Security-Based Swap Information

Regulation SCI Regulation Systems Compliance and Integrity 

Regulation SHO Regulation of Short Sales

Rule 2a-7 Money Market Fund Reform

Rule 6c-11 Exchange-Traded Funds

Rule 12d1-4 Funds of Funds Arrangements

Rule 15c3-5 Risk Management Controls for Brokers or Dealers with Market Access (Market 

Access Rule)

Rule 15Fb1-1 to 15Fb6-2 Registration Process for Security-Based Swap Dealers and Major SecurityBased Swap Participants (Security-Based Swap Entity Registration)

Rule 15Fi-1 to 15Fi-2 Trade Acknowledgment and Verification of Security-Based Swap Transactions

Rule 17Ad-22 Standards for Covered Clearing Agencies

Rule 22e-4 Open-End Fund/Investment Company Liquidity Risk Management Programs

Rule 139b Covered Investment Fund Research Reports

Rule 147 and 147A Exemptions to Facilitate Intrastate and Regional Securities Offerings