U.S. Commodity Futures Trading 

Commission

Office of External Affairs 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

(202) 418-5080 

www.cftc.gov

U.S. Securities & Exchange Commission 

100 F Street, NE 

Washington, DC 20549 

(202) 942-8088 

www.sec.gov

A Joint Report of the SEC and the CFTC 

on Harmonization of Regulation 

October 16, 2009 
A Joint Report of the SEC and the CFTC 

on Harmonization of Regulation 

Executive Summary 

On June 17, 2009, the Administration released a White Paper on Financial 

Regulatory Reform (“Treasury White Paper” or “White Paper”),1

 outlining a plan for 

comprehensive financial reform to set the foundation for restoring confidence in the 

integrity of the financial system. Noting that “[t]he broad public policy objectives of 

futures regulation and securities regulation are the same: protecting investors, ensuring 

market integrity, and promoting price transparency,” the White Paper requested the U.S. 

Securities and Exchange Commission (“SEC”) and the U.S. Commodity Futures Trading 

Commission (“CFTC”) to identify “all existing conflicts in statutes and regulations with 

respect to similar types of financial instruments and either explain why those differences 

are essential to achieve underlying policy objectives with respect to investor protection, 

market integrity, and price transparency or make recommendations for changes to statutes 

and regulations that would eliminate the differences.”2 

The President’s call prompted the agencies to hold joint meetings to hear from the 

public. The agencies held unprecedented joint meetings on September 2 and 3, 2009 

(“September Meeting”), with the participation of all nine sitting Commissioners. Thirty 

panelists, consisting of members of the investor community, academics, industry experts, 

and market participants assisted the agencies in defining the issues of greatest concern, 

and explored topics ranging from exchange, markets, and clearing issues, to regulation of 

intermediaries and end-users, to enforcement.3 

Since the 1930s, securities and futures have been subject to separate regulatory 

regimes. While both regimes seek to promote market integrity and transparency, 

securities markets are concerned with capital formation, which futures markets are not. 

The primary purpose of futures markets is to facilitate the management and transfer of 

risk, and involve management of positions in underlying assets of limited supply. Certain 

securities markets, such as securities options and other securities derivatives markets, 

also facilitate the transfer of risk. The unique capital formation role of certain securities 

markets has informed the manner in which the two regulatory regimes have developed 

and, in part, explain differences between the regulatory structures of the CFTC and the 

SEC. 

 

1

 Financial Regulatory Reform – A New Foundation: Rebuilding Financial Supervision and 

Regulation (June 17, 2009) (“Treasury White Paper”), available at

http://www.financialstability.gov/docs/regs/FinalReport_web.pdf. 

2

 See id. at 50–51. 

3

 Transcripts of the September Meeting are available on the agencies’ websites: at the SEC, 

http://www.sec.gov/spotlight/harmonization.htm; and at the CFTC, http://www.cftc.gov

(“Transcripts”).
Because of the role of certain securities markets in capital formation, securities 

regulation is concerned with disclosure – including accounting standards related to such 

disclosure, while commodities regulation is not. For example, because futures markets 

for physical commodities concern regulation of instruments which reference a limited 

supply of an underlying asset, regulation permits imposition of position limits. Position 

limits in the securities markets is important for different reasons, namely to mitigate the 

potential for derivatives to be used to manipulate the market for underlying securities. 

This Report does not address all of these differences between the regulatory regimes. 

Moreover, the rapid development of the market in complex financial instruments 

known as derivatives, large parts of which neither agency has had the authority to 

regulate, has created significant regulatory gaps. These gaps, which are discussed at 

some length in the Treasury White Paper and currently are the subject of deliberation 

before Congress, are also not covered in this Report. 

The focus of this Report, however, is on a number of issues that emerged through 

the agencies’ public deliberations as the matters most relevant to a reconciliation of the 

two agencies’ statutory and regulatory schemes. Drawing on the input received from the 

September Meeting and others, this Report reviews and analyzes the current statutory and 

regulatory structure for the CFTC and the SEC in the following areas: (i) product listing 

and approval; (ii) exchange/clearinghouse rule changes; (iii) risk-based portfolio 

margining and bankruptcy/insolvency regimes; (iv) linked national market and common 

clearing versus separate markets and exchange-directed clearing; (v) price manipulation 

and insider trading; (vi) customer protection standards applicable to financial advisers; 

(vii) regulatory compliance by dual registrants; and (viii) cross-border regulatory matters. 

These subjects are not exclusive, but the ones most emphasized by the public and in the 

agencies’ review. 

The Report concludes with a series of specific recommendations for strengthening 

the agencies’ oversight and enforcement, enhancing investor and customer protection, 

rendering compliance more efficient, and improving coordination and cooperation 

between the agencies. 

Oversight of New Products. The CFTC and the SEC are governed by different 

approaches to reviewing and approving products. Specifically, the securities laws are 

premised on the notion of high quality disclosure of material information about an 

issuer’s securities. An issuer that seeks to list on an exchange must also satisfy that 

exchange’s listing standards, which are filed with the SEC. The SEC has the authority to 

ensure that listing standards are consistent with the purposes of the Securities Exchange 

Act of 1934 (“Securities Exchange Act”), such as market integrity, public interest, and 

investor protection. The CFTC, however, does not have the authority to disapprove of a 

product listing unless it makes an affirmative finding that a product “would violate” the 

Commodity Exchange Act (“CEA”). Thus, the CFTC does not have the authority to 

review a product for approval prior to introduction, including contracts that may 

otherwise be contrary to public policy (e.g., gambling, terrorism). Whereas in the past, 

the CEA contained an “economic purpose” test to govern product approval, the statutory 

2
test containing that provision was repealed by the Commodity Futures Modernization Act 

of 2000 (“CFMA”). Moreover, under the CEA, exchanges are permitted to provide “selfcertification” that a product meets the requirements of the statute and CFTC regulations, 

which allows the product to be immediately listed. Different procedures exist under the 

framework of securities regulation, which provides a streamlined process for listing and 

trading derivative securities products. 

The agencies have faced the sometimes difficult question of which agency has 

jurisdiction over a particular product. Some financial products have attributes that make 

it difficult to determine which agency has jurisdiction over them. This uncertainty at 

times has caused lengthy delays in bringing new products to market. The lack of legal 

certainty can be costly and confusing, and it can impede innovation and competition. 

Public feedback on these subjects suggested the following: 

• A method of reaching prompt resolution of jurisdictional disputes is 

needed. 

• A mechanism should be developed to break deadlocks between the CFTC 

and the SEC over disagreements regarding jurisdiction over products. 

• Self-certification procedures should have a meaningful burden for 

exchanges to demonstrate that a proposed product listing will comply 

with applicable law. 

• Regulatory agencies must have the authority to choose to review contracts 

or products prior to listing and be able, in some instances, to disapprove 

of listings. 

Review and Approval of Rules. There are some basic differences in the regimes 

under which the CFTC and SEC approve and review rule changes and amendments for 

exchanges, clearinghouses, and other self-regulatory organizations (“SROs”). Under the 

CEA’s principles-based approach to oversight, applicable to exchanges and 

clearinghouses as established by the CFMA, in most cases, rule filings are made under 

self-certification procedures. Under a principles-based approach, an exchange or 

clearinghouse has significant discretion in the manner in which it satisfies the statutory 

core principles, which are less susceptible to change, given that they may only be 

modified by Congress. To take formal action to disapprove a self-certified rule, the 

CFTC must determine that a rule violates the CEA. Thus, under the principles-based 

approach of the CEA, the CFTC’s ability to regulate exchange and clearinghouse rules is 

limited. Under the Securities Exchange Act, although exchanges must submit proposed 

rule changes to the agency, about two-thirds of proposed rule changes are effective 

immediately upon filing. The remaining rule changes, however, must be approved by the 

SEC before they are effective. All proposed rule changes are published for comment. 

This process allows an opportunity for the market participants, including brokers, dealers, 

and investors, to comment on changes to exchange and SRO rules. 

3
• Panelists and comments have stated that the agencies’ oversight of 

exchange and clearinghouse rules should balance the opportunity to 

comment with the speed provided by self-certification. Some exchanges 

and clearinghouses state that self-certification enables them to implement 

business decisions promptly. However, other exchanges and their 

constituents note that a prior approval process, including one that involves 

a comment procedure, is important because it creates legal certainty and 

permits regulators to exercise oversight with proper information, which is 

derived in part from public input on significant issues during the comment 

process. Other panelists encouraged looking at ways to expedite the rule 

approval process. 

• The CFTC standard of review for rule filings, which forbids the agency 

from disapproving a rule unless it finds that it “would violate” the CEA, 

does not afford the agency sufficient authority to ensure exchange and 

clearinghouse compliance with the CEA, adopt to market conditions and 

international standards, and protect the public.. 

• The SEC review process for rule filings was recently modified to create 

set time periods for action to be taken. 

Financial Responsibility: Segregation, Insolvency and Margin. There are 

distinct differences in the SEC’s and CFTC’s approaches to segregation of customer 

funds, insolvency and margin. 

Segregation and Insolvency. Both regimes have “segregation” rules that aim to 

protect customers from inappropriate use of customer funds by futures commission 

merchants (“FCMs”) and broker-dealers (“BDs”). CFTC and SEC statutory and 

regulatory provisions, however, contain significant differences in the specific manner in 

which assets are to be segregated. Under the CEA, FCMs may not commingle customer 

funds either with their own accounts or the accounts of customers. Generally, a BD may 

not commingle its securities with those of customers or pledge its customers’ securities in 

an amount greater than what the customer owes. If a customer has an outstanding margin 

loan, the BD may use a limited amount of the customer’s securities for financing. There 

is no parallel financing practice in the futures markets because futures margin is a 

performance bond and does not involve an extension of credit. 

The regimes governing bankruptcy and insolvency are also different. For 

example, in the case of a BD insolvency, there is $500,000 per customer protection under 

the Securities Investor Protection Act (“SIPA”). By contrast, the Bankruptcy Code and 

CFTC regulations, by virtue of the governing segregation rules, contemplate portability 

of positions and funds, whereby customers may rapidly transfer their accounts from an 

insolvent FCM to a financially healthy FCM. SEC regulations also contemplate 

expeditious transfer of customer accounts through self-liquidation or a proceeding under 

SIPA. In general, if the books and records of the broker-dealer are in order and customer 

accounts are properly margined, customer accounts may be transferred to another broker4
dealer in a process known as bulk transfer. There is no insurance coverage for customer 

positions and funds that are held in a segregated futures account. 

 

Setting Margin. The CFTC and SEC also approach the regulation of margin from 

different perspectives. Customer margin regulations for cash securities are set by the 

Board of Governors of the Federal Reserve System (“FRB”) and SROs. In contrast to the 

SEC, the CFTC does not have general authority to set margin. Margin requirements for 

exchange-traded securities options are generally set by the exchanges and SROs. Under 

the CEA, clearinghouses set “clearing” margin (margin that the clearing member posts 

with the clearinghouse) and exchanges set customer margin (margin a customer posts 

with the intermediary). 

In the futures markets, margin requirements are imposed to ensure that customers 

post a sufficient performance bond in case they fail to meet their obligations. Margin 

requirements for cash securities positions establish limits on the amount of credit a 

broker-dealer may extend to finance securities transactions. Margin requirements for 

cash securities and for securities options are therefore calculated using different 

approaches than for futures. 

• Risk-based portfolio margining, i.e., the ability to cross-margin related 

instruments in one account, was cited by many panelists at the September 

Meeting as a significant area for reconciling the two regulatory regimes. 

Portfolio margining refers to the ability to reduce the amount of margin 

required by the holding of one position if another position simultaneously 

held by the customer would offset the risk posed by the first position. 

Portfolio margining would release firm and customer capital to be used for 

other purposes. 

• Portfolio margining may be attained in one of two general ways: by 

placing the relevant instruments in either a single securities or futures 

account, or in two separate accounts. Industry participants are beginning 

work to establish two account portfolio margining programs. However, 

most panelists stated that the single account model is generally preferable. 

• To achieve portfolio margining under the one account model, legislative 

and rule changes are needed, including legislative changes to the 

bankruptcy/insolvency regime of the SEC by amending the SIPA to 

provide for insurance protection of futures positions and performance 

bond supporting such positions. 

Markets and Clearing Systems. The securities and futures markets differ 

significantly in their structure. Identical, fungible securities are traded on multiple 

markets in the United States as part of the “national market system,” which was 

mandated by Congress in 1975 through amendments to the federal securities laws. Under 

this model, exchanges compete for trading and execution services, and clearing is done 

through one central clearinghouse for each product type. This structure differs from the 

5
futures markets, where individual futures contracts generally are traded on the exchange 

that creates the contract. Each futures exchange then “directs” clearing, that is, it selects 

the clearinghouse for the instruments it lists. Often, there is vertical integration where the 

exchange and the clearinghouse to which it directs trades have common ownership. This 

same structure generally holds in other areas of the world, including Europe and Asia. In 

the futures markets, exchanges in the United States compete with exchanges in foreign 

markets to offer competing products. Although product offerings in futures exchanges 

may be similar in terms and their functions, they are not fungible across markets and 

clearing organizations. In this regard, the futures markets are different from the securities 

options market, which use a common clearing model that serves competing exchanges. 

Though the CFTC and the SEC at present do not have any recommendations 

concerning market linkage and clearing with regard to futures or securities, they have 

supported provisions for non-discriminatory access to clearing organizations for the OTC 

derivatives market. On the general topic of market linkage and clearing, panelists at the 

September Meeting articulated contrasting views, including the following: 

• The “national market system” for securities has created competition 

between trading venues. 

• To have a system in which trading venues compete, products traded across 

exchanges must be fungible. 

• Products in the futures industry are not treated as fungible because 

exchanges expend resources to develop them and fungibility would enable 

other trading venues to “free ride” on these product development efforts; 

futures exchanges should be able to recoup their investments in (or, as 

some economists would term it, enjoy the rents from) their product 

development, and that any changes should be predicated on reform in 

foreign jurisdictions. 

• Competition among trading venues in the futures markets could be 

enhanced by permitting market participants to clear trades at a 

clearinghouse regardless of the facility on which the trade was executed. 

Manipulation, Insider Trading and Fraud Enforcement. Although the 

agencies share many enforcement interests, there are differences in enforcement authority 

and, on occasion, such as with insider trading, in overall approach. 

Manipulation. Manipulation is unlawful under both the securities and futures 

laws. While there is some overlap in the types of manipulative activity that occur in the 

securities and futures markets, certain kinds of activity, such as corners and squeezes are 

particular to the futures markets. 

Public input on this issue indicated that: 

6
• Enforcement with respect to manipulation in the futures and securities 

markets requires both legal action in response to violations and 

prescriptive action through proper market oversight. 

• While the CFTC has had success in bringing manipulation cases, its 

authority with respect to disruptive trading practices should be enhanced. 

Insider Trading. The approaches of the securities and futures laws also diverge 

on the issue of insider trading. The market integrity provisions of the securities laws 

prohibit insider trading. They do so in large part because securities laws are premised on 

a corporation’s duties to disclose material information to protect shareholders from 

corporate insiders who have access to non-public information. Specifically, corporate 

officials and personnel of a firm who trade that firm’s securities on the basis of inside 

information are viewed as breaching a fiduciary duty to the shareholders hold those 

securities. 

In contrast, the CEA’s insider trading prohibitions are focused on employees and 

agents of the CFTC and of SROs and markets that are regulated by the CFTC. The 

difference between the two regimes is attributable, first, to the historical functions of the 

futures markets. These markets permit hedgers to use their non-public material 

information to protect themselves against risks to their commodity positions. Though 

counterparties to these kinds of transactions may not have access to the same non-public 

information, corporate officials and personnel generally do not have a similar fiduciary 

duty with respect to those counterparties; indeed, their duties are to ensure that the 

company properly manages its risks by trading on the best available information. 

Accordingly, comments on this issue noted the following: 

• Some extension of insider trading prohibition under the futures laws 

would be appropriate since current laws would not prohibit, for example, 

misappropriation of non-public government information for trading 

purposes (such as information depicted in the popular motion picture 

“Trading Places”). 

• Although there are different views as to precisely where the line should be 

drawn, commentary indicated that current prohibitions applicable to CFTC 

and registered entity personnel should be extended to all other SROs (such 

as securities exchanges), other government agencies and departments, and 

members of Congress and their staffs who are in possession of material 

non-public information. 

Other Enforcement. There also are differences in enforcement remedies. A 

difference between the two regulatory frameworks is that the CFTC has specific statutory 

authority for aiding and abetting all violations of the CEA and CFTC regulations. The 

SEC has specific statutory authority for aiding and abetting under the Securities 

7
Exchange Act and the Investment Advisers Act but not under the Securities Act or the 

Investment Company Act. Also, whereas the securities laws require BDs to maintain 

firewalls between the analyst and trading functions, there is no parallel mechanism for 

avoiding conflicts of interest under the CEA. Finally, neither agency has the ability to 

rely on whistleblowers to assist in detecting violations of their statutes. 

Obligations to Customers. Financial intermediaries that offer investment advice 

to clients are subject to varying standards under the regulatory schemes of the CFTC and 

the SEC. 

With respect to suitability, the CFTC requires financial advisers to determine an 

appropriate level of disclosure particularized to the client based on the “know your 

customer” information they have obtained. Because of the fundamental role of leverage 

and the inherent volatility of commodities markets, futures trading is considered “risky” 

by nature. Futures regulation, therefore, imposes an initial suitability determination 

before a customer even opens a futures trading account. However, once that threshold is 

crossed, the customer may engage in futures trade without a trade-by-trade suitability 

determination by the financial professional. This approach to suitability is generally 

premised on the notion that, once customers in the futures industry receive an 

appropriately tailored disclosure stating that all futures are risky and volatile instruments, 

they subsequently are in the best position to determine the propriety of a particular 

futures trade. 

Under the federal securities laws and SRO rules, broker-dealers are required to 

deal fairly with their customers. This includes having a reasonable basis for 

recommendations given the customer’s financial situation (suitability), engaging in fair 

and balanced communications with the public, providing timely and adequate 

confirmation of transactions, providing account statement disclosures, disclosing 

conflicts of interest, and receiving fair compensation both in agency and principal 

transactions. In addition, the SEC’s suitability approach requires BDs to determine 

whether a particular investment recommendation is suitable for a customer, based on 

customer-specific factors and factors relating to the securities and investment strategy. A 

BD must investigate and have adequate information regarding the security it is 

recommending and ensure that its recommendations are suitable based on the customer’s 

financial situation and needs. The suitability approach in the securities industry is 

premised on the notion that securities have varying degrees of risk and serve different 

investment objectives, and that a BD is in the best position to determine the suitability of 

a securities transaction for a customer. Disclosure of risks alone is not sufficient to 

satisfy a broker-dealer’s suitability obligation. Thus, the different approaches to 

suitability reflect underlying differences between futures and securities markets: whereas 

trading in the former always involves assuming or hedging potentially significant risk, 

trading in the latter turns on the customer’s particular investment objectives, which 

invites a trade-by-trade suitability determination. At this point, the Commissions do not 

offer a recommendation on this issue. 

On the question of what duties are owed by the financial professional to the 

customer, the two statutory and regulatory schemes are varied. Under the SEC’s regime, 

8
investment advisers are considered fiduciaries, but BDs are not as such. While the 

statutes and regulations do not uniformly impose fiduciary obligations on a BD, a BD 

may have a fiduciary duty under certain circumstances, at times under state common law, 

which varies by state. Generally, BDs that exercise discretion or control over customer 

assets, or have a relationship of trust and confidence with their customers, are found to 

owe customers a fiduciary duty similar to that of investment advisers. The 

Administration’s proposed reform legislation seeks to establish a uniform fiduciary duty 

standard for investment advisers and BDs who provide similar investment advisory 

services. 

As with BDs, there are no explicitly defined fiduciary duties under the CEA or the 

CFTC’s regulations for financial professionals such as FCMs, commodity trading 

advisors (“CTAs”), or commodity pool operators (“CPOs”). State common law imposes 

fiduciary duties upon persons who make decisions regarding the assets of others. This 

law generally holds that a futures professional owes a fiduciary duty to a customer if it is 

offering personal financial advice. 

Views in this area generally indicate that: 

• Having inconsistent standards for financial advisers performing similar 

functions causes confusion. 

• There should be a uniform fiduciary duty standard of conduct for persons 

providing similar investment advisory services, regardless of whether that 

advice relates to securities or futures. 

Registration and Recordkeeping Requirements. The CFTC and the SEC have 

separate but complementary registration, reporting and compliance regimes for 

intermediaries, including BDs and FCMs, and CTAs, CPOs, and investment advisers. 

The two agencies have worked in several areas to relieve burdens on dual registrants. For 

example, they have established uniform capital and related reporting requirements for 

firms that register as both BDs and FCMs. Moreover, certain provisions in the CEA and 

the Investment Advisers Act provide exemptions for investment advisers already 

registered with the other agency. 

On recordkeeping, the CFTC and the SEC have generally similar rules for BDs 

and FCMs. However, the requirements diverge on how long records must be kept 

overall. The CFTC has an overall 5-year retention rule, whereas the SEC generally 

requires that some records be kept for 3 years, and others for 6 years. 

• Panelists and comments have urged the agencies to develop uniform 

recordkeeping rules. 

• With private fund managers increasingly registering with both agencies, 

the Commissions have been asked to consider revising certain disclosure 

and reporting documents applicable to dually registered private fund 

9
advisers with the goal of easing potentially duplicative or unnecessary 

compliance requirements. 

Regulation of Cross-Border Activity. Increasing globalization of financial 

markets has made the agencies’ efforts regarding oversight of cross-border activity 

critically important. Both agencies have taken steps to encourage the cross-border flow 

of capital and trading while promoting adoption of robust regulatory standards 

throughout the world. While the basic objectives of the two agencies have been the 

same, their particular approaches with respect to certain cross-border access issues have 

differed. 

Under the federal securities laws, an exchange wishing to engage in a securities 

business in the United States must register. The situation for foreign boards of trade 

(“FBOTs”) under the CFTC’s regulatory scheme is somewhat different; under 

appropriate conditions, such boards of trade may qualify for no-action relief and may 

provide their members or participants with access to their trading systems without 

seeking designation or registration under the CEA. There is no statutory registration 

category under the CEA for foreign boards of trade, which would enhance the CFTC’s 

authority to oversee trading by United States entities on such platforms. 

With regard to intermediaries, foreign broker-dealers’ interaction with U.S. 

investors in securities transactions is facilitated primarily through the exemptions from 

U.S. broker-dealer registration offered under the Securities Exchange Act. The CFTC’s 

regulatory regime allows for broader cross-border access by intermediaries. 

• The agencies should continue to cooperate with their foreign counterparts 

to seek global regulatory harmonization, especially with regard to the 

regulation of over-the-counter derivatives. 

• The SEC and CFTC regimes should further encourage cross-border access 

with respect to securities transactions in the secondary market consistent 

with fair and orderly markets, standards of full and fair disclosure, and the 

protection of investors in the United States. 

Operational Coordination. Improving coordination and cooperation between 

the SEC and CFTC is essential to achieving the Administration’s directive on 

harmonization going forward. Accordingly, the Report concludes with several 

recommendations that will allow the SEC and the CFTC to better coordinate their 

operations, information-sharing, and regulations. 

• An appropriate forum for discussion and communication between the SEC 

and the CFTC to identify emerging regulatory risks and assess and 

quantify their implications for investors and other market participants, and 

provide recommendations for solutions would serve the agencies’ 

harmonization initiative. 

10
• A number of panelists at the September Meeting endorsed creation of a 

task force on enforcement matters that would consist of staff from each 

agency to coordinate joint investigations in response to events that affect 

both the securities and futures markets. Such an initiative would help 

eliminate inefficiencies, and ensure comprehensive and consistent fraud 

and manipulation detection across the two marketplaces. 

 Summary of Recommendations

Markets

1. The Report recommends legislation to facilitate the holding of (i) 

futures products in an SRO securities portfolio margin account and (ii) 

securities options, SFPs, and certain other securities derivatives in a 

futures portfolio margin account. In addition, the Commissions should 

undertake to review their existing customer protection, margin and any 

other relevant regulations to determine whether any rule changes or 

exemptive relief would be necessary to achieve the full benefits of riskbased portfolio margining. The Commissions should also undertake, 

with input from experts, the industry, and the public, to explore 

whether further modifications to portfolio margining, including 

adoption of a one account model that would accommodate all financial 

instruments and all broker-dealers and FCMs, would be in the public 

interest. 

2. The Report recommends legislation that would provide a process for 

expedited judicial review of jurisdictional matters regarding new 

products. Specifically, the SEC and the CFTC support legislation to 

establish and clarify: (i) legal certainty with respect to the agencies’ 

authority over products exempted by the other agency; and (ii) a review 

process to ensure that any jurisdictional dispute is resolved by the 

Commissions against a firm timeline. 

3. The Report recommends legislation to enhance CFTC authority over 

exchange and clearinghouse compliance with the CEA. The CFTC 

currently lacks sufficient authority to ensure that exchanges and 

clearinghouses it regulates are operating within the principles, rules and 

regulations established under the CEA, adapt to market conditions and 

international standards, and protect the public. The CEA should be 

amended to provide the CFTC with clear authority with respect to 

exchange and clearinghouse rules that the CFTC determines are 

necessary for them to comply with the CEA. 

4. The Report recommends that the SEC review its approach to crossborder access to determine whether greater efficiencies could be 

11
achieved with respect to cross-border transactions in securities 

consistent with the protection of investors and the public interest. The 

SEC intends to undertake a focused review of its approach to crossborder access. In particular, the SEC intends to consider whether its 

current approach could be modified to achieve greater efficiencies 

regarding cross-border securities transactions without impairing 

investor protections. 

5. The Report recommends legislation to empower the CFTC to require 

foreign boards of trade to register with the CFTC. Because there is no 

statutory registration requirement under the CEA for FBOTs, the 

CFTC’s authority to oversee trading by United States entities abroad is 

limited. Therefore, the CFTC recommends that the CEA be amended 

to grant the agency authority to require registration of any FBOT that 

seeks to provide direct access to members or other participants located 

in the United States and, when appropriate, relying on the foreign 

regulator to avoid duplicative regulation. 

Financial Intermediaries

6. The Report recommends legislation that would impose a uniform 

fiduciary duty on intermediaries who provide similar investment 

advisory services regarding futures or securities. Consistent with Title 

IX of the Administration’s financial regulatory reform legislation, 

which seeks to establish a uniform standard of conduct for brokerdealers and investment advisers, the agencies recommend that a 

consistent standard apply to any CTA, FCM, introducing broker (“IB”), 

broker-dealer, or investment adviser who provides similar investment 

advisory services. 

7. The Report recommends that the SEC and the CFTC undertake to align 

their record retention requirements for intermediaries by harmonizing 

the length of time records are required to be maintained. The SEC 

intends to review its current three (3) and six (6) year record retention 

requirements and consider, as appropriate, rule changes that would 

harmonize these requirements with the five (5) year record retention 

requirements the CFTC makes applicable to CFTC registrants. 

8. The Report recommends that the agencies undertake to provide greater 

consistency in their customer risk disclosure documents. The SEC 

intends to review the current Options Disclosure Document (“ODD”) 

to determine whether a customer disclosure document more akin to that 

which is used for futures products would be appropriate and consistent 

with the protection of investors and the public interest. 

12
9. The Report recommends efforts to align specific private fund reporting 

requirements. The CFTC and the SEC should review regulatory 

requirements applicable to investment advisers and commodity trading 

advisors/commodity pool operators with respect to private funds to 

eliminate, as appropriate, any inconsistent or conflicting provisions 

regarding: (i) the use of performance track records; (ii) requirements 

applicable to investor reports (including the financial statements often 

used by registered investment advisers to comply with the Advisers Act 

custody rule and the financial statements delivered to investors by 

commodity pool operators); and (iii) recordkeeping requirements. 

10. The Report recommends legislation to expand the CFTC’s conflict of 

interest prevention authority. Legislation should be enacted to 

authorize the CFTC to require FCMs and IBs to implement conflict of 

interest procedures that would separate the activities of persons in a 

firm engaged in research or analysis of commodity prices from those 

involved in trading or clearing activities. 

Enforcement

11. The Report recommends legislation on whistleblower protections. 

Consistent with Title IX of the Administration’s proposed financial 

regulatory reform legislation, legislation should be enacted to 

encourage whistleblowers to come forward with relevant information 

to authorities in both SEC and CFTC registered markets. 

12. The Report recommends legislation that would address customer 

restitution in CFTC enforcement actions. The CFTC currently has 

express authority to seek restitution for investor losses in administrative 

proceedings. However, the legislation should clarify that restitution in 

civil actions is defined in terms of the losses sustained by persons as a 

result of the unlawful conduct. 

13. The Report recommends legislation to enhance the CFTC’s authority 

over disruptive trading practices. Legislation should be enacted to 

enhance the CFTC’s enforcement authorities with respect to certain 

disruptive practices that undermine market integrity and the price 

formation process in the futures markets. 

14. The Report recommends legislation to expand the scope of insider 

trading prohibitions under the CEA. Specifically, the CEA should be 

amended to make unlawful the misappropriation and trading on the 

basis of material non-public information from any governmental 

authority. 

13
15. The Report recommends legislation that would grant the SEC specific 

statutory authority for aiding and abetting under the Securities Act and 

the Investment Company Act. The CFTC has specific statutory 

enforcement authority for aiding and abetting all violations of the CEA 

and CFTC rules and regulations. Expanding the SEC’s statutory 

authority to allow the SEC to bring actions for aiding and abetting 

violations of the Securities Act and the Investment Company Act 

would close the gap between the SEC and CFTC’s regulatory regimes. 

Operational Coordination

16. The Report recommends legislation to authorize the SEC and the 

CFTC to jointly form, fund, and operate a Joint Advisory Committee 

that would be tasked with considering and developing solutions to 

emerging and ongoing issues of common interest in the futures and 

securities markets. Specifically, the Joint Advisory Committee would 

identify emerging regulatory risks and assess and quantify their 

implications for investors and other market participants, and provide 

recommendations for solutions. 

17. The Report recommends that the agencies create a Joint Agency 

Enforcement Task Force to harness synergies from shared market 

surveillance data, improve market oversight, enhance enforcement, and 

relieve duplicative regulatory burdens. The task force would prepare 

and offer training programs for the staffs of both agencies, develop 

enforcement and examination standards and protocols, and coordinate 

information sharing. The task force also would oversee temporary 

details of personnel between the agencies to assist in furthering the 

aforementioned objectives. 

18. The Report recommends that the SEC and the CFTC should establish a 

joint cross-agency training program for staff. The Commissions 

believe that joint training programs for enforcement personnel would 

be highly beneficial. The training program would be for staff at both 

agencies, and would focus on enforcement matters. 

19. The Report recommends to develop a program for the regular sharing 

of staff through detail assignments. The agencies anticipate that, 

through this program, each year several staff from each agency will 

have the opportunity to work at the other agency through temporary 

detail positions for a specified period of time. Implementing a program 

where staff engages in a rotation between the two agencies will allow 

for greater collaboration and coordination between the two agencies. 

20. The Report recommends that the agencies develop a Joint Information 

Technology Task Force to pursue linking information on CFTC and 

14
SEC regulated persons made available to the public and such other 

information as the Commissions find jointly useful and appropriate in 

the public interest. Linking publicly-filed information and such other 

information as the Commissions jointly find useful and appropriate in 

the public interest residing with the two agencies would promote 

transparency and facilitate the use and understanding of such 

information by providing a comprehensive, consolidated database on 

persons and entities regulated by the SEC and the CFTC. 

I. Introduction 

On June 17, 2009, the Treasury Department released a White Paper4

 to set the 

foundation for restoring confidence in the integrity of the US financial system. Noting 

that “[t]he broad public policy objectives of futures regulation and securities regulation 

are the same: protecting investors, ensuring market integrity, and promoting price 

transparency,”5

 the White Paper called on the SEC and CFTC to identify “all existing 

conflicts in statutes and regulations with respect to similar types of financial instruments 

and either explain why those differences are essential to achieve underlying policy 

objectives with respect to investor protection, market integrity, and price transparency or 

make recommendations for changes to statutes and regulations that would eliminate the 

differences.”6 

 While the CFTC and SEC share these broad regulatory objectives, historically, 

futures regulation and securities regulation have occupied distinct areas of market 

activity. In the last quarter century, however, with the proliferation of new financial 

instruments, the two markets have begun to overlap. 

The Evolution of Financial Markets and Overlapping Jurisdiction

When Congress originally established the CFTC in 1974, its jurisdiction and the 

SEC’s jurisdiction could be delineated with relative clarity to refer to distinct markets. 

The line defining their jurisdictional divide began to erode with the development of 

derivative financial products. The emergence of financial instruments such as swaps, 

stock-index futures, and other derivative instruments, some of which were traded offexchange, began to introduce challenges to defining precisely which regime should 

oversee the new products.7

 

From the beginning, the two agencies began to seek ways to cooperate in 

resolving jurisdictional disputes. In 1981, for example, the CFTC and the SEC 

negotiated an agreement that divided jurisdiction and regulatory responsibility over stock 

 

4

 Treasury White Paper, supra note 1. 

5

 Id. at 49. 

6

 Id. at 50–51. 

7

 See U.S. Gen. Accounting Office, The Commodity Exchange Act: Issues Related to the 

Commodity Futures Trading Commission’s Reauthorization, GAO/GGD-99-74, 19 (May 1999). 

15
index futures and options between the two agencies. The agreement, known as the ShadJohnson Accord, was later codified in the Futures Trading Act of 1982,8

 which remained 

in place for almost two decades. In the same spirit, in 1989, the CFTC issued a policy 

statement regarding swaps in which it identified certain transactions that it would decline 

to regulate as futures or futures options.9

 

Critics have stated that the agencies’ attempts to define their respective 

jurisdictions never fully succeeded. First, governing statutes never definitively addressed 

the fundamental question of whether certain derivative instruments qualified as futures 

contracts or options. Moreover, financial engineers developed products that had 

attributes of both futures and securities, thus helping to confuse the line between futures 

and securities regulation. One example is when several exchanges developed index 

participations. These contracts are based on the value of an index of securities, usually 

cash-settled, and they are designed to trade as securities on securities exchanges. A 

federal court of appeals, which presided over a phase of litigation proceedings involving 

a jurisdictional dispute over these products, concluded that index participations were both 

futures and securities and then determined that the CFTC’s exclusive jurisdiction over 

futures meant that the securities laws did not apply.10 

The developing overlaps were not limited to jurisdiction over products. In the 

past twenty years, there has also been convergence of marketplaces and market 

participants such that the same entity is subject to the regulatory authority of both the 

SEC and the CFTC. For example, exchanges that list and trade security futures are 

subject to the jurisdiction of both the SEC and the CFTC. Financial intermediaries 

register with both the SEC and CFTC, as they serve investors who trade in instruments 

that are subject to the jurisdiction of the two agencies. For instance, approximately 45% 

of FCMs are also registered with the SEC as BDs. In addition, 262 ,or approximately 

2.3%, of SEC-registered advisers, are also registered as CTAs or CPOs. 

Due to the continued challenge posed by evolving market realities, the agencies 

have continued efforts to work together in various areas. The SEC and the CFTC have 

had longstanding cooperation in enforcement matters. For example, over the last year, 

65% of the CFTC’s fraud cases have involved cooperative efforts with the SEC and 

almost 40% resulted in joint case filings. The agencies have also sought to formalize 

their cooperation. In March 2004, the agencies signed a memorandum of understanding, 

agreeing to share information regarding security futures, which are regulated by both 

agencies.11 More recently, in March 2008, the SEC and the CFTC entered into the 

Memorandum of Understanding Regarding Coordination in Areas of Common 

Regulatory Interest (“MOU”) with the goal of creating a closer relationship between the 

 

8

 Pub. L. No. 97-444, 96 Stat. 2294 (1983). 

9

 CFTC Swaps Policy Statement, 54 FR 30694 (July 21, 1989). 

10 See Chicago Mercantile Exchange v. SEC, 883 F.2d 537, 544 (7th Cir. 1989). 

11 Memorandum of Understanding Regarding Oversight of Security Futures Product Trading and 

Sharing of Security Futures Product Information (March 17, 2004). 

16
agencies on a broad range of issues affecting their jurisdictions.12 The agreement 

identified points of contact for coordination, outlined a protocol for addressing novel 

derivative products, and generally contemplated enhanced information sharing between 

the two agencies on areas of mutual concern and interest. The agencies have also been 

active in joint initiatives involving rulemakings or orders. Some of the recent rulemaking 

has related to security futures.13 Other examples have concerned narrow-based security 

index products, exchange-traded funds (“ETFs”), and margin requirements for security 

futures products (“SFPs”).14 

The Financial Crisis and the Impetus for Reform

The call for comprehensive financial regulatory reform followed the worst 

financial crisis the nation has suffered in over half a century. On June 17, 2009, the 

Treasury White Paper outlined a roadmap for restoring confidence in the integrity of the 

financial system.15 The Treasury White Paper asked the SEC and the CFTC to prepare a 

report that would identify differences between their regulatory schemes, would determine 

whether the differences were justified by differences in the nature of the markets, and 

otherwise would recommend changes to harmonize futures and securities regulation. 

 

12 Memorandum of Understanding Between the U.S. Securities and Exchange Commission and the 

U.S. Commodity Futures Trading Commission Regarding Coordination in Areas of Common 

Regulatory Interest (March 11, 2008), available at http://www.sec.gov/news/press/2008/2008-

40_mou.pdf. 

13 In 2006, the SEC and CFTC adopted SEC Rule 6h-2, 17 CFR 240.6h-2, and an amendment to 

CEA Rule 41.21, 17 CFR 41.21, respectively, to permit security futures to be based on individual 

debt securities or narrow-based indexes composed of such securities. See Securities Exchange Act 

Release No. 54106 (July 6, 2006) 71 FR 39534 (July 13, 2006). That rulemaking also adopted 

SEC Rule 3a55-4, 17 CFR 240.3a55-4, and CFTC Rule 41.15, 17 CFR 41.15, excluding indexes 

of debt securities that meet certain specified criteria from the definition of “narrow-based security 

index”. 

14 Since 2001, the agencies have engaged in a number of other joint initiatives involving rulemaking 

or orders. See, e.g., Securities Exchange Act Release Nos. 44724 (August 20, 2001), 66 FR 44490 

(August 23, 2001) (adopting rules establishing the method for determining the “market 

capitalization” and “dollar value of average daily trading volume” for purposes of the statutory 

definition of a “narrow-based security index”); 46009 (May 31, 2002), 67 FR 38941 (June 6, 

2002) (excluding from the definition of “narrow-based security index” indexes that qualified for 

the exclusion from that definition under Section 1a(25)(B)(v) of the CEA and Section 

3(a)(55)(C)(v) of the Securities Exchange Act); 45956 (May 17, 2002), 67 FR 36740 (May 24, 

2002) (requiring that the final settlement price for cash-settled SFPs fairly reflect the opening price 

for the underlying security or securities, and that trading in any SFP halt when a regulatory halt is 

instituted with respect to a security or securities underlying the SFP); 46292 (August 1, 2002), 67 

FR 53146 (August 14, 2002) (establishing margin requirements for security futures); 46473 

(September 9, 2002), 67 FR 58284 (September 13, 2002) (requiring all firms conducting business 

in security futures products to make certain disclosures to customers); 46090 (June 19, 2002), 67 

FR 42760 (June 25, 2002) (permitting depository shares and shares of Exchange-Traded Funds, 

Trust Issued Receipts, and registered closed-end management investment companies to underlie 

security futures); and 49469 (Mar. 25, 2004), 69 FR 16900 (Mar. 31, 2004) (excluding indexes 

comprised of certain index options from the definition of “narrow-based security index”). 

15 See Treasury White Paper, supra note 1. 

17
In response to this call, on August 20, 2009, the SEC and the CFTC announced 

that they would hold a joint meeting to hear from the public regarding the most pressing 

issues for regulatory harmonization. Chairman Gensler of the CFTC noted that 

“[h]armonizing our regulatory policies will improve market integrity by applying 

consistent standards to market participants. There are three areas where this review will 

most benefit the American public: to address gaps between the two agencies’ financial 

regulatory authorities, to assess the effects of regulatory overlap, and to bring appropriate 

consistency to the two agencies’ regulation over similar products, practices and 

markets.”16 Chairman Schapiro of the SEC observed that “[t]hese joint meetings will 

build on the progress the CFTC and the SEC have made on designing a framework to 

regulate OTC derivatives. It will move us further down the road of harmonizing our 

regulations to increase transparency, reduce regulatory arbitrage and rebuild confidence 

in our markets.”17

The two agencies invited experts and representatives of stakeholders to speak at 

the public meeting. Public comment was also invited. The historic event – this was the 

first time that the agencies have held a joint public meeting – took place on September 2 

and 3, 2009 (“September Meeting”), with the participation of all sitting Commissioners 

of both agencies. The September Meeting convened five panels on which a total of 30 

panelists participated. Members of the investor community, academics, industry experts, 

and market participants explored topics ranging from exchange, market, and clearing 

issues, to regulation of intermediaries and end-users, to enforcement.18 The agencies 

received 14 comments from the public and the panelists submitted written statements 

reflecting the views they had expressed.19

The Joint Report

During the September Meeting, the Commissioners and panelists identified a 

number of areas in which the statutory and regulatory schemes differ.20 In some 

instances, panelists made specific proposals for reform with respect to the issues; in 

others, they noted that differences between the regulatory schemes of the SEC and the 

CFTC do not necessarily imply the existence of a regulatory gap or inconsistency. 

Rather, as indicated by the nature of the two markets, the panelists noted that there are 

some inherent differences between securities and futures regulation. 

This Report builds on the comments and observations offered during the 

September Meeting. It will review the following areas: (i) product listing and approval; 

 

16 See Press Release: SEC, CFTC to Hold Joint Meetings on Regulation Harmonization (August 20, 

2009), available at http://www.sec.gov/news/press/2009/2009-186.htm or at

http://cftc.gov/newsroom/generalpressreleases/2009/pr5696-09.html. 

17 See id.

18 See Transcripts, supra note 3.

19 Written testimony by the panelists and public comments are available on the agencies’ websites: at 

the SEC, http://www.sec.gov/comments/4-588/4-588.shtml; at the CFTC, http://www.cftc.gov.

20 See Transcripts supra note 3. 

18
(ii) exchange/clearinghouse rule changes; (iii) risk-based portfolio margining and 

bankruptcy/insolvency regimes; (iv) linked national market and common clearing versus 

separate markets and exchange-directed clearing; (v) market manipulation and insider 

trading; (vi) customer protection standards applicable to financial advisers; (vii) 

regulatory compliance by dual registrants; and (viii) cross-border regulatory matters. 

After describing the statutory and regulatory framework with respect to each issue, the 

Report then analyzes the differences and inter-play between the agencies’ frameworks 

with specific reference to views expressed by panelists and commentators. 

The CFTC and SEC also offer a series of recommendations. Some of these 

recommendations require legislative change by Congress. But others are within the 

authority of the agencies to pursue. The two Commissions are prepared to work together 

in an effort to make progress on those recommendations. This Report serves as a 

significant step in the agencies’ continuing efforts on the path toward reform. The 

Commissioners and staff at both the SEC and the CFTC are fully committed to their 

respective missions, and to their overall goal of protecting investors, the marketplace, and 

the American public. 

II. Discussion of CFTC and SEC Regulatory Approaches 

A. Oversight of New Products 

As the Treasury White Paper notes, the CFTC and SEC are governed by two 

different approaches to the regulation of exchanges and clearing organizations. In certain 

areas, this basic difference affects the way in which the two agencies approach review 

and approval of new products for listing. In addition, as the Treasury White Paper 

observes, many financial products “have attributes that may place the instrument within 

the purview of both regulatory agencies.”21 As many commentators, including 

participants in the September Meeting, have explained, the resulting jurisdictional 

overlap has caused the agencies to expend considerable resources to determine the 

regulatory requirements for such instruments. 

1. SEC Regulatory Framework 

The Securities Exchange Act22 requires a national securities exchange to have 

rules governing the listing and trading of securities on its market.23 Before an issuer can 

list a class of its securities for trading on a national securities exchange, such class of 

securities must be registered under Section 12(b) of the Securities Exchange Act.24 

 

21 See Treasury White Paper, supra note 1. 

22 15 U.S.C. 78a et seq. 

23 See Section 6 of the Securities Exchange Act, 15 U.S.C. 78f. 

24 15 U.S.C. 78l(b). Issuers that list on the NYSE, American Stock Exchange (“Amex”) or 

NASDAQ Stock Market (“Nasdaq”), as well as any other national securities exchange which the 

SEC has determined has substantially similar listing standards to those of NYSE, Amex or 

Nasdaq, are generally exempt from state blue sky laws. Section 18(a) of the Securities Act of 

1933. 15 U.S.C. 77r(a). 

19
The securities laws are premised on the notion of high quality disclosure of 

material information about an issuer’s securities. Registration and periodic reporting 

requirements for an issuer’s securities are prescribed under the Securities Act of 1933 

(“Securities Act”)25 and the Securities Exchange Act.26 These requirements are designed 

to assure that there is public information available to enable investors to make informed 

judgments about whether to purchase or sell an issuer’s securities. Such judgments 

involve capital allocation decisions, and therefore consideration of not just market 

information, such as price and volume, but also business and financial information.27 

Investors who purchase securities and suffer losses have important remedies if the 

securities were offered in violation of the registration requirements, or if the offering 

disclosure included an untrue statement of a material fact or omitted to state a material 

fact necessary to make the statements not misleading.28 These disclosure obligations on 

issuers apply whether a security trades in the over-the-counter market or is listed on an 

exchange. An exchange that lists securities has additional obligations, which are 

discussed below. 

An issuer that seeks to list on an exchange must also satisfy initial listing 

standards established by the exchange. For example, exchange listing standards establish 

minimum distribution and financial criteria for the issue of securities and/or the issuer.29 

Issuers must meet the exchange’s corporate governance standards, which generally 

require that a majority of the issuer’s directors be independent and that certain 

committees, including the audit committee, be fully independent, as well as other 

governance-related matters.30 These exchange rules cover the listing process for a wide 

range of securities such as common stock, preferred stock, warrants, convertible 

securities, and debt securities that are issued by entities including operating companies, 

closed-end companies, real estate investment trusts, acquisition companies, and foreign 

private issuers. To continue to be listed on the exchange, an issuer’s securities must be 

able to satisfy continuing listing requirements under exchange rules. 

 

25 15 U.S.C. 77a et seq. 

26 See supra note 22. 

27 This discussion focuses on issuer disclosure related to the purchase or sale of securities. Often 

included in the bundle of rights that comprise a security is the right to vote on certain issuer 

matters. The SEC has, pursuant to the Securities Exchange Act, promulgated rules designed to 

assure that when security holders are asked to vote by proxy, information is provided to them to 

enable investors to make informed voting decisions. The ability to employ derivatives such as 

futures and options on securities to separate economic and voting rights is one reason why 

regulation of securities and derivatives of securities should be consistent and coordinated. 

28 Sections 11 and 12(a) of the Securities Act. 15 U.S.C. 77k and 77l(a). 

29 See, e.g., Sections 102.00-106.03 of the New York Stock Exchange (“NYSE”) Listed Company 

Manual and Nasdaq Rules 5200-5560.

30 See, e.g., Sections 301.00-315.00 of the NYSE Listed Company Manual and Nasdaq Rules 5600-

IM5640. See also Section 10A of the Securities Exchange Act (15 U.S.C. 78j-1) and Rule 10A-3 

thereunder (17 CFR 240.10A-3), which relates to audit committee independence, among other 

things. 

20
Options and security futures listed on a national securities exchange are exempt 

from registration with the SEC.31 However, exchange rules generally only permit trading 

in options and futures on securities registered under Section 12(b) of the Securities 

Exchange Act.32 Options exchange listing requirements establish requirements for the 

underlying securities or index. For example, the rules of the Chicago Board Options 

Exchange (“CBOE”) require that the underlying security have: a minimum of 7,000,000 

shares owned by public investors; a minimum of 2,000 holders; and trading volume of at 

least 2,400,000 shares in the preceding twelve months.33

The SEC also regulates the listing and trading of derivative securities products 

other than equity and index options. These derivative securities products include a wide 

range of securities whose value is based, in whole or in part, upon the performance of, or 

interest in, an underlying instrument or group or index of securities. These products 

include equity-based derivative securities products, commodity- and currency-based 

derivative securities products, and structured notes, among others. As for all securities 

that an exchange lists and trades, an exchange must have in place listing standards for 

these types of derivative securities products that are consistent with the Securities 

Exchange Act and rules promulgated thereunder. 

For these types of securities, exchanges may establish “generic” listing standards 

for a particular class of derivative securities products, such as exchange-traded funds, 

index-linked securities, and equity-linked notes. Like the listing standards for other types 

of securities, such listing standards would typically require minimums relating to the 

number of publicly held trading units, number of holders, and the principal amount or 

market value outstanding. These rules also generally seek to ensure the fair and timely 

disclosure of information to all market participants.34 Another common key element in 

listing standards of derivative securities products is the restriction of the use and 

dissemination of material, non-public information relating to composition of, and changes 

made to, the index or investments comprising the portfolio underlying the derivative 

securities product.35 

 

31 See Section 12(a) of the Securities Exchange Act, 15 U.S.C. 78l(a). 

32 See Section 6(h)(3)(A) of the Securities Exchange Act, 15 U.S.C. 78f(h)(3)(A), and Section 

2(a)(1)(D)(i)(I) of the CEA, 7 U.S.C. 2(a)(1)(D)(i)(I). 

33 CBOE Rule 5.3. The underlying security must also be a National Market System (“NMS”) stock, 

as defined in Rule 600 of Regulation NMS under the Securities Exchange Act. See CBOE Rule 

5.3(a)(1). 

34 For example, listing standards typically include requirements relating to the calculation and 

dissemination of key values pertaining to the shares of, and the assets underlying, the derivative 

securities product, such as that: (1) the value of the derivative securities product’s underlying 

asset or index, as the case may be, must be calculated and disseminated at regular intervals during 

the trading day; (2) the derivative securities product’s intraday indicative value must be calculated 

and disseminated at least every 15 seconds during the trading day; and (3) the net asset value and 

the composition of the portfolio, if applicable, of the derivative securities product must be 

available to all market participants at the same time. If such information is not being disseminated 

as required, the listing standards would also specify when a trading halt would be appropriate. 

35 For example, for index-based derivative securities products, if the underlying index is maintained 

by a broker-dealer, the broker-dealer would be required to erect a “firewall” around the personnel 

21
Derivative securities products that qualify for listing and/or trading under 

“generic” listing standards may commence trading once they satisfy the applicable listing 

requirements. Exchanges listing or trading a derivative securities product under 

“generic” listing standards must submit to the SEC Form 19b-4(e) within five business 

days after trading commences for such security. The purpose of this requirement is to 

notify the SEC when an exchange begins to trade a derivative securities product. 

Certain securities may not fit within approved listing standards of an exchange or 

may be of a class of derivative securities products that may not be listed or traded 

pursuant to “generic” listing standards. In such cases, the exchange would be required to 

submit a proposed rule change pursuant to Section 19(b)(1) of the Securities Exchange 

Act to list and trade the specific security.36

Exchanges have made substantial use of the process afforded to them for 

derivative securities products under “generic” listing standards pursuant to Rule 19b4(e). The chart below describes the number of filings by type, for derivative securities 

products (other than listed equity and index options), as well as the number of derivative 

securities products listed and traded pursuant to those filings, for SEC fiscal years 2007 

and 2008.37

Form Type FY 2007 FY 2008 

Total Filed 

Total Derivative 

Securities 

Products Listed 

and/or Traded 

Total Filed 

Total Derivative 

Securities 

Products Listed 

and/or Traded 

Proposed 62 522 50 378 

 responsible for the maintenance of such index or who have access to information concerning 

changes and adjustments to the index, and, in such cases, a third party that is not a broker-dealer 

would be required to calculate the index value. Similarly, for derivative securities products that 

are based on a portfolio that is actively managed by a registered investment adviser, if the 

investment adviser is affiliated with a broker-dealer, such investment adviser is required to erect a 

firewall between itself and the broker-dealer affiliate with respect to access to information 

concerning the composition and/or changes to the portfolio. 

36 The SEC generally must either approve the proposed rule change or institute disapproval 

proceedings within 35 days of the publication of notice of the filing. The SEC must approve a 

proposed rule change if it finds that the rule change is consistent with the requirements of the 

Securities Exchange Act and the rules and regulations thereunder applicable to the exchange 

proposing the rule change. The SEC also may approve a proposed rule change on an accelerated 

basis prior to 30 days after publication of the notice if the SEC finds good cause for so doing and 

publishes its reasons for so finding. See 15 U.S.C. 78s(b)(2). In addition, certain proposed rule 

changes may be filed for immediate effectiveness under Section 19(b)(3)(A) of the Securities 

Exchange Act. See 15 U.S.C. 78s(b)(3)(A). 

37 An SRO sometimes seeks to list and trade more than one derivative securities product per Form 

19b-4. In addition, SROs have sometimes submitted a single Form 19b-4(e) for more than one 

derivative securities product. 

22
rule change 

Generic 

Listing 

1,589 2,010 1,277 2,136 

These statistics reflect that, in recent years, the overwhelming majority of 

derivative securities products are listed and/or traded pursuant to the streamlined process 

under Rule 19b-4(e). 

2. CFTC Regulatory Framework 

Before passage of the CFMA,38 contracts could not be listed unless they satisfied 

an “economic purpose” criterion. This standard required that exchanges affirmatively 

demonstrate to the CFTC that a proposed contract could be used for hedging or price 

basing. The CFMA repealed that provision. Thus, although after the CFMA, the CEA 

still gives the CFTC authority over a decision by an exchange, or designated contract 

market (“DCM”), to list new contracts for trading, products may be listed unless the 

CFTC determines that they “would violate” the CEA.39 Under the provisions of the 

CEA, among other things, a DCM only may list contracts that are not readily susceptible 

to manipulation.40

Generally, under the CEA, new contracts may be listed through a self-certification 

process or after approval by the CFTC pursuant to prior review procedures.41 Most 

products are listed pursuant to self-certification. The process of self-certification reflects 

the principles-based approach to oversight, whereby, with certain exceptions, exchanges 

(and clearinghouses) generally have reasonable discretion in establishing the manner in 

which they comply with the core principles outlined in the statute.42 By filing a selfcertification, a DCM certifies that the contract, or new financial product, complies with 

the CEA and CFTC regulations. The self-certification process requires submissions to be 

filed with the agency no later than one full CFTC business day before initial 

implementation of the product listing.43 A submission relating to a product approval 

must include a copy of the product’s rules, including all rules related to its terms and 

conditions, or the rules establishing the terms and conditions of the listed product that 

make it acceptable for clearing.44 While the CFTC primarily relies on the DCM’s 

 

38 Appendix E of Pub. L. No. 106-554, 114 Stat. 2763 (2000). 

39 CEA Section 5c(c)(3), 7 U.S.C. 7a-2(c)(3) 

40 CEA Section 5(d)(3), 7 U.S.C. 7(d)(3). 

41 CEA Sections 5c(c)(1)-(2), 7 U.S.C. 7a-2(c)(1)-(2). 

42 See, e.g., CEA Section 5(d)(1), 7 U.S.C. 7(d)(1), and CEA Section 5b(c)(2), 7 U.S.C. 7a-1(c)(2). 

43 CFTC Regulation 40.6, 17 CFR 40.6. 

44 Id.

23
certification that the contract terms and conditions comply with the CEA and the CFTC’s 

regulations, CFTC staff conducts a due diligence review.45 

If an entity seeks prior approval for listing a product, its submission must include, 

among other things, a copy of the rules that set forth the contract’s terms and conditions 

and a demonstration of compliance with CFTC regulations.46 Compliance requires: an 

explanation of how the specific terms and conditions satisfy acceptable practices as set 

forth in CFTC guidelines; for physical delivery contracts, an explanation of how terms 

and conditions will result in a deliverable supply that will not be conducive to price 

manipulation or distortion; for cash-settled contracts, an explanation how the cash 

settlement of the contract is at a price reflecting the underlying cash market, will not be 

subject to manipulation or distortion, and is based on a cash price series that is reliable, 

acceptable, publicly available and timely; a brief description of the cash market for the 

commodity; a description of agreements or contracts entered into with other parties that 

enable the registered entity to carry out its responsibilities; and certifications for product 

approval of a commodity that is a security future or a SFP.47 Products that are submitted 

for prior approval are subject to a 45-day review period (or a 90-day period for products 

deemed to be novel or complex). Again, the CFTC must approve the new products 

unless it affirmatively finds that listing or clearing the products would violate the CEA.48

3. Analysis of SEC/CFTC Regulatory Frameworks 

 

 The SEC and CFTC have different product introduction and approval processes. 

With certain exceptions,49 derivatives on securities may be listed on securities exchanges 

without filing a proposed rule change with the SEC. Instead, these products are listed 

under previously approved exchange listing rules.50 Most new derivative products listed 

on a securities exchange have tended to fall within previously approved “generic” listing 

 

45 The CEA and CFTC regulations contain an exception to self-certification for material amendments 

to terms or conditions of a contract for future delivery of an enumerated agricultural commodity -- 

which includes basic agricultural commodities such as wheat, cotton, rice, corn, oats, butter, eggs, 

wool, soybeans and livestock – or an option on such a contract or commodity in a delivery month 

having open interest. Such contracts must receive prior CFTC approval. The exceptions are 

enumerated in Section 1a(4) of the CEA, 7 U.S.C. 1a(4). See also Section 5c(c)(2)(B), 7 U.S.C. 

7a-2(c)(2)(B); CFTC Regulation 40.4, 17 CFR 40.4. 

46 Appendix A to Part 40 – Guideline No. 1, 17 CFR Part 40, Appendix A. 

47 CFTC Regulation 40.3, 17 CFR 40.3. 

48 CEA Section 5c(c)(3), 7 U.S.C. 7a-2(c)(3). 

49 The exception is “new derivative products” which consists of any type of option, warrant, hybrid 

securities product or any other security, other than a single equity option or a security futures 

product, whose value is based, in whole or in part, upon the performance of, or interest in, an 

underlying instrument. See 17 CFR 240.19b-4(e). 

50 In SEC fiscal year 2007, a total of 2,010 new derivative securities products were listed and traded, 

or traded pursuant to unlisted trading privileges. In SEC fiscal year 2008, a total of 2,136 new 

derivative securities products were listed and traded, or traded pursuant to unlisted trading 

privileges. 

24
standards and, accordingly, no prior approval has been required before commencement of 

trading. In these circumstances, the exchange must file a notice with the SEC within five 

days after trading begins. New derivative products that are novel and therefore do not fit 

within existing listing standards, however, must be approved by the Commission. 

The CEA, by contrast, generally allows for the introduction of all products to the 

market upon certification by a DCM that the product does not violate the CEA or CFTC 

regulations. The CFTC conducts due diligence reviews of all self-certified products to 

ensure compliance with statutory and regulatory requirements. Generally, the level of 

scrutiny for these reviews is commensurate with the complexity of the product, with 

innovative or novel products receiving more detailed review. Ultimately, however, the 

CFTC may not move to de-list the product unless it determines that the listing violates 

the CEA. 

Most panelists generally favored streamlined product listing and approval 

procedures.51 Some recommended that the SEC adopt a certification regime similar to 

that of the CFTC for product introduction.52 As an alternative, it was suggested that the 

SEC set strict time limits on product approvals.53 There currently are time restrictions 

under the SEC’s product approval process. The Commission must approve or institute 

disapproval proceedings for proposals within 35 days of the date of publication. Further, 

pursuant to the SEC’s recently approved process for streamlining rule changes, proposals 

generally must be published within 15 days of receipt. This new process was designed to 

balance regulatory certainty and fostering innovation with adequate time for deliberation. 

Even as panelists advocated streamlined procedures, however, they acknowledged that 

exchanges certifying that a rule or product is in compliance with underlying laws and 

regulations should bear the burden of showing compliance upon certification,54 and that 

the agencies should retain the authority to disapprove a contract or rule.55

 

51 See e.g., Testimony of Craig Donohue, Chief Executive Officer, CME Group, Inc., September 2, 

2009 (“Donohue Testimony”); Larry Leibowitz, Group Executive Vice President, NYSE 

Euronext, Inc., September 2, 2009 (“Leibowitz Testimony”); and Peter Reitz, Member of the 

Executive Board, Eurex, September 2, 2009 (“Reitz Testimony”); see also letter from John Yetter, 

Vice President and Deputy General Counsel, NASDAQ OMX Group, Inc. (“Nasdaq”), to 

Elizabeth M. Murphy, Secretary, SEC, and David Stawick, Secretary, CFTC, dated September 14, 

2009 (“Nasdaq Comment Letter”). 

52 See Testimony of William Brodsky, Chairman and Chief Executive Officer, Chicago Board 

Options Exchange, September 2, 2009 (“Brodsky Testimony”); Kenneth Raisler, Partner, Sullivan 

& Cromwell, LLP, September 3, 2009 (“Raisler Testimony”); and Leibowitz Testimony, supra

note 51; see also letter from Ira Hammerman, Senior Managing Director and General Counsel, 

Securities Industry and Financial Markets Association (“SIFMA”), to Elizabeth M. Murphy, 

Secretary, SEC, and David Stawick, Secretary, CFTC, dated September 14, 2009 (“SIFMA 

Comment Letter”) and letter from Boston Options Exchange, Chicago Board Options Exchange, 

International Securities Exchange, NASDAQ Options Market, NASDAQ OMX PHLX, and the 

Options Clearing Corporation, to Elizabeth M. Murphy, Secretary, SEC, and David Stawick, 

Secretary, CFTC, dated September 16, 2009 (“Options Exchanges Comment Letter”). 

53 See Leibowitz Testimony, supra note 51 and Donohue Testimony, supra note 51. 

54 See Testimony of Sharon Brown-Hruska, Vice President, NERA Economic Consulting, September 

3, 2009 (“Brown-Hruska Testimony”). 

55 See Leibowitz Testimony, supra note 51.

25
The issue that garnered greater attention at the September Meeting was the 

experience of past disagreements between the CFTC and the SEC regarding which 

agency had jurisdiction over particular products. One panelist referred to this as “the 

most vexing aspect of split jurisdiction.”56 In the past, the issue arose because of 

uncertainty as to proper classification of the product. In the absence of agreement by the 

agencies, there occasionally have been lengthy delays attendant to bringing new products 

to market. The lack of legal certainty is costly and confusing to market participants, and it 

can impede innovation, undermine competition. 

Panelists acknowledged that the agencies have recognized that coordination on 

new product approvals is crucial.57 For example, the CFTC and the SEC entered into a 

MOU in 2008 to coordinate “[p]roposals to list or trade novel derivative products.”58 

Nonetheless, panelists pointed to past examples of the agencies’ inability promptly to 

resolve jurisdictional issues and, in the absence of substantive legislation more clearly 

defining the jurisdictional boundaries between the two agencies, suggested a number of 

potential procedures for resolving the inter-agency disputes.59 In the absence of 

legislation to clarify jurisdiction, one approach mentioned was to develop express 

timelines for approval once a product has been submitted for review and a mechanism for 

final arbitration should the agencies become deadlocked in their discussions.60 The 

Treasury Department and the President’s Working Group on Financial Markets were 

mentioned as potential arbiters.61 

Another proposal was to permit the applicant exchange to elect whether to 

introduce the product as a security solely under the SEC jurisdiction or a futures contract 

solely under CFTC jurisdiction.62 Proponents of this option argued that it would remove 

legal uncertainty about the new product, avoid litigation and promote incentives for 

responsible innovation and fair competition.63

 

56 See Brodsky Testimony, supra note 52. 

57 See Leibowitz Testimony, supra note 51; and Nasdaq Comment Letter, supra note 51.

58 See MOU, supra note 12. 

59 See Brodsky Testimony, supra note 52; Donohue Testimony, supra note 51; Leibowitz 

Testimony, supra note 51; Testimony of Wayne Luthringshausen, Chairman of the Board and 

Chief Executive Officer, The Options Clearing Corporation, September 2, 2009 (“Luthringshausen 

Testimony”); Raisler Testimony, supra note 52; Reitz Testimony, supra note 51; Testimony of 

Damon Silvers, Associate General Counsel, AFL-CIO, September 3, 2009 (“Silvers Testimony”); 

see also letter from John Damgard, President, Futures Industry Association, to Elizabeth M. 

Murphy, Secretary, SEC, and David Stawick, Secretary, CFTC, dated September 14, 2009 (“FIA 

Comment Letter”); Options Exchanges Comment Letter, supra note 52; and SIFMA Comment 

Letter, supra note 52. 

60 See Leibowitz Testimony, supra note 51. 

61 See Brodsky Testimony, supra note 52; and Luthringshausen Testimony, supra note 59. 

62 See Donohue Testimony, supra note 51; and FIA Comment Letter, supra note 59. 

63 See FIA Comment Letter, supra note 59. 

26
B. Review and Approval of Rules

1. SEC Regulatory Framework

Pursuant to Section 19(b)(1) of the Securities Exchange Act, each SRO must file 

any proposed change in, addition to, or deletion from the rules of the exchange 

electronically on a Form 19b-4, submitted to the SEC through the Electronic Form 19b-4 

Filing System, which is a secure web-site operated by the SEC.64 

Once filed, the SEC must publish a notice of the filing in the Federal Register, 

which notice must include the SRO’s description of the terms of substance of the 

proposed change, the purpose of the proposal, and the statutory basis for the proposal, 

and give the public an opportunity to submit comments on the proposed rule change.65 If 

the proposed rule change was filed pursuant to Section 19(b)(2) of the Securities 

Exchange Act, the SEC must, within 35 days of publication of the notice, approve the 

proposed rule change by order or institute proceedings to determine whether the proposed 

rule change should be disapproved.66 The SEC can extend this time up to 90 days if it 

finds such longer period to be appropriate and publishes its reasons therefore or may 

receive consent from the exchange to extend the 35 day period. After publication, if 

comment letters raise significant issues, SEC staff may request that the exchange respond 

to comments by submitting a comment letter or amending the proposal. The SEC must 

approve a proposed rule change if it finds that the proposed rule change is consistent with 

the requirements of the Securities Exchange Act and the rules and regulations thereunder 

applicable to the SRO. If the Commission cannot make such a finding, it must 

disapprove the proposed rule change. In addition, whenever the Commission is engaged 

in reviewing an SRO rule and is required to consider or determine whether an action is 

necessary or appropriate in the public interest, the Commission shall also consider, in 

addition to the protection of investors, whether the action will promote efficiency, 

competition and capital formation.67

There are certain proposed rule changes that may be filed under Section 

19(b)(3)(A) of the Securities Exchange Act and take effect upon filing (i.e., without need 

for specific SEC approval).68 The proposed rule changes that may take effect upon filing 

 

64 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4. The SRO must also post the proposed rule change 

and any amendments to it on its web-site. See Rule 19b-4(l). 17 CFR 240.19b-4(l). 

65 15 U.S.C. 78s(b)(1). SEC staff must issue notices of all proposed rule changes within 15 business 

days of filing thereof by the exchange unless the Director of the Division of Trading and Markets 

personally directs otherwise. If the Director has so directed, he must promptly notify the 

Commission and either the Commission or the Director may order publication of the notice 

thereafter. See Rule 200.30-3(a)(12), 17 CFR 200.30-3(a)(12). See also Securities Exchange Act 

Release No. 58092, 73 FR 40144 (July 11, 2008) (“Streamlining Release”). 

66 15 U.S.C. 78s(b)(2). 

67 Section 3(f) of the Securities Exchange Act, 15 U.S.C. 78c(f). 

68 The Commission has the authority to abrogate any proposed rule change submitted as effective 

upon filing. See Section 19(b)(3)(A) of the Securities Exchange Act and further discussion below. 

15 U.S.C. 78s(b)(3)(A). 

27
under this section of the Securities Exchange Act include: (i) those that constitute a stated 

policy, practice or interpretation with respect to the enforcement of an existing rule of the 

SRO;69 (ii) those that establish or change a due, fee, or other charge imposed by the 

SRO;70 and (iii) those that are concerned solely with the administration of the SRO.71 

In addition, pursuant to its authority under Section 19(b)(3)(A) of the Securities 

Exchange Act, the SEC adopted Rule 19b-4(f) to expand the types of proposed rule 

changes that may become effective upon filing. Specifically, an SRO may file a 

proposed rule change that is effective upon filing if the proposal effects a change to an 

existing order entry or trading system that (i) does not significantly affect the protection 

of investors or the public interest; (ii) does not impose a significant burden on 

competition; and (iii) does not have the effect of limiting the access or availability of the 

system.72 In addition, Rule 19b-4(f)(6) permits exchanges to file “non-controversial” 

changes to their rules that may take effect upon filing so long as they (i) do not 

significantly affect the protection of investors or the public interest; (ii) do not impose 

any significant burden on competition; and (iii) do not become operative for 30 days after 

the date of filing and the exchange has given written notice of the proposal, including a 

brief description and rule text, at least five business days prior to filing. 73 

Although rule changes filed under Section 19(b)(3)(A) are immediately effective, 

the SEC still publishes them for notice and comment. The Commission may abrogate the 

rule within 60 days of the date of filing if necessary or appropriate in the public interest, 

for the protection of investors, or otherwise in furtherance of the purposes of the 

Securities Exchange Act.74 A rule abrogated by the Commission may be re-filed by the 

SRO for review and publication under the regular notice and comment process, described 

above. 

In July last year, the SEC issued a Streamlining Release, which was intended, 

among other things, to increase the number of rule proposals that could be submitted for 

immediate effectiveness.75 Since the effective date of the Streamlining release in July 

last year to September 9, 2009, the Commission received 1,484 proposed rule changes. 

Of those, 1,403 filings were submitted by national securities exchanges, the 

Financial Industry Regulatory Authority (“FINRA”), the Municipal Securities 

 

69 See Section 19(b)(3)(A)(i) of the Securities Exchange Act, 15 U.S.C. 78s(b)(3)(A)(i). 

70 15 U.S.C. 78s(b)(3)(A)(ii). This provision only applies to dues, fees or other charges imposed on 

members of the exchange. See Rule 19b-4(f)(2). 17 CFR 240.19b-4(f)(2). 

71 See Section 19(b)(3)(A)(iii) of the Securities Exchange Act, 15 U.S.C. 78s(b)(3)(A)(1). 

72 Rule 19b-4(f)(5), 17 CFR 240.19b-4(f)(5). 

73 Rule 19b-4(f)(6), 17 CFR 240.19b-4(f)(6). 

74 15 U.S.C. 78s(b)(3)(C). 

75 See Streamlining Release, supra note 65. 

28
Rulemaking Board (“MSRB”), and notice-registered securities futures exchanges.76 

Among those filings: 

• 68% were submitted for immediate effectiveness under Section 19(b)(3)(A). 

• 32% were submitted “regular way” under Section 19(b)(2). 

On average, for closed filings, the SEC published proposed rule changes within 

5.5 business days (4 business days median) from the date of filing.77 On average, for 

closed filings, the SEC approved filings submitted under Section 19(b)(2) within 30 

calendar days (34 days median) from publication. 

2. CFTC Regulatory Framework 

Rules and rule amendments by registered entities, including not only DCMs but 

derivatives clearing organizations (“DCOs”) and exempt commercial markets (“ECMs”) 

with significant price discovery contracts, are governed generally by the same statutory 

authority that addresses product filings by DCMs.78 Registered entities must submit all 

new rules and amendments either through self-certification or with a request for approval. 

In self certifying a rule or rule amendment, the registered entity’s submission 

must include: (i) a brief explanation of any substantive opposing views of its governing 

board, board committee members or market participants; and (ii) a certification that the 

rule complies with the CEA and the CFTC’s regulations. The submission must be filed 

with the CFTC no later than the opening of business on the CFTC’s business day 

preceding the CFTC business day of the initial implementation of the rule.79 

As with the product self-certification procedures, self-certification of a rule or rule 

amendment does not extinguish the CFTC’s review authority. Upon receipt of a rule 

self-certification that has a material consequence, for example, the CFTC reviews the 

proposal, even if the new rule may be in effect while that review is underway. The CFTC 

also generally engages in ongoing dialogue with exchanges, and it may require a 

registered entity to address concerns regarding a new rule or rule amendment by filing 

information demonstrating how it is in compliance with one or more of the designation 

criteria or core principles.80 Exchanges also may elect to seek CFTC approval of a rule 

or rule amendment. 

 

76 The remaining filings were submitted by clearing agencies. 

77 This figure excludes twenty filings (1.4%) held beyond 15 days for additional review. As 

contemplated by the Streamlining Release, certain proposed rule changes involve novel issues that 

require additional analysis and consultation. Such filings may be withheld from notice beyond 15 

business days. 

78 See CEA Section 5c(c), 7 U.S.C. 7a-2(c). 

79 CFTC Regulation 40.6, 17 CFR 40.6. 

80 CFTC Regulation 38.5(b), 17 CFR 38.5(b). 

29
Notwithstanding these procedures and practices, as with products, the CFTC’s 

role in rule approval is circumscribed. For example, the CFTC must approve the 

submitted rule or rule amendment unless it finds that it “would violate” the CEA.81

The CFTC does have the authority to alter or supplement the rules of a registered 

entity after a determination that a modification would be necessary to protect the markets 

and market participants, after notice and opportunity for a hearing.82 The CFTC may 

direct a registered entity, whenever it has reason to believe that an emergency exists, to 

take such action as is necessary to maintain or restore orderly trading in, or liquidation of, 

any futures contract.83

3. Analysis of SEC/CFTC Regulatory Frameworks 

There are basic differences in the regimes under which the CFTC and SEC 

approve and review rule changes for exchanges and clearinghouses. Under the CEA’s 

principles-based approach to oversight, rule filings are mostly made under selfcertification procedures. To take formal action and to disapprove a self-certified rule, the 

CFTC must determine that a rule violates the CEA.84 This approach lessens the authority 

of the regulatory agency to review proposed rules. Exchanges state that the selfcertification process is competitively important because it allows them to implement rule 

changes very quickly. 85

Under the Securities Exchange Act, although exchanges must submit proposed 

rule changes to the agency, about two-thirds of proposed rule changes are effective 

immediately upon filing. The remaining rule changes, however, in contrast to the 

approach under the CEA, must be approved by the SEC before they are effective. All 

proposed rule changes are published for comment, which permits the public to comment. 

Public comments identify aspects of proposed rule changes that are potentially unfair or 

anticompetitive, or that would have unanticipated practical consequences. 

The panelists and commentators offered mixed views of both of the SEC’s and 

CFTC’s regulatory approaches. Exchanges and clearinghouses generally indicated a 

preference for the self-certification of rules on the ground that the approach creates an 

appropriate balance between enabling exchanges (and clearinghouses) to implement 

business decisions promptly and permitting the regulatory agency to focus on proposals 

that present significant regulatory issues.86 Some of these panelists emphasized that the 

 

81 CEA Section 5c(c)(3), 7 U.S.C. 7a-2(c)(3). 

82 CEA Section 8a(7), 7 U.S.C. 12a(7). 

83 CEA Section 8a(9), 7 U.S.C. 12a(9). 

84 CEA Section 5c(c)(3). 

85 See Brodsky Testimony, supra note 52; Leibowitz Testimony, supra note 51; Options Exchanges 

Comment Letter, supra note 52; Nasdaq Comment Letter, supra note 51; see also Brown-Hruska 

Testimony, supra note 54. 

86 See e.g., Brodsky Testimony, supra note 52; Leibowitz Testimony, supra note 51; see also 

Options Exchanges Comment Letter, supra note 52; Nasdaq Comment Letter, supra note 51. 

30
delays attendant to a prior approval regime caused significant domestic and international 

competitive disadvantages.87 Some speakers also complained that a prior approval 

process could subject exchanges, clearinghouses, and SROs to arbitrary decision-making 

by staff.88

Other speakers, however, observed that the pre-approval approach under the 

securities laws, among other things, has the virtue of creating legal certainty for the 

regulated entity.89 One commentator emphasized this issue with respect to SRO rules 

governing the conduct of SRO members, since such rules have a significant impact on 

member business conduct and provide for disciplinary actions for noncompliance.90 

Accordingly, some commentators stated that it is important that there be notice and 

comment on significant rules governing the conduct of business and discipline of SRO 

members, and that the agencies take an active role in the approval of these SRO rules 

before they become effective.91 

Although some panelists and commentators demonstrated preference for one 

regime or the other, most stated that the agencies’ oversight of exchange and 

clearinghouse rules should be governed by a set of overarching principles that balance the 

enhanced legal certainty and opportunity to comment of prior approval with the 

expedition provided by self-certification.92 These panelists stated that each approach 

advanced important public policy goals for the two markets.93

Some panelists suggested that the SEC could move more toward principles-based 

regulation and more rapid approval of exchange rules.94 They advocated, for example, 

that the SEC increase the number of rules or products that are eligible for the “effective 

 

87 See e.g., Brodsky Testimony, supra note 52; see also Options Exchanges Comment Letter, supra 

note 52.

88 Id. 

89 See Leibowitz Testimony, supra note 51. 

90 See SIFMA Comment Letter, supra note 52. See also FIA Comment Letter, supra note 59, stating 

“FIA believes that before SRO rules are imposed on market participants some public process, 

including a 30 day notice and comment period, should be afforded to interested parties. FIA 

believes this transparent process should allow for expeditious action by the relevant Commission 

on the proposed SRO rules.” 

91 See, e.g., SIFMA Comment Letter, supra note 52.

92 See, e.g., Leibowitz Testimony, supra note 51. 

93 One panelist stated that these principles should be comparable to and consistent with the 

International Organization for Securities Commissions (IOSCO) principles for securities 

regulation and screen-based trading to ensure a more consistent alignment of regulation across 

global markets. See Leibowitz Testimony, supra note 51; see also Testimony of Johnathan Short, 

Senior Vice President and General Counsel, Intercontinental Exchange, Inc., September 2, 2009 

(“Short Testimony”). 

94 See e.g., Brodsky Testimony, supra note 52 and Brown-Hruska Testimony, supra note 54; see 

also Leibowitz Testimony, supra note 51 (recommending for the SEC a certification regime 

similar to the CFTC). 

31
on filing” status.95 Quoting the Treasury White Paper, those panelists proposed that 

“[t]he SEC should recommend requirements to respond more expeditiously to proposals 

for new products and SRO rule changes and should recommend expansion of the types of 

filings that should be deemed effective upon filing.”96 Those commentators who 

advocated for the self-certification model generally, though not exclusively, focused on 

rule changes involved in listing a new product.97 Other speakers acknowledged, 

however, that in many contexts policy objectives such as speed, which may be advanced 

by a self-certification model, should be tempered by a more deliberative process that 

would permit the regulator to properly assess the proposal, particularly with respect to 

rules (or products) that may have significant competitive and other public effects. 

In the same vein, it was suggested that, if there is to be convergence in 

overarching rules governing exchange and clearinghouse oversight by the agencies, those 

rules should be much more precise than the core principles in the CEA.98 In addition, it 

was stated that the CFTC standard of review for rule filings – that the rule shall be 

approved unless it “would violate” the CEA – did not afford the agency sufficient 

authority to address potentially problematic certification filings. 

C. Financial Responsibility: Segregation, Insolvency and Margin 

The securities and futures regulatory regimes administered by the SEC and CFTC, 

respectively, both strive to promote a system that protects customers’ funds and 

facilitates efficient and sound markets. However, there are distinct differences in the 

SEC’s and CFTC’s approaches to segregation of customer funds, insolvency and margin, 

which are based, in part, on the legal frameworks established for their respective markets 

and the nature of the products that are traded in those markets. Discussed below are the 

current SEC and CFTC approaches with respect to these financial responsibility matters. 

 1. SEC Regulatory Framework 

Segregation and Insolvency 

A broker-dealer conducting a general securities business that is required to 

register with the SEC under Section 15(b) of the Securities Exchange Act99 must comply 

withthe SEC’s net capital rule. Broker-dealers are subject to the SEC’s net capital rule 

under Section 15(c)(3) of the Securities Exchange Act.100 

 

95 See, e.g., Leibowitz Testimony, supra note 51. 

96 See Donohue Testimony, supra note 51. 

97 See, e.g., Raisler Testimony, supra note 52; FIA Comment Letter, supra note 59; and SIFMA 

Comment Letter, supra note 52. 

98 See SIFMA Comment Letter, supra note 52, citing the Treasury White Paper, supra note 1, at 50. 

99 15 U.S.C. 78o(b). 

100 15 U.S.C. 78o(c)(3); and 17 CFR 240.15c3-1. 

32
 Under Section 15(c)(3) of the Securities Exchange Act, the SEC may prescribe 

rules and regulations “to provide safeguards with respect to the financial responsibility 

and related practices of broker and dealers, including, but not limited to, the acceptance 

of custody and use of customers’ securities and the carrying and use of customers’ 

deposits or credit balances.”101 The primary purpose of the net capital rule – Rule 15c3-

1102 – is to protect the customers and creditors of registered broker-dealers from 

monetary losses and delays that can occur when a registered broker-dealer fails. With 

sufficient net capital, a broker-dealer can liquidate in an orderly manner without the need

for a formal Securities Investor Protection Corporation (“SIPC”) liquidation. 

 

 A broker-dealer required to register with SEC must comply with the SEC’s 

customer protection rule – Securities Exchange Act Rule 15c3-3.103 Under this rule, a 

broker-dealer must, in essence, segregate customer funds and fully paid and excess 

margin securities held by the firm for the accounts of customers. The intent of the rule is 

to require a broker-dealer to hold customer assets in a manner that enables their prompt 

return in the event of an insolvency, which, in turn, increases the ability of the firm to 

wind down in an orderly self-liquidation and thereby avoid the need for a proceeding 

under the SIPA.104 The SEC adopted Rule 15c3-3 in response to the Paperwork Crisis of 

1968-1971, when, unable to handle the increased trading volume of the time, brokerdealers’ bookkeeping was commonly inaccurate due to a lack of automation, which led to 

the misplacement and misappropriation of customer funds and securities. Congress was 

also concerned that customer funds and funds obtained from the use of customer 

securities were being used to finance the speculative activities of broker-dealers, 

therefore exposing customers to unwarranted risk of loss. In response to these concerns, 

Congress enacted SIPA which amended Section 15(c)(3) of the Securities Exchange 

Act105 to direct the Commission to establish rules to “provide safeguards with respect to 

financial responsibility [of broker-dealers], [i]ncluding...the acceptance and use of 

customer funds and securities and the carrying and use of customers’ deposits or credit 

balances. Subsequently, in 1972, the SEC adopted Rule 15c3-3.106

 Rule 15c3-3, as part of the SEC’s financial responsibility rules, safeguards and 

restricts the use of customer assets by the broker-dealer in its business activities in two 

ways. The rule protects customer funds, by requiring, in accordance with a prescribed 

formula, the broker-dealer to deposit into a separate bank account the net amount of 

funds derived from customer activities. In addition, the rule requires the broker-dealer to 

obtain possession or control of a customer’s fully paid and excess margin securities. 

These requirements are described in detail below. 

101 Id.

102 17 CFR 240.15c3-1. 

103 17 CFR 240.15c3-3. 

104 15 U.S.C. 78aaa et seq. 

105 15 U.S.C. 78o(c)(3). 

106 See Securities Exchange Act Release No. 9856 (November 10, 1972), 37 FR 25224 (November 

29, 1972). 

33
 Rule 15c3-3 also requires a broker-dealer to maintain physical possession or 

control of all fully paid and excess margin securities carried for customers. This means 

the broker-dealer cannot lend or hypothecate these securities and must hold them itself or, 

as is more common, in a satisfactory control location. 

 Moreover, a broker-dealer cannot: commingle the securities of different 

customers as collateral for a loan without the consent of each customer; commingle its 

own securities with those of its customers; and pledge its customers’ securities in an 

amount exceeding the amount the customers owe the broker-dealer.107

Margin Requirements

 Pursuant to Section 7(a) of the Securities Exchange Act,108 Congress delegated 

the sole authority to set margin levels with respect to stock to the Board of Governors of 

the Federal Reserve System(“FRB”). It is significant to note that Congress’s delegation 

of margin authority to the FRB arose in the aftermath of the 1929 stock market crash and 

reflects Congress’s conclusion that "the trading of securities on credit could lead to 

significant problems in financial markets and the economy more generally.”109 As 

discussed in more detail below, the FRB generally sets initial margin requirements, while 

SROs generally set maintenance margin levels (through rule filings with the SEC). 

 The FRB promulgated regulations for initial margin only in Regulation T.110 

Regulation T regulates securities credit extended by broker-dealers to their customers by 

establishing “accounts” in which securities transactions may be effected and/or financed. 

Different requirements apply to each type of account. There are presently five Regulation 

T accounts—the margin account, the special memorandum account, the good faith 

account, the cash account, and the broker-dealer credit account.111

 The margin account rules of Regulation T only specify an initial margin 

requirement and limit withdrawals and substitutions of cash and collateral; they do not 

require the maintenance of margin levels to reflect changes in market values of collateral. 

 

107 SEC Rule 8c-1, 17 CFR 240.8c-1.

108 15 U.S.C. 78g(a). 

109 Staff of the Board of Governors of the Federal Reserve, a Review and Valuation of Federal 

Margin Regulations (1984). 

110 12 CFR 220.1–220.12. 

111 Any transaction not specifically permitted in a special purpose account must be recorded in a 

margin account. 12 CFR 220.4. Cash accounts are designed to accommodate customer purchase 

and sales on a noncredit basis. 12 CFR 220.8 The special memorandum account (or SMA) 

supplements a customer’s margin account to preserve buying power in the customer’s margin 

account by reflecting any excess equity in the margin account that is above the required amount 

(e.g. 50% for marginable securities). 12 CFR 220.5. The broker-dealer credit account allows a 

broker-dealer to extend certain types of credit to another broker-dealer (DVP/RVP, omnibus 

credit). 12 CFR 220.7. A good faith account permits a broker-dealer to effect and finance a wide 

range of transactions in good faith margin securities without the restrictions of the cash or margin 

account. 12 CFR 220.6.

34
Regulation T margin account rules also cover other credit-based securities transactions, 

such as short sales and the writing of options. The SEC enforces Regulation T with 

respect to broker-dealers. 

 SRO rules set maintenance margin rules for securities transactions for brokerdealers.112 In addition, SRO rules may act as a supplement to Regulation T. In this 

regard, SRO margin rules generally, among other things: (1) provide maintenance 

requirements with respect to customer margin accounts; (2) establish specific margin 

requirements on securities transactions and positions which require only good faith 

margin under Regulation T; (3) provide that certain cash account transactions will be 

treated as margin transactions; (4) regulate margin to be maintained on positions in 

“control” and “restricted” securities under the Securities Act; and (5) specify margin 

requirements for the writing of put and call options. SRO margin requirements for similar 

securities products are generally similar across exchanges. 

 SRO margin rules generally are based on specific percentages or strategies for 

each position held in a margin account. The SEC has also approved SRO rules for riskbased portfolio margin for equity-based products (because of an exception in Regulation 

T). See the next section for a description of portfolio margining. 

With respect to options margin, initial and maintenance margin requirements are 

generally set by the exchanges and SROs.113 Generally, Buyers of (long) options must 

pay for these positions in full. However, a customer can generally buy equity options and 

equity index options on margin, provided the option has more than nine (9) months until 

expiration. For example, the initial (maintenance) margin requirement is generally 75% 

of the cost (market value) of a listed, long term equity or equity index put or call option. 

A buyer of a "long" position in a non-marginable put option or call option is required to 

pay the premium amount in full. Margin requirements for option writers are complex and 

are not the same for every type of underlying interest. SRO rules generally require an 

option writer to post 100% of the options proceeds to the margin account, plus a specific 

percentage of the market value of the underlying securities as options margin (e.g., 20% 

for an equity option). SRO rules also recognize certain spread positions. Finally, equitybased options are also eligible positions under the SRO securities portfolio margin 

described below. 

 With respect to SFPs, the CFMA added Subsection 2(a)(1)(D)(i)(XI) to the 

CEA114 and Subsection 7(c)(2) to the Securities Exchange Act.115 These provisions 

direct the FRB to prescribe regulations establishing initial and maintenance customer 

margin requirements subject to certain statutory standards. This authority was delegated 

 

112 See NYSE Rule 431 and NASD Rule 2520 – which are presently part of the FINRA rulebook. 

113 See 12 CFR 220.12(f). 

114 7 U.S.C. 2(a)(1)(D)(i)(XI). 

115 15 U.S.C. 78g(c)(2). 

35
to the CFTC and the SEC, and the agencies issued joint customer margin regulations that 

became effective September 13, 2002.116 

Portfolio Margining

As part of the 1997 amendments to Regulation T, the FRB adopted new Section 

220.1(b)(3)(i) in Regulation T,117 excluding from the scope of Regulation T “[f]inancial 

relations between a customer and a creditor to the extent that they comply with a 

portfolio margining system under rules approved or amended by the SEC.” 

 The SEC has approved portfolio margining for positions held in a securities 

account for equities, securities options, equity-based OTC derivatives, single stock 

futures, and broad-based index futures.118 These pilot programs were made permanent in 

2008.119

 The SRO portfolio margin rules permit futures positions (that are not securities) to 

be held in a portfolio margin securities account together with securities positions. This is 

often referred to as the “one pot approach.” 

 Under the SRO portfolio margin rules,120 firms must compute margin using a 

method approved by the SEC. Currently, the only approved theoretical pricing model is 

the Options Clearing Corporation’s (“OCC”) Theoretical Intermarket Margin System 

(“TIMS”) model.121 TIMS considers movements for all instruments based on an 

underlying equity (in TIMS a “portfolio” consists of all positions, including options, 

futures and stock, referencing the same underlier) across a range of 30 percent, by 

moving 15 percent up from the current market price and down 15 percent from the 

current market price. Broad-based indices are moved 6 percent up and 8 percent down. 

At 10 points equally spaced within the relevant range, the profit and loss on all positions 

in the same underlier is computed. The margin requirement is determined by simply 

summing the losses resulting from the most adverse event for each underlier. TIMS does 

not recognize offsets across individual equity portfolios. Offsets between certain broadbased indices are recognized. 

2. CFTC Regulatory Framework 

Segregation, Insolvency and Margin Requirements 

 

116 17 CFR 41.42 through 41.49; 17 CFR 240.400 through 406; see also Securities Exchange Act 

Release No. 46292 (August 1, 2002), 67 FR 53146 (August 14, 2002). 

117 12 CFR 220.1(b)(e)(i). 

118 See NYSE Rule 431(g) and NASD Rule 2520(g). 

119 See Securities Exchange Act Release No. 58251 (July 30, 2008), 73 FR 45506 (August 5, 2008). 

120 See supra note 118. 

121 See Securities Exchange Act Release No. 28928 (March 1, 1991), 56 FR 9995 (March 8, 1991). 

36
In the futures markets, “margin” refers to the performance bond posted by both 

the buyer (long) and seller (short) against loss on an open futures contract. “Clearing 

margin,” which is paid by an FCM to a clearinghouse, is set by the clearinghouse, and 

“customer margin,” which is paid by a customer to its FCM, is set by the exchange on 

which a particular contract is traded. The exchange minimum is based on the level set by 

the clearinghouse (typically about 30 percent higher than the clearing margin), although 

an FCM may set a level higher than the minimum for any or all of its customers. 

 

The CFTC does not have general authority to set margin levels for futures 

contracts or options on futures. However, by way of its oversight responsibility for DCO 

financial resources and DCO risk surveillance, the agency monitors and oversees clearing 

margin levels to ensure adequate performance bond coverage for all contracts.122 The 

CFTC has authority to set margin levels on any futures contract in the exercise of its 

emergency authority.123 The CEA confers upon the FRB authority to review margin on 

broad-based stock index futures and options thereon.124 The FRB has delegated this 

authority to the CFTC.125 Therefore, exchanges that trade such contracts are required to 

file with the CFTC any rule establishing or changing the levels of initial or maintenance 

margin. 

Under the CEA, an FCM must at all times possess segregated property sufficient 

to pay all customers with credit balances.126 To the extent any customers have debit 

balances, the FCM must deposit that amount out of its own capital. Each FCM must 

perform an accounting every business day based on balances as of the close of business 

on the previous business day. If an FCM, at any time, fails to have sufficient segregated 

property, it must self-report that violation.127 As a practical matter, all FCMs maintain a 

cushion of their own funds in segregation to avoid such failures. In a FCM bankruptcy, 

customers share customer property pro rata in proportion to their claims, without any 

support from a compensation fund.128 Such possession and control of full collateral 

facilitates prompt transfer of customer funds in bankruptcies, such as the case of Lehman 

Brothers, to avoid market disruption.129

 

122 Core Principle B, CEA Section 5b(c)(2)(B), 7 U.S.C. 7a-1(c)(2)(B); Core Principle D, CEA 

Section 5b(c)(2)(D), 7 U.S.C. 7a-1(c)(2)(D). 

123 CEA Section 8a(9), 7 U.S.C. 12a(9). 

124 CEA Section 2(a)(1)(C)(v) , 7 U.S.C. 2(a)(1)(C)(v). 

125 Letter dated April 14, 1993 from William W. Wiles, Secretary of the Board, Board of Governors 

of the Federal Reserve System to William P. Albrecht, Acting Chairman, Commodity Futures 

Trading Commission. 

126 Section 4d(a)(2), 7 U.S.C. 6d(a)(2). 

127 17 CFR 1.12(h). 

128 Customers do, however, receive a priority in bankruptcy to customer property over other 

 unsecured claims, other than certain administrative expenses of the debtor FCM’s estate. See 11 

 U.S.C. 766(h). 

129 The Bankruptcy Code and CFTC regulations provide explicit protection against attack by the 

 trustee in bankruptcy of pre-bankruptcy and certain post- bankruptcy transfers in a bankruptcy 

 case. See 11 U.S.C. 764(b); 17 CFR 190.06(g)(i). See also 11 U.S.C. 546(e). 

37
Portfolio Margining

“Risk-based portfolio margining” generally refers to a margin methodology that 

sets a minimum level of required margin by analyzing the risk of each component 

position in an account and then recognizing any risk offsets in the overall portfolio of 

positions. For futures contracts, the minimum margin amount is calculated using a riskbased analysis and is designed to cover the expected one-day price change of an open 

position in that contract with an established level of statistical confidence (generally 95-

99%). The one-day time frame reflects the fact that futures positions are marked to 

market at least once a day. 

Minimum margin levels for futures contracts, except for SFPs, are generally 

calculated using the Standard Portfolio Analysis of Risk (“SPAN”) risk-based portfolio 

margining methodology. The margin requirement for a portfolio that may contain 

positions in different futures and/or options contracts is similarly calculated by using a 

risk-based portfolio margining system that assesses the net market risk of all the positions 

in the account. The calculation is based upon the premise that combinations of positions 

can have offsetting risk characteristics due to historic or expected correlations in their 

price movements. 

The SRO securities portfolio margining program facilitated by NYSE Rule 431(g) 

and National Association of Securities Dealers (“NASD”) Rule 2520(g) has a crossmargining component that would permit margin reductions between securities and broadbased index futures products held in a securities portfolio margin account. Because the 

CEA requires segregation of futures positions, futures options positions, and customer 

property related to those positions, absent a waiver of these CFTC segregation 

requirements, such positions and property can be held only in a futures account, absent a 

CFTC exemption.130

As noted above, the CEA and the Securities Exchange Act govern margin for 

SFPs.131 The statutes authorize the FRB to prescribe regulations establishing initial and 

maintenance customer margin, but the FRB delegated rulemaking authority to the CFTC 

and the SEC. In its delegation letter of March 6, 2001, the FRB stated its support of 

“more risk-sensitive, portfolio-based approaches to margining security futures 

products.”132 Pursuant to this authority, the CFTC and SEC issued joint customer margin 

regulations that became effective September 13, 2002.133 

 

130 CEA Section 4d, 7 U.S.C. 6d. 

131 See supra notes 114 and 115 and accompanying text. 

132 Under the Securities Exchange Act, margin for SFPs cannot be lower than the lowest level 

permitted for a comparable security option. See Securities Exchange Act Section 

7(c)(2)(B)(iii)(I), 15 U.S.C. 78g(c)(2)(B)(iii)(I). As a result, the 2002 CFTC-SEC joint margin 

regulations for SFPs establish a fixed-rate customer performance bond requirement of 20%, with 

margin reductions permitted for specified combinations of positions. More recently, Section 

13106 of the CFTC Reauthorization Act of 2008, Title XIII of Pub. L. No. 110-246, 112 Stat. 

2189 (2008), required the SEC and the CFTC to take action to permit “risk-based portfolio 

38
3. Analysis of SEC/CFTC Regulatory Frameworks 

Approaches to Segregation and Insolvency

 Under the CEA and the federal securities laws, both broker-dealers and FCMs are 

subject to restrictions when handling customer funds and property. These “segregation” 

rules aim to protect customers from inappropriate use of customer funds by FCMs and 

broker-dealers. Although CFTC and SEC regulations provide detailed requirements 

regarding the segregation of customer assets, their governing statutory regimes provide 

for certain significant differences in the specific manner in which assets are segregated. 

 Section 4d(a)(2) of the CEA requires that an FCM “treat and deal with all 

customer funds as belonging to such customer” and not to any other person.134 Thus, an 

FCM must collect required margin from each customer to cover the margin or obligations 

only of such customer and is not permitted to use one customer’s funds to cover the 

obligations of another. SEC Rule 15c3-3135 prohibits a broker-dealer from commingling 

its own securities with those of its customers or pledging its customers’ securities in an 

amount exceeding the amount the customer owes the broker-dealer. If a customer has an 

outstanding margin loan from his broker-dealer, the broker-dealer is permitted to use a 

limited percent of that customer’s securities for financing. However, a broker-dealer may 

not use one customer’s fully paid securities as collateral for a loan to another customer. 

In contrast, the ability to finance customer securities positions has no analog in the 

futures regulatory framework because futures are not assets against which loans may be 

extended. Finally, under the CFTC’s regulations, FCM’s are permitted to invest 

segregated customer funds, subject to certain limitations, in permissible investments, 

including certain money market funds. The funds that broker-dealers are required to 

segregate for customers must be held either in cash or Treasury securities. 

With regard to bankruptcy, a broker-dealer is generally liquidated in accordance 

with the provisions of SIPA,136 while an FCM is liquidated in accordance with the 

provisions of Subchapter IV of Chapter 7 of the Bankruptcy Code.137 These regimes 

 margining” for security options and SFPs by September 30, 2009. The CFTC and SEC staffs are 

currently working on a Notice of Proposed Rulemaking that would propose a reduction of 

minimum customer margin for SFPs from 20% to 15% for positions that are not held in a 

securities portfolio margin account. This would mean that minimum margin for unhedged 

positions held in a regular securities account or a futures account, would be 15%.

133 See supra note 116. 

134 7 U.S.C. 6d(a)(2). 

135 17 CFR 240.15c3-3. 

136 See supra note 104 and accompanying text. 

137 11 U.S.C. Chapter 7, Subchapter IV. For broker-dealers, in a SIPC liquidation, except where 

SIPA is inconsistent, SIPA provides that a broker-dealer liquidation is conducted under chapters 1, 

3 and 5 and subchapters I and II of chapter 7 of title 11 of the Bankruptcy Code. SIPA Section 

39
governing bankruptcy and insolvency for broker-dealers and FCMs both provide that 

customers have priority status over unsecured creditors (with the exception of certain 

unsecured estate administration claims) and that, in the event an insolvent firm is unable 

to return all customer property, the impact of the shortfall is shared pro rata among 

customers. However, these two regimes are not uniform and the procedures to be 

followed in the event of the insolvency of a broker-dealer or FCM differ. For example, 

securities are protected by an additional $500,000 per customer under SIPA, which is a 

protection that futures accounts do not have. Instead, coupled with the strict segregation 

rules, the Bankruptcy Code and CFTC regulations contemplate portability, whereby 

customers may transfer their positions and accounts expeditiously from an insolvent 

FCM to a financially healthy FCM, if feasible.138 SEC regulations also contemplate 

expeditious transfer of customer accounts through self-liquidation or a proceeding under 

SIPA. In general, if the books and records of the broker-dealer are in order and customer 

accounts are properly margined, customer accounts may be transferred to another brokerdealer in a process known as a bulk transfer. 

In noting these issues, panelists asked the agencies to consider whether such 

differences in the bankruptcy/insolvency regimes should persist, particularly as related to 

insolvency treatment for an entity that is both a broker-dealer and a FCM.139 Panelists 

observed that these differences were highlighted when Lehman Brothers Inc.—a jointly 

regulated BD/FCM—filed for bankruptcy.140 They noted that as more OTC derivatives 

come onto exchanges and clearinghouses, it would be important to develop and 

implement a more uniform customer account regime that protects both customer assets 

and the integrity of the market in the event of a default of a major firm.141 According to 

panelists, in the absence of amendments to the Bankruptcy Code relating to the 

liquidation of stockbrokers and commodity brokers, the SEC and CFTC should develop 

procedures to guide a trustee, as well as the Bankruptcy Court, when a joint BD/FCM 

becomes insolvent.142 

 

Setting Margin

 6(b), 15 U.S.C.78fff(b). In the case of a firm that is a dually-registered broker-dealer/FCM, SIPA 

provides that, to the extent consistent with SIPA, a SIPA trustee is subject to the duties of a trustee 

under Subchapter IV of Chapter 7 of the Bankruptcy Code. See SIPA Section 7(b), 15 U.S.C. 

78fff-1(b). 

138 See 11 U.S.C. 764(b); CFTC Regulations 1.17(a)(4), 17 CFR 1.17(a)(4); and 190.06(g), 17 CFR 

190.06(g). 

139 See Brodsky Testimony, supra note 52 and Testimony of Yvonne Downs, Senior Director, 

Newedge USA LLC, September 2, 2009 (“Downs Testimony”); see also FIA Comment Letter, 

supra note 59 and Options Exchanges Comment Letter, supra note 52. 

140 See Leibowitz Testimony, supra note 51 and Testimony of Anthony J. Leitner, AJ Leitner and 

Associates, LLC, September 2, 2009 (“Leitner Testimony”). 

141 See Leibowitz Testimony, supra note 51; see generally Leitner Testimony, supra note 140, 

Testimony of Annette Nazareth, Partner, Davis Polk & Wardwell, LLP, September 2, 2009 

(“Nazareth Testimony”), and FIA Comment Letter, supra note 59.

142 See Leibowitz Testimony, supra note 51 and FIA Comment Letter, supra note 59. 

40
Broker-dealers and FCMs collect margin from their customers to address the risks 

arising from their intermediation of customer transactions. In the securities markets, 

minimum customer margin requirements have been established for cash and derivative 

securities positions. In the futures markets, minimum customer margin or performance 

bond requirements have been established for the derivative positions. Differences 

between the methodology for calculating margin requirements in the cash securities and 

the methodologies used in the options securities and futures markets reflect differences 

between cash and derivatives markets. In futures markets, margin is a performance bond 

to satisfy the performance of both parties to a futures contract. A performance bond 

deposit is not partial payment on a purchase, nor does it involve an extension of credit by 

an FCM. Similarly, in securities options markets, margin is a performance bond to 

satisfy the performance obligations of the option seller. 

 In cash securities markets, margin generally is viewed as the extension of credit 

by a broker-dealer to purchase such securities, using the securities as collateral. Further, 

if a customer is unable to satisfy a margin call, the broker-dealer must sell the customer’s 

securities to satisfy the margin loan. 

 Given that margin serves different functions in the futures and securities options 

markets than in the cash securities markets, margin requirements are calculated using 

different approaches. In the cash securities and securities options markets, customer 

margin rules have been set by the FRB and the SROs since the 1930s. The requirement 

that an SRO file proposed margin rules with the SEC has helped ensure that SROs do not 

compete on the basis of different margin requirements and that margin levels are set at 

sufficiently prudent levels to reduce systemic risk and protect the solvency of brokerdealers. This approach has generally resulted in similar margin requirements for each 

securities exchange. With respect to securities options, the FRB and the SROs have 

developed different approaches for minimum customer margin requirements for cash 

securities markets than for securities options. Further, Regulation T does not apply to 

positions held in an approved portfolio margining system. 

In contrast, in the futures markets, the clearinghouses set “clearing” margin levels 

for performance bond paid by clearing FCMs to the clearinghouse, and futures exchanges 

set higher customer margin levels for performance bond paid by customers to their FCM. 

The CEA does not provide the CFTC with general authority to set margin levels, and the 

CFTC does not approve inputs into the risk-based portfolio margin calculation used for 

futures contracts. However, CFTC staff actively monitors and oversees clearing margin 

levels to ensure adequate performance bond coverage for all contracts. 

Risk-Based Portfolio Margining 

 Panelists identified portfolio margining as a significant area for 

harmonization.143 In particular, they asked for consideration of whether limits on the 

 

143 See Brodsky Testimony, supra note 52; Leibowitz Testimony, supra note 51; Leitner Testimony, 

supra note 140; Luthringshausen Testimony, supra note 59; Downs Testimony, supra note 139; 

Nazareth Testimony, supra note 141; Testimony of Edward Rosen, Partner, Cleary, Gottlieb, 

41
types of products that may be cross-margined within a portfolio should be changed.144 

Panelists noted that while securities regulations now allow broker-dealers to establish a 

portfolio margin account, the instruments that can be included in the account are 

effectively limited to equity securities and related options.145 They added that, although 

the securities regulations technically permit the inclusion of certain index futures in the 

calculation, the CEA and CFTC regulations preclude the inclusion of futures products in 

the securities portfolio account. Absent CFTC exemptive relief, it was noted, customers 

who use futures to hedge risk in their securities positions do not get the full benefit of 

portfolio margining.146 Since certain off-shore jurisdictions permit full-fledged portfolio 

margining, panelists agreed that portfolio margining is important to the international 

competitiveness of America’s financial markets.147 The ability to margin all related 

instruments in one account allows customers to more fully realize the risk management 

potential of these instruments. Portfolio margining also would assist regulators monitor a 

larger segment of positions in the market as part of their surveillance efforts. 

Two general approaches have been advanced regarding how portfolio margining 

across securities and futures products might be structured: (i) a one account (“one pot”) 

model, which contemplates a single account at the firm level and a set of agreements 

between the futures and options clearing houses that allow the clearing broker’s crossmargining accounts at the futures and securities clearing houses to be margined as if they 

were a single account with jointly held collateral; and (ii) a two account (“two pot”) 

model which, at the clearing firm level, is based on maintenance of a futures account and 

a securities account that guarantee one another and that, accordingly, receive reductions 

in the margin calculation. At the clearinghouse level, the two account model is based on 

 Steen & Hamilton, LLP, September 2, 2009 (“Rosen Testimony”); Testimony of Lawrence Harris, 

Professor, USC Marshall School of Business, September 2, 2009 (“Harris Testimony”); 

Testimony of Brandon Becker, Executive Vice President and Chief Legal Officer, TIAA-CREF, 

September 2, 2009 (“Becker Testimony”); see also Transcript of Oral Testimony of David 

Downey, Chief Executive Officer, OneChicago, September 2, 2009; Brian Nigito, Managing 

Director, GETCO LLC, September 2, 2009; and Mark Young, Partner, Kirkland & Ellis, on behalf 

of the Futures Industry Association, September 2, 2009, supra note 3. See also letter from Gary 

DeWaal, Senior Managing Director and Group General Counsel, Newedge USA, LLC, to David 

Stawick, Secretary, CFTC, and Elizabeth M. Murphy, Secretary, SEC, dated September 14, 2009 

(“Newedge Comment Letter”); SIFMA Comment Letter, supra note 52; FIA Comment Letter, 

supra note 59 and Options Exchanges Comment Letter, supra note 52. 

144 See, e.g., Brodsky Testimony, supra note 52; Luthringshausen Testimony, supra note 59; 

Nazareth Testimony, supra note 141; see also SIFMA Comment Letter, supra note 52; and 

Options Exchanges Comment Letter, supra note 52. 

145 See, e.g., Brodsky Testimony, supra note 52; Leitner Testimony, supra note 140; Luthringshausen 

Testimony, supra note 59; see also FIA Comment Letter, supra note 59; and Options Exchanges 

Comment Letter, supra note 52. 

146 See Brodsky Testimony, supra note 52; Leibowitz Testimony, supra note 51; Leitner Testimony, 

supra note 140; Luthringshausen Testimony, supra note 59. 

147 See Luthringshausen Testimony, supra note 59; Nazareth Testimony, supra note 141; Leitner 

Testimony, supra note 140; see also SIFMA Comment Letter, supra note 52; and Options 

Exchanges Comment Letter, supra note 52. 

42
unsecured cross-guarantees between the two clearinghouses with no common pool of 

collateral. 

Most panelists expressed a preference for the one account model, but noted that it 

would require legislative and regulatory change. If the financial instruments are to be 

held in a securities account, SIPA would need to be amended to provide that futures held 

in a securities portfolio margin account could be covered by SIPC, and the CFTC would 

need to provide exemptive relief to allow customer futures positions to be held in a 

securities account.148 If the single portfolio margin account were a futures account, the 

SEC and CFTC would need to provide exemptive relief to allow securities to be held in a 

futures account. Under both alternatives of a one account model, there also would be a 

question as to what risk-based methodology should be used to determine the margin 

offsets. 

Some panelists observed that, for the short-term, the agencies could consider the 

model implemented in the joint regulation of SFPs, which allowed certain BDs and 

FCMs to hold customer SFPs in either a securities account with SIPC protection or a 

futures account with full segregation safeguards.149 According to these panelists, such an 

approach would provide investors with greater choice and control in how their funds are 

protected, whether it be opting for an insurance regime or maintaining portability of their 

positions in the event of the intermediary’s bankruptcy. 

 In the long run, however, most panelists agreed that the agencies should create a 

new unified account regime that adopts the best of both systems and allows for futures 

and securities to be held in the same location.150 To this end, some panelists advocated 

creation of a jointly organized effort, such as an advisory committee, that would be 

tasked with recommending a solution.151 

D. Market Linkages and Clearing 

 The Treasury White Paper identifies direct competition between exchanges for 

trading like financial instruments as a goal that would make markets more efficient and 

“would benefit users of the markets, including investors and risk managers.”152 As the 

 

148 See Brodsky Testimony, supra note 52; Luthringshausen Testimony, supra note 59; Nazareth 

Testimony, supra note 141; Leitner Testimony, supra note 140; see also SIFMA Comment Letter, 

supra note 52; and Options Exchanges Comment Letter, supra note 52. 

149 See Leibowitz Testimony, supra note 51. 

150 See Brodsky Testimony, supra note 52; Luthringshausen Testimony, supra note 59; Nazareth 

Testimony, supra note 141; Leitner Testimony, supra note 140; see also Newedge Comment 

Letter, supra note 143; SIFMA Comment Letter, supra note 52; and Options Exchanges 

Comment Letter, supra note 52. 

151 See Leibowitz Testimony, supra note 51, and Leitner Testimony, supra note 140; see also letter 

from Douglas Engmann, President, Engmann Options, Inc., to Mary Schapiro, Chairman, SEC, 

and Gary Gensler, Chairman, CFTC, dated September 13, 2009 (“Engmann Comment Letter”). 

152 Treasury White Paper, supra note 1, at 49–50. 

43
panelists noted at the September Meeting, at the exchange level, the securities and futures 

markets are structured differently: the former are linked in a national market system 

mandated by Congress, whereas the latter operate as largely separate, vertically 

integrated markets. 

The Treasury White Paper’s focus on direct competition between exchanges for 

trading like financial instruments also assumes that the financial instruments will be 

fungible, such that a position on one exchange and clearinghouse may be offset on 

another. Panelists and commentators at the September Meeting also addressed the issue 

of fungibility in the context of the current structural differences between the two markets 

and the rationales for the existence of such differences in the two regulatory regimes. 

1. SEC Regulatory Framework 

 The Securities Exchange Act mandates a national market system for both trading 

and clearance and settlement of securities. The Securities Exchange Act’s mandate 

makes a comprehensive regulatory approach essential because of the relationship 

between the markets for trading services and clearing services. In particular, the 

regulatory structure for clearing services can have an impact on the nature of competition 

in the market for trading services. 

 The SEC has administered the Securities Exchange Act by requiring that cleared 

securities products be fungible and that all brokers and exchanges have fair access to the 

clearing services offered by a central counterparty (“CCP”). In the Securities Act 

Amendments in 1975 (the “1975 Amendments”), Congress mandated that clearing 

systems be interconnected and operate under uniform rules, specifically finding that 

“[t]he linking of all clearance and settlement facilities and the development of uniform 

standards and procedures for clearance and settlement will reduce unnecessary costs and 

increase the protection of investors.”153 

While originally each securities exchange’s trading was cleared on its associated 

clearing agency, these clearing agencies were linked and coordinated in accordance with 

the national system for clearance and settlement mandated by the 1975 Amendments. 

Over time, these separate clearing agencies gave way to the emergence of a common 

clearing agency to clear and settle transactions in equity and fixed income securities. In 

the options markets, the SEC encouraged the development of a central clearing 

organization that issued and cleared standardized options traded on the competing 

exchanges.154

Product fungibility and fair access to clearing services are necessary for 

competition in the market for trading services. They enable market participants to 

establish a position at one trading venue and liquidate the position at another trading 

 

153 Securities Exchange Act Section 17A(a)(1)(D), 15 U.S.C. 78q-1(a)(1)(D). 

154 In 1974, the SEC approved the OCC registration as a common clearing agency for exchange listed 

options. See Securities Exchange Act Release No. 11146 (December 19, 1974). 

44
venue, yet still clear and settle the transactions through a centralized system just as 

efficiently as if they had traded at a single trading venue. 

 The national market system for trading is thus designed to promote fair and 

vigorous competition among multiple venues that simultaneously trade the same 

products, while also promoting the consolidation of trading interest necessary to address 

any adverse effects that might arise from the fragmentation of trading among multiple 

venues. There inherently is tension between these dual objectives of promoting 

competition among trading venues and minimizing the problems of fragmentation. 

 Competition among trading venues can generate benefits for market participants. 

It gives venues incentives to offer innovative trading tools and reliable systems at 

competitive fees. The existence of this competition, however, cannot be taken for 

granted because of the network effect that operates in trading markets – captured in the 

old saying that “liquidity attracts liquidity.” As a single venue attracts more and more 

trading volume, each new participant in that venue enhances the value of the venue to 

both existing and prospective participants by adding liquidity and thereby enabling that 

venue to offer better prices. After an initial period of possibly vigorous competition 

among multiple venues, liquidity can be expected to tip to a single venue and stick there 

indefinitely. 

 Because of this network effect, any venue attempting to compete with the 

dominant venue will face a difficult challenge. Even if the new venue offers better 

technology and lower fees, it may not attract trading volume because it cannot assure its 

participants that they will receive prices that match the quality of executions available at 

the dominant venue. Moreover, the dominant venue may respond to competitive 

challenges by reducing fees in the short-term until a competitor is driven off, or by 

adopting improved technology that was developed and introduced by the competitor. 

 On the other hand, regulatory intervention designed to counter the network effect 

by promoting opportunities for competition among trading venues can, if successful, lead 

to fragmentation of trading interest among the competing venues. Market efficiency is 

enhanced when the most willing buyer in a product is able to trade with the most willing 

seller, but, in some circumstances, fragmentation can lead to impaired price discovery 

and higher transaction costs for market participants. In addition, multiple venues trading 

the same product can, in some circumstances, cause market participants to trade at 

inferior prices if their orders are not routed to the particular venue that has the best 

available prices at that time. 

 To secure the benefits of both competition among trading venues and 

consolidation of trading interest, the SEC has employed the following regulatory tools: 

i. Consolidated price transparency. At the core of the national market 

system are the consolidated market data networks that collect the bestpriced quotations (pre-trade transparency) and trade reports (post-trade 

transparency) from the various trading venues and disseminate the pricing 

45
information to the public on a real-time basis. The consolidated data 

streams assure that all market participants have affordable access to a 

single source of pricing information for a product. Consolidated data is 

the principal tool both for addressing fragmentation (by enhancing the 

ability of participants to trade in the venue with the best prices) and 

promoting competition among trading venues (by preventing a dominant 

venue from restricting its prices to favored customers and by assuring that 

venues that display the best prices, even small ones, are able to 

disseminate those prices to all market participants). 

ii. Fair access. It is not enough for market participants to know the best 

prices across different trading venues; they also must be able to access 

those prices efficiently at each venue. Trading venues in the national 

market system are required to provide access to market participants on 

terms that are not unfairly discriminatory. In particular, trading venues are 

not permitted to discriminate against market participants based on an 

association with, or trading at, competing venues. 

iii. Trade-through protection and connectivity. Trading venues are prevented 

from executing trades at prices that are inferior to displayed quotations at 

other venues. This requirement provides greater assurance to market 

participants that they will receive the best available prices for their orders. 

It also provides strong incentives for trading venues to establish efficient 

connectivity with other trading venues. To attract order flow, trading 

venues offer routing services that seek out liquidity at other venues when 

the trading venue itself does not have liquidity at the best prices. These 

order routing services require extensive connectivity that closely link 

trading venues together. 

iv. Duty of best execution. Brokers owe a duty of best execution to their 

customers to execute their orders at the most favorable terms reasonably 

available in the marketplace. This duty is particularly important when the 

broker has a choice of routing to many different venues that trade the same 

products. Brokers are required to undertake regular and rigorous reviews 

of the execution quality likely to be obtained from different trading 

venues. In this respect, the duty of best execution benefits both a broker’s 

customers and the efficiency of the market system as a whole. The 

requirement that orders be routed to the best venues creates strong 

competitive pressures for venues to compete based on execution quality. 

These regulatory tools have enabled the securities national market system to 

preserve an appropriate balance between two essential types of competition – competition 

among trading venues for order flow and competition among the orders of market 

participants in an individual product. In particular, the national market system has 

avoided the extremes of: (1) isolated venues that trade products without regard to trading 

on other venues and thereby fragment the competition among buyers and sellers in a 

46
product; and (2) a single venue that overwhelmingly dominates trading in its products 

and thereby loses the benefits of vigorous competition and innovation among trading 

venues. Together, the two forms of competition generate vitally important benefits for 

market participants that otherwise would not be possible. 

2. CFTC Regulatory Framework 

Market Linkages

As discussed above, in legislation amending the securities laws, Congress 

mandated market linkage in the securities markets to increase competition among trading 

venues so that competing exchanges would offer lower trade execution fees. There has 

been no comparable legislative mandate for the futures markets. Accordingly, futures 

exchanges are not linked in a national market system in the manner Congress has 

prescribed for the securities markets. The current structure in the futures industry 

predates the passage of the CEA, and even of its predecessor, the Grain Futures Act of 

1922. There has been no indication from Congress that there should be changes to that 

structure. Market differences that may account for the difference in approach include the 

fact that exchange listings in the securities markets are fungible securities issued by 

public companies, whereas futures exchange listings typically are highly specialized and 

differentiated contracts. This difference highlights one of the underlying purposes of the 

two markets: the securities markets principally address the need for capital formation 

and the futures markets are concerned with risk management. 

Nevertheless, the CEA does not preclude futures exchanges from listing contracts 

with terms and conditions identical to those of contracts listed on other exchanges. 

However, the “first mover advantage,” whereby trading generally gravitates to the market 

with pre-existing liquidity, typically leads to liquidity building and stabilizing in the 

exchange that first introduces a futures contract. Accordingly, once liquidity is 

established on one trading venue, others may be reluctant to invest resources in 

developing liquidity in the same product on their own platform. 

Exchange-Directed Clearing

Under the CEA, individual exchanges and clearinghouses are governed by core 

principles, subject to oversight by the CFTC. The CEA also makes exchanges 

responsible for maintaining the fairness and financial integrity of trading in the contracts 

they list. These self-regulatory obligations are reflected in the statutory designation 

criteria and core principles that exchanges must satisfy. An exchange may delegate 

responsibility for compliance with core principles to another registered entity; however, 

under the CEA, the market remains ultimately responsible for satisfying the core 

principles. 

To ensure financial integrity, a “board of trade shall establish and enforce rules 

providing for the financial integrity of any contracts traded on the contract market 

(including the clearance and settlement of the transactions with a derivatives clearing 

47
organization).”155 To fulfill this obligation, exchanges select the clearinghouse(s) that 

will clear and settle the contracts that they list, also known as “exchange-directed 

clearing.” The clearinghouses associated with a futures exchange could either be 

vertically integrated into the market itself or serve as a third party clearing organizations. 

Historically, most clearinghouses have been integrated into their futures exchanges. The 

“exchange-directed clearing” characteristic of futures markets contrasts with “common 

clearing,” which prevails in the securities markets, where Depository Trust and Clearing 

Corporation (“DTCC”) clears all equity securities transactions and OCC clears security 

options transactions. 

In addition to directing clearing, futures exchanges ordinarily do not treat 

contracts listed across markets as “fungible.” “Fungibility” refers to a situation where 

identical contracts are listed on two different exchanges and a trader can establish a 

position on one exchange and close out that position on another exchange. Equity 

securities and equity options are considered to be fungible because they may be 

purchased on one exchange and sold on another. The reasons why futures exchanges 

have generally not accepted fungibility involve decreased incentives of a futures 

exchange to innovate product listings and potential exposure of one clearinghouse to the 

credit risks of another. 

Futures contracts typically address specific risk management needs and thus often 

require considerable investment of resources for development, marketing, and on-going 

maintenance (i.e., ensuring that the contracts stay up-to-date with changes in the 

underlying markets). The value of a futures contract is derived not only from its 

underlying commodity, but from the exchange-specific contract terms and conditions that 

are specifically designed by the futures exchange to address specific hedging needs. 

Contract maintenance involves significant costs, including ensuring deliverable supply 

both in terms of quantity and quality (i.e., adherence to specified contract terms). 

Accordingly, permitting listing of replica contracts on competing exchanges facilitates 

“free-riding” on the first exchange’s investment and may decrease incentives favoring 

innovation. 

Unless a transaction on one exchange can be cleared through the clearinghouse of 

another, fungibility would require each clearinghouse associated with competing 

exchanges to recognize a position offset or performance bond reduction based on a 

position cleared by another clearinghouse. This phenomenon is sometimes referred to as 

“inter-operability.” Inter-operability would require a threshold risk management 

determination by one clearinghouse that it is prudent to take on the liability of the other. 

Clearinghouses may be reluctant to increase their interconnectedness to each other and 

thereby to assume each other’s credit risks, which they may deem to be unreasonably 

high. 

The futures clearing model contemplates competition among clearinghouses. A 

clearinghouse can compete on fees, operational efficiencies, financial strength, and 

 

155 CEA Section 5(d)(11), 7 U.S.C. 7(d)(11). 

48
effectiveness of risk management techniques (i.e., a firm would be hesitant to join a 

clearinghouse if it had doubts about the clearinghouse’s risk management program). In 

particular, competition with regard to operational efficiencies and risk management 

techniques could lead to innovation in the delivery of clearing services. 

3. Analysis of SEC/CFTC Regulatory Frameworks 

As a result of a mandate from Congress in 1975, the SEC has overseen the 

gradual creation of a national system of linked securities markets. The creation of this 

national market of linked execution platforms and exchanges has included issuance of 

regulations and guidelines concerning market transparency, best execution, tradethroughs, and intermarket competition. By contrast, Congress has not issued any such 

express mandate for the futures markets. As a result, the futures exchanges operate 

relatively independently of each other and, thus, the nature of intermarket competition 

between the securities and futures markets is different. 

As noted by a number of panelists, the securities and futures markets differ 

significantly in their structure.156 Identical securities are traded on multiple United 

States markets as part of the “national market system” for securities. Unlike securities, 

individual futures contracts generally are traded on the one exchange that creates the 

contract and such exchange typically has the first mover advantage in developing and 

retaining liquidity in the contract. Each exchange selects the clearinghouse for all 

instruments listed on that exchange. In the futures markets, competition exists among 

United States and foreign markets offering competing products, some of which may be 

similar in terms and functions, but are not fungible across markets and clearing 

organizations. 

According to some panelists, the national market system for securities, including 

access to a common clearing utility, has encouraged vigorous competition between 

securities exchanges that has benefited market participants.157 These panelists and 

commentators noted that, due to the existence of a common clearing facility, small 

entrants with innovative products and trading technologies can compete and garner 

substantial market share without substantial hurdles.158 They also stated that the 

 

156 See Brodsky Testimony, supra note 52; Donohue Testimony, supra note 51, Harris Testimony, 

supra note 143; Nazareth Testimony supra note 141; and Short Testimony, supra note 93 ; see 

also letter from Neal Wolkoff, Chief Executive Officer, ELX Futures, September 14, 2009 (“ELX 

Futures Comment Letter”). 

157 See, e.g., Harris Testimony, supra note 143; and Nazareth Testimony supra note 141. See also

ELX Futures Comment Letter, supra note 156. 

158 See Harris Testimony, supra note 143; and Nazareth Testimony supra note 141; see also Raisler 

Testimony, supra note 52 (“One example of this innovation is the promotion of fungibility in the 

equity options markets. Using a clearing house as a utility and allowing product to be cleared at 

the same clearing house regardless of where it is executed is an idea worth careful study in the 

futures and OTC markets. To the extent that the fungibility model has allowed new exchanges to 

enter the market and promote innovative products, and will encourage competition among 

exchanges and among clearing houses, it is worth considering.”). 

49
existence of a common clearer helps reduce systemic risk through enabling offsetting 

positions.159 Thus, one suggestion for harmonizing securities and futures regulations and 

increasing competition among trading facilities in the futures markets was the adoption of 

fungibility for futures contracts similar to the structure for securities and equity 

options.160 

Other panelists noted drawbacks to the common clearing model when it comes to 

futures markets.161 According to this view, a trading facility that uses a utility-style 

clearinghouse is less likely to innovate for product development if competitors can 

immediately free ride off their ideas through a horizontal clearing model.162 It was also 

stated that all futures markets across the globe currently operate under a vertical clearing 

model.163 Moreover, some have observed that creation of a utility-style clearinghouse for 

futures markets would encourage payment for order flow. 

Panelists observed that, notwithstanding common clearing, a disincentive to 

innovate has not been seen in the cash securities or security options markets.164 In the 

cash securities markets, companies—rather than exchanges—issue securities that are 

fungible by design.165 However, because exchanges--rather than the companies--design 

and list futures contracts, with endless possibilities for design of contract terms, futures 

exchanges claim there would be a disincentive to invest time and capital in designing 

better products for market participants unless they can have an opportunity to recoup this 

investment, which the vertical clearing model allows.166 In this regard, however, 

securities options possess many characteristics similar to financial futures, including that 

they are derivative instruments that are designed and listed by exchanges, and options 

exchanges have been both competitive and innovative in developing new products. 

A number of panelists added that creating one utility clearinghouse for futures 

would disrupt the market and would risk migration of business offshore in an age of 

electronic trading, which enables an exchange to be located nearly anywhere in the 

 

159 See Harris Testimony, supra note 143; and Nazareth Testimony supra note 141. See also ELX 

Futures Comment Letter, supra note 156. 

160 See Leibowitz Testimony supra note 51; see also Transcript of Oral Testimony of David Downey, 

OneChicago, September 3, 2009, supra note 3 (“There needs to be a national clearing and 

settlement system for futures in America that is nondiscriminatory for qualified organizations to 

join, along the lines of the Options Clearing Corporation. This will allow for competition which 

would breed innovation as different organizations would compete to offer the fastest access 

through the best prices at the lowest cost”). 

161 See Leibowitz Testimony supra note 51; and Transcript of Oral Testimony of Craig Donohue, 

CME Group, September 3, 2009, supra note 3. 

162 See Leibowitz Testimony supra note 51. 

163 See Leibowitz Testimony, supra note 51; and Transcript of Oral Testimony of Craig Donohue, 

CME Group, Inc., September 2, 2009, supra note 3. 

164 See Leibowitz Testimony supra note 51; and Harris Testimony, supra note 143. 

165 See Nazareth Testimony supra note 141; and Leibowitz Testimony supra note 51. 

166 See Leibowitz Testimony, supra note 51. 

50
world.167 One commentator noted that the solution to concentration in futures clearing is 

for the CFTC and SEC to approve more competitors to enter the space.168

Some panelists observed that steps short of fungibility could be taken by 

regulators to enhance competition among futures trading facilities.169 Aside from 

vigorous antitrust enforcement, the panelists noted that the process and rights for market 

participants that want to move open interest to competing exchanges could be further 

clarified.170 In the past, futures exchanges have claimed that open interest is owned and 

controlled by the exchange. According to these panelists, clearinghouses have a strong 

interest in managing their positions due to the systemic risk inherent in the business, and 

the risks associated with ownership and control of open interest has deterred market 

participants from taking positions to competing exchanges.171 One proposal, therefore, 

would be to provide non-discriminatory open access, and to clarify the rights of market 

participants and clearinghouses regarding open interest as well as the process by which 

participants can transfer positions to other exchanges. Some panelists stated that this 

would significantly improve the ability of other exchanges to compete for business and 

that enhanced transparency of clearing fees would also allow users of the markets to be 

informed buyers of these services.172

Finally, one commentator stated that it would welcome a comprehensive study of 

how best to improve competition and the market structures for both futures and listed 

options markets.173 

E. Prevention of Fraud and Manipulation 

A number of panelists at the September Meeting identified manipulation as an 

area in which there was some divergence between the securities and futures laws. Some 

of the panelists suggested that some enhancements to the futures manipulation 

enforcement regime would be in order. 

Panelists at the September Meeting noted that the securities and commodity 

futures laws cover insider trading very differently. Panelists and commentators explained 

that there are reasons for these differences, but some panelists indicated that the 

commodity futures laws could be modified somewhat to expand the scope of the insider 

trading preclusion. 

 1. SEC Regulatory Framework 

 

167 Id. 

168 Id. 

169 Id. 

170 Id. 

171 Id. 

172 Id. 

173 See FIA Comment Letter, supra note 59. 

51
The SEC Division of Enforcement investigates possible violations of the federal 

securities laws, recommends SEC action when appropriate, either in a federal court or 

before an administrative law judge, prosecutes those actions, negotiates and recommends 

settlements, and administers the distribution of funds to harmed investors. The four primary 

statutes the Enforcement Division enforces are the Securities Act,174 the Securities 

Exchange Act,175 the Investment Company Act of 1940 (Investment Company Act),176 and 

the Investment Advisers Act of 1940 (Advisers Act).177

Investigations and enforcement actions undertaken by the Enforcement Division 

include fraud by any person or entity, whether or not such actor is otherwise regulated by 

the SEC, where the violation is in connection with the offer, purchase, or sale of 

securities or security-based swap agreements. Areas of fraud enforcement include: 

financial fraud and disclosure violations by public issuers, fraud involving broker-dealers 

or associated persons, fraud involving mutual funds and investment advisers, fraud 

involving municipal securities, securities offering frauds (including Ponzi schemes), 

market abuse and manipulation, and insider trading. In addition to fraud, the 

Enforcement Division also investigates and prosecutes regulatory misconduct, including 

registration, reporting, and recordkeeping violations relating to issuers, broker-dealers, 

municipal securities dealers, investment advisers, investment companies, and transfer 

agents. 

Rule 10b-5 under the Securities Exchange Act makes it unlawful for any person, 

directly or indirectly: (1) to employ any device, scheme, or artifice to defraud; (2) to 

make any untrue statements of material fact or to omit to state a material fact necessary in 

order to make the statements made, in light of the circumstances under which they were 

made, not misleading; or (3) to engage in any act, practice, or course of business which 

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

purchase or sale” of any security.178 Rule 10b-5 implements Section 10(b) of the 

Securities Exchange Act179 prohibiting any person, in connection with a purchase or sale 

of any security or any security-based swap agreement, from using or employing any 

manipulative or deceptive device or contrivance in contravention of the SEC’s rules and 

regulations. Similarly, Section 17 of the Securities Act makes it unlawful for any person, 

directly or indirectly: (1) to employ any device, scheme, or artifice to defraud; (2) to 

obtain money or property by means of any untrue statement of material fact or any 

omission to state a material fact necessary in order to make the statements made, in light 

of the circumstances under which they were made, not misleading; or (3) to engage in 

any transaction, practice, or course of business which operates or would operate as a 

 

174 15 U.S.C. 77a et seq. 

175 15 U.S.C. 78a et seq. 

176 15 U.S.C. 80a-1 et seq. 

177 15 U.S.C. 80b-1 et seq. 

178 17 CFR 240.10b-5. 

179 15 U.S.C. 78j(b). 

52
fraud or deceit upon the purchaser, “in the offer or sale” of any security or any securitybased swap agreement.180 

Manipulation

Manipulation, in the context of the federal securities laws, is conduct designed to 

deceive or defraud investors by controlling or artificially affecting the price of securities. 

Manipulation cases brought by the SEC generally fall into two broad, sometimes 

overlapping categories: pump and dump cases and manipulative trading cases. 

A pump-and-dump case generally involves the use of false disclosures to cause 

the price of a stock to go up – i.e., the price of a stock is “pumped” by the issuance of 

false or misleading press releases, spam emails, message board postings, or other 

promotional materials. In addition, a pump and dump scheme may include some of the 

classic manipulative trading techniques described below. 

In manipulative trading cases, a stock’s price is artificially affected not by false 

disclosures, but by artificial or deceptive trading conduct. Examples of manipulative 

trading practices include effecting wash sales (transactions in which there is no change in 

beneficial ownership) or matched trades (pre-arranged transactions to artificially maintain 

or otherwise affect a stock’s price), painting the tape (buying activity among nominee 

accounts at increasingly higher prices or causing fictitious transactions reports to appear 

on the ticker tape), and marking the close (placing orders at or near the close of the 

market in order to inflate the reported closing price). 

Both pump-and-dump and manipulation trading cases can be brought under the 

general antifraud provisions described above. In a case brought under Section 10(b) and 

Rule 10b-5, the SEC is required to establish that the violator acted with scienter, a mental 

state that the courts have held is satisfied by knowing or reckless conduct. 

In addition, Section 9 of the Securities Exchange Act specifically outlaws certain 

manipulative practices in connection with the trading of exchange-listed securities.181 

Section 9(a)(1) makes it unlawful for any person, directly or indirectly, for the purpose of 

creating a false or misleading appearance of active trading in any security registered on a 

national securities exchange, or a false or misleading appearance with respect to the 

market for any such security: (1) to effect any transaction in such security which involves 

no change in the beneficial ownership thereof (i.e., a wash sale); or (2) to enter an order 

for the purchase or sale of such security with the knowledge that an order of substantially 

the same size, at substantially the same price, for the sale or purchase of any such 

security, has been or will be entered by or for the same or different parties (i.e., a 

matched trade).182 Section 9(a)(2) makes it unlawful for any person, directly or 

indirectly, to effect a series of transactions in any security registered on a national 

 

180 15 U.S.C. 78q. 

181 15 U.S.C. 78i. 

182 15 U.S.C. 78i(a)(1). 

53
securities exchange or in connection with any security-based swap agreement with 

respect to such security creating actual or apparent active trading in such security, or 

raising or depressing the price of such security, for the purpose of inducing the purchase 

or sale of such security by others.183 Both Sections 9(a)(1) and (2) require that the 

proscribed activities be engaged in with the requisite manipulative intent. However, a 

finding of manipulative intent may be inferred from circumstantial evidence. 

Several other provisions of, and rules under, the Securities Exchange Act govern 

particular types of manipulative activities. For example, Section 9(a)(6) gives the SEC 

the authority to promulgate rules prohibiting “pegging, fixing or stabilizing” securities 

prices.184 Section 15(c) of the Securities Exchange Act185 covers the OTC markets and 

municipal securities. With respect to abusive naked short selling, Rule 10b-21 of the 

Securities Exchange Act makes it unlawful for any person to submit an order to sell an 

equity security if such person deceives a broker-dealer, participant of a registered clearing 

agency, or purchaser regarding its intention or ability to deliver the security and such person 

fails to deliver the security.186 Regulation M precludes certain activities that could 

artificially influence the market in an initial or secondary offering of securities.187 There 

is no scienter requirement for violations of Regulation M. 

Insider Trading

Insider trading is prosecuted as a type of fraud under the federal securities laws. 

In general, insider trading refers to buying or selling securities on the basis of material, 

nonpublic information in breach of a duty. The prohibitions against insider trading have 

been developed largely by SEC and court decisions arising under the general antifraud 

provision of Section 10(b) of the Securities Exchange Act188 and Rule 10b-5 

thereunder.189 

 The courts have recognized two different “theories” of insider trading. Under 

what is known as the “traditional” or “classical theory” of insider trading, it is a violation 

of Section 10(b) and Rule 10b-5 for corporate insiders – a category that includes officers, 

directors, and employees of a corporation, as well as certain outside advisers or 

consultants who temporarily become fiduciaries of the corporation – to trade in the 

securities of their corporation on the basis of material, nonpublic information.190 Under 

the classical theory, trading on such information is fraudulent because the insider, who 

 

183 15 U.S.C. 78i(a)(2). 

184 15 U.S.C. 78i(a)(6). 

185 15 U.S.C. 78o(c). 

186 17 CFR 240.10b-21. 

187 17 CFR 242.100 et seq. 

188 17 U.S.C. 78j(b). 

189 17 CFR 240.10b-5. 

190 United States v. O’Hagan, 521 U.S. 642 (1997). 

54
has a relationship of trust and confidence with the corporation’s shareholders, is under a 

duty to disclose the material information that is not known to the shareholders if the 

insider decides to trade.191 This is to prevent the insider from taking unfair advantage of 

uninformed shareholders.192

 The second theory of insider trading is the “misappropriation theory.” Under the 

misappropriation theory, a person violates Section 10(b) and Rule 10b-5 “when he 

misappropriates confidential information for securities trading purposes, in breach of a 

duty owed to the source of the information.”193 The Supreme Court has affirmed this 

theory, holding that the misappropriator’s use of the principal’s information “to purchase 

or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal 

of the exclusive use of that information.”194 As the Court explained, the theory serves 

“an animating purpose of the Securities Exchange Act: to insure honest securities markets 

and thereby promote investor confidence. . . . [I]nvestors likely would hesitate to venture 

their capital in a market where trading based on misappropriated nonpublic information is 

unchecked by law.”195

In addition, Section 16(b) of the Securities Exchange Act imposes liability for 

short-swing profits in the issuer’s stock upon all persons required to file reports under 

Section 16(a) of the Securities Exchange Act (officers, directors and beneficial owners of 

more than ten percent of any class of equity security). These statutory insiders must 

disgorge to the issuer any profit realized as a result of a purchase and sale or sale and 

purchase of covered equity securities occurring within a six-month period. 

 In order to prevent insiders and misappropriators of information from indirectly 

exploiting material nonpublic information, the courts have also held that Section 10(b) 

and Rule 10b-5 prohibit “tipping” – that is, the improper disclosure of material nonpublic 

information to another person who engages in trading. Further, in a tipping case, trading 

by the recipients of the information – the “tippees” – will also violate Section 10(b) and 

Rule 10b-5 when the insider’s disclosure has been in breach of a duty and the tippee 

knows or should know that there has been a breach.196

The SEC has also adopted a specific rule addressing insider trading in connection 

with tender offers – Rule 14e-3.197 This rule prohibits trading while in possession of 

material, nonpublic information relating to a tender offer if any person has taken a 

substantial step or steps toward a tender offer, and the person knows or has reason to 

 

191 Chiarella v. United States, 445 U.S. 222, 228 (1980). 

192 O’Hagan, 521 U.S. at 652, citing Chiarella v. United States. See also Cady, Roberts & Co., 40 

S.E.C. 907 (1961). 

193 Id. 

194 Id. 

195 O’Hagan, 521 U.S. at 658. 

196 Dirks v. SEC, 463 U.S. 646, 660 (1983). 

197 17 CFR 240.14e-3. 

55
know that the information is nonpublic and came directly or indirectly from a proscribed 

source, such as the offeror, the target, or persons acting on their behalf. Rule 14e-3 does 

not require any showing of a breach of duty. 

Remedies

The SEC can seek “disgorgement” of ill-gotten gain pursuant to the court’s 

equitable powers in federal court cases and is authorized to seek disgorgement by statute 

in administrative and cease-and-desist proceedings.198 Disgorgement is a remedy that is 

designed to deprive a wrongdoer of ill-gotten gains.199 It extends to the amount, with 

interest, by which a defendant profited from his wrongdoing,200 which in some cases 

differs from the amount of victim losses. In the Sarbanes-Oxley Act of 2002, Congress 

also provided that courts, in actions brought by the SEC, may order “any equitable relief 

that may be appropriate or necessary for the benefit of investors.”201 

The SEC can also obtain civil monetary penalties for violations. Section 308(a) 

of the Sarbanes-Oxley Act of 2002 authorizes the SEC to add civil penalty amounts to 

any disgorgement fund for distribution to harmed investors.202 

2. CFTC Regulatory Framework 

Manipulation

A core purpose of the Commodity Securities Exchange Act is “to deter and 

prevent price manipulation or any other disruptions to market integrity.”203 The CEA 

prohibits manipulation and attempts to manipulate price in both the commodity futures 

markets and commodity cash markets, together with cornering or attempting to corner 

any such commodity.204 

Three statutory provisions (other than Section 22, which deals with private 

actions) authorize suit in both futures and cash market manipulation cases: Sections 6(c), 

6(d) and 9(a)(2).205 A person violates Sections 6(c) and 6(d) if he or she “is 

manipulating or attempting to manipulate or has manipulated or attempted to manipulate 

the market price of any commodity, in interstate commerce, or for future delivery on or 

 

198 See, e.g., Section 8A of the Securities Act, 15 U.S.C. 77h-1, and Sections 21B and 21C of the 

Securities Exchange Act, 15 U.S.C. 78u-2 and 15 U.S.C. 78u-3, respectively. 

199 SEC v. Blavin, 760 F.2d 706 (6th Cir. 1985). 

200 SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1985). 

201 Section 21(d)(5) of the Securities Exchange Act, 15 U.S.C. 78u(d)(5). 

202 15 U.S.C. 7246(a). 

203 CEA Section 3(b), 7 U.S.C. § 5(b). 

204 CEA Section 9(a)(2), 7 U.S.C. § 13(a)(2). 

205 7 U.S.C. 9, 13b, and 13(a)(2). 

56
subject to the rules of any registered entity.” Similarly, Section 9(a)(2) provides that it is 

unlawful for “[a]ny person to manipulate or attempt to manipulate the price of any 

commodity in interstate commerce, or for future delivery on or subject to the rules of any 

registered entity, or to corner or attempt to corner any such commodity.” 

The element of intent often distinguishes manipulative from non-manipulative 

trading.206 A core concept underlying this element is “an intentional exaction of a price 

determined by forces other than supply and demand,”207 or conduct “with the purpose or 

conscious object of causing or effecting a price or price trend in the market that did not 

reflect the legitimate forces of supply and demand.”208 While “knowledge of relevant 

market conditions is probative of intent, it is not necessary to prove that the accused knew 

to any particular degree of certainty that his actions would create an artificial price.” It is 

thus sufficient “to present evidence from which it may reasonably be inferred that the 

accused ‘consciously desire[d] that result, whatever the likelihood of that result 

happening from his conduct.’”209 

Separate from the general anti-manipulation provisions under the CEA, specific 

manipulative practices are prohibited in both the statute and in the CFTC’s regulations. 

For example, the CEA prohibits knowingly false or misleading reports “concerning crop 

or market information or conditions that affect or tend to affect the price of any 

commodity in interstate commerce.”210 The CEA also makes it a violation to 

“knowingly” exceed the limits set by either a contract market or the Commission “on the 

amount of trading which may be done or positions which may be held by any person 

under contracts of sale of any commodity for future delivery.”211 The purpose of position 

limit rules is to prevent market manipulation, price instability, and market disorder as 

futures contracts reach their expiration date.212 The CEA prohibits a person from 

offering to enter into, entering into or confirming the execution of any transaction that is, 

is of the character of, or is commonly known to the trade as, a “wash sale” or 

“accommodation trade”; is a fictitious sale; or is used to cause any price to be report

registered, or recorded that is not a true and bona fide price.

ed, 

using any false writing or document knowing that it contains any false, fictitious, or 

213 Finally, the statute 

prohibits willful false, fictitious, or fraudulent statements or representations, or making or

 

206 In re Indiana Farm Bureau, ¶ 21,796 at 27,282 (stating that “intent is the essence of 

manipulation...”); In re Hohenberg Bros. Co., ¶ 20,271 at 21,447. 

207 Frey, 931 F.2d at 1175. 

208 Indiana Farm Bureau, ¶ 21,796 at 27,283; see also Volkart Bros. v. Inc. v. Freeman, 311 F.2d at 

58 (“a purpose to create prices not responsive to the forces of supply and demand; the conduct 

must be ‘calculated to produce a price distortion’”). 

209 Indiana Farm Bureau, ¶ 21,796 at 27,283, quoting U.S. v. United States Gypsum Co., 438 U.S. at 

445. 

210 CEA Section 9(a)(2), 7 U.S.C. 13(a)(2). 

211 CEA Section 4a(e), 7 U.S.C. 6a(e). 

212 See Saberi v. CFTC, 488 F.3d 1207 (9th Cir. 2007). 

213 CEA Section 4c(a), 7 U.S.C. 6c(a). 

57
fraudulent statement or entry to a registered entity, board of trade, or futures 

association.214

Insider Trading

Trading on material non-public information is prohibited under the CEA, but 

only with respect to three general categories of persons. First, the statute prohibits CFTC 

Commissioners, employees and agents from trading on non-public information.215 The 

statute similarly prohibits Commissioners and CFTC employees from delivering nonpublic information to third parties with the intent to assist them in conducting trades; the 

CEA also forbids individuals who receive this information from trading on it.216 Finally, 

the CEA prohibits employees and board/committee members of a board of trade, 

registered entity, or registered futures association, from willfully and knowingly trading 

for their own or on behalf of any other account, futures or options contracts on the basis 

of any material non-public information obtained through special access related to the 

performance of their duties.217 These felony violations are punishable by fines of up to 

$500,000, plus the amount of any profits realized from the trading. In the case of 

criminal prosecutions, there is a maximum sentence of five (5) years. 

3. Analysis of SEC/CFTC Regulatory Frameworks 

Manipulation

Manipulation is unlawful under both the securities and futures laws. While there 

is some overlap in the concepts of manipulation as they relate to the securities and futures 

markets, panelists observed that the fact patterns of manipulation cases often differ 

between the two markets. In securities markets, for example, attempts to “corner” a 

market in a particular stock (or to “squeeze” the shorts) are relatively rare; the more 

common manipulation case in the securities field is the “pump and dump” scheme, which 

involves dissemination of false information to raise the price of a stock. 

In futures markets, corners, squeezes, and the use of manipulative trading 

practices are of primary concern. As a result, some panelists noted that the standards that 

would satisfy a finding of scienter in the making of a false statement under the securities 

laws (e.g., “recklessness” under Rule 10b-5) may not fit precisely with all varieties of 

manipulation in the futures markets.218 

 

214 CEA Section 9(a)(4), 7 U.S.C. 13(a)(4). 

215 CEA Section 9(c), 7 U.S.C. 13(c). 

216 CEA Section 9(d), 7 U.S.C. 13(d). 

217 CEA Section 9(e), 7 U.S.C. 13(e). 

218 See Testimony of John Coffee, Professor, Columbia University School of Law, September 3, 2009 

(“Coffee Testimony”); and Short Testimony, supra note 93. 

58
Some commentators stated that the CEA’s manipulation standard itself has been 

working well, and cited to the CFTC’s enforcement successes.219 Others, however, noted 

that the existence of financial derivatives under the jurisdiction of the CFTC, which 

would expand significantly if and when the OTC market comes under the agency’s 

jurisdiction, made it critical to seek appropriate statutory changes to enhance the CFTC’s 

authority.220 It was noted that a vigorous and coordinated approach to enforcement by 

both agencies can help prevent jurisdictional overlap from creating enforcement gaps and 

the potential for regulatory arbitrage.221 

Some panelists proposed that the agencies form a staff-level joint task force to 

ensure comprehensive and consistent fraud and manipulation detection across the two 

marketplaces.222 More specific to the futures markets, one speaker advocated adoption of 

suggestions made by Professor Jerry Markham in a 1991 article.223 The suggestions in 

that article included a combination of statutory changes and active market surveillance, 

which would include the ability to take action to prevent market congestion.224

Insider Trading

As a number of panelists observed, the approaches of the securities laws and the 

futures laws diverge on the issue of insider trading.225 One of the cornerstones of the 

market integrity provisions of the securities laws is the prohibition on insider trading. 

The CEA generally contains no such ban (except for the categories of persons 

enumerated above). The difference between the statutes is attributable in part to the 

historical functions of the futures markets to permit hedgers to protect themselves against 

risks to their commodity positions based on their own knowledge of those positions. 

 

219 See, e.g., FIA Comment Letter, supra note 59. 

220 See, e.g., Silvers Testimony, supra note 59. 

221 See Raisler Testimony, supra note 52; Silvers Testimony, supra note 59; and Testimony of Daniel 

Roth, President and Chief Executive Officer, National Futures Association, September 3, 2009 

(“Roth Testimony”). 

222 See Silvers Testimony, supra note 59; and Testimony of Richard Owens, Partner, Latham & 

Watkins, September 3, 2009 (“Owens Testimony”); see also Transcript of Oral Testimony of 

William McLucas, Partner, Wilmer Cutler Pickering Hale and Dorr, September 3, 2009 

(“McLucas”) and John Coffee, Professor, Columbia University School of Law, September 3, 

2009, supra note 3. 

223 See Coffee Testimony, supra note 218. 

224 Unlike the SEC, the CFTC possesses the authority to set position limits with respect to commodity 

futures contracts. The suggestion made in Professor Markham’s article was proactive use of the 

CFTC’s authority to set position limits as a means of complementing enforcement against 

manipulation. See Jerry W. Markham, Manipulation of Commodity Futures Prices – The 

Unprosecutable Crime, 8 Yale J. on Reg. 281 (1991). 

225 See Brodsky Testimony, supra note 52; Nazareth Testimony, supra note 141; Raisler Testimony, 

supra note 52; Short Testimony, supra note 93; Silvers Testimony, supra note 59; Coffee 

Testimony, supra note 218; and Young Testimony, supra at 143; see also Newedge Comment 

Letter, supra note 143; FIA Comment Letter, supra note 59; and Options Exchanges Comment 

Letter, supra note 52. 

59
Thus, unlike securities cases brought under the classical theory of insider trading, where 

trading while in possession of material nonpublic company information by management 

insiders is in breach of a fiduciary obligation to shareholders, use of inside information 

by a company to hedge its risks is integral to futures markets and does not give rise to 

similar concerns. 

Accordingly, a number of panelists and commentators noted that insider trading 

laws should not be extended to customers engaging in bona fide futures hedging 

activities.226 However, panelists and commentators did state that some extension of 

insider trading laws would be appropriate.227 Specifically, the CEA prohibits CFTC and 

futures SRO officials and staff from using for their own trading purposes any nonpublic 

information they receive through their official duties. The CEA also prohibits CFTC and 

SRO personnel from tipping off anyone about trading opportunities based on nonpublic 

information received in their official capacities. According to these panelists, these 

prohibitions should be extended to all other SROs (like securities exchanges), other U.S. 

government agencies and departments, and members of Congress and their staffs.228

Panelists had mixed views on the potential application of the misappropriation 

theory of insider trading to the futures markets.229 One commentator noted that theft or a 

breach of ethical duties for personal enrichment by professionals of any kind is always 

wrong, but added that the CFTC and the SROs have ample authority under current law to 

prosecute employees of regulated intermediaries who breach an intermediary’s duties to 

its customers by purloining a customer’s trading plans or strategy and trading ahead for 

personal gain.230 Other commentators stated that the misappropriation theory could 

apply to professionals and certain other categories of individuals who have access to 

material, nonpublic information relating to the futures markets and misuse that 

information for their own tradin 231 g purposes.

 

226 See Short Testimony, supra note 93; and Young Testimony, supra note 143. See also FIA 

Comment Letter, supra note 59; and Newedge Comment Letter, supra note 143. 

227 See Brodsky Testimony, supra note 52; Nazareth Testimony, supra note 141; Silvers Testimony, 

supra note 59; and Coffee Testimony, supra note 218. See also Newedge Comment Letter, supra

note 143; FIA Comment Letter, supra note 59; and Options Exchanges Comment Letter, supra

note 52. 

228 See FIA Comment Letter, supra note 59 and Newedge Comment Letter, supra note 143 (“We 

believe that insider trading laws should not be applied to customers engaging in bona fide futures 

hedging activities. However, we do believe that the various evolving theories of misappropriation 

should be applied to professionals and certain other categories of individuals who have access to 

material, nonpublic information relating to the futures markets but who are not themselves 

conducting hedging activities.”). 

229 See Brodsky Testimony, supra note 52; Coffee Testimony, supra note 218; Nazareth Testimony, 

supra note 141; Short Testimony, supra note 93; Silvers Testimony supra note 59; Young 

Testimony, supra note 143; see also FIA Comment Letter, supra note 59; Newedge Comment 

Letter, supra note 143; and Options Exchanges Comment Letter, supra note 52.

230 See FIA Comment Letter, supra note 59. 

231 See Coffee Testimony, supra note 218; see also Newedge Comment Letter, supra note 143; FIA 

Comment Letter, supra note 59. 

60
In terms of potential enforcement remedies, some observed that, unlike the CFTC, 

the SEC lacks statutory authority to seek restitution.232 The SEC can seek disgorgement 

of ill-gotten gains in court and in administrative and cease-and-desist proceedings and 

distribute those funds to victims of fraud. When penalties are also sought along with 

disgorgement, those penalties may also be distributed to victims. Disgorgement, 

however, is measured by reference to the wrongdoer’s ill-gotten gain, not the victim’s 

losses. 

Another difference between the two regulatory frameworks includes that the 

CFTC’s specific statutory authority for aiding and abetting violations. The SEC has 

specific statutory authority for aiding and abetting under the Securities Exchange Act and 

the Advisers Act but not under the Securities Act or the Investment Company Act. 

F. Obligations to Investors and Customers 

The securities and futures regulatory regimes each impose customer protection 

obligations and standards to govern the conduct of financial intermediaries that provide 

advisory services to customers. These standards, however, are varied, and differ between 

financial advisers that operate under the two regulatory regimes. Thus, while the same 

customer may be purchasing both securities and futures products from these 

intermediaries for the same overall trading and investment purposes, the advisers are 

nevertheless subject to different customer protection requirements depending on the 

nature of the product at issue. 

 1. SEC Regulatory Framework 

Customer Protection

Broker-dealers are subject to a comprehensive set of Commission and SRO 

requirements that are designed to promote business conduct that would facilitate fair, 

orderly and efficient markets and protect investors from abusive practices. 

Broker-dealers are required to deal fairly with their customers. This duty is 

derived from the anti-fraud provisions of the federal securities laws.233 Under the socalled “shingle” theory, by virtue of engaging in the brokerage profession, a brokerdealer makes an implicit representation to those persons with whom it transacts business 

that it will deal fairly with them, consistent with the standards of the profession. 234 This 

 

232 See Owens Testimony, supra note 222. 

233 See SEC, Report of the Special Study of Securities Markets of the Securities and Exchange 

Commission, H.R. Doc. No. 88-95, at 238 (1st Sess. 1963) (“Report of Special Study”); Richard 

N. Cea, 44 S.E.C. 8, 18 (1969) (involving excessive trading and recommendations of speculative 

securities without a reasonable basis); Mac Robbins & Co., 41 S.E.C. 116 (1962) (involving 

“boiler-room” sales tactics of speculative securities).

234 See, e.g., Charles Hughes & Co. v. SEC, 139 F.2d 434 (2d Cir. 1943), cert. denied, 321 U.S. 786 

(1944) (although not expressly referencing the “shingle theory,” held that broker-dealer was under 

61
essential representation proscribes certain conduct, which has been articulated by the 

Commission and courts over time through interpretive statements and enforcement 

actions. 235 

Broker-dealers also are required under SRO rules to observe high standards of 

commercial honor and just and equitable principles of trade.236 This includes having a 

reasonable basis for recommendations in light of customer financial situation to the 

extent known to the broker (suitability), engaging in fair and balanced communications 

with the public, providing timely and adequate confirmation of transactions, providing 

account statement disclosures, disclosing conflicts of interest, receiving fair 

compensation both in agency and principal transactions, and giving customers the 

opportunity for redress of disputes through arbitration.237 The Commission’s and the 

SROs’ books and records rules help to ensure that regulators can access information 

regarding broker-dealer trading activity, to examine for compliance with sales practice 

obligations. 

Moreover, a broker-dealer has a legal duty to seek to obtain best execution of 

customer orders.238 This duty derives from common law, and is incorporated in SRO 

rules and, through judicial and Commission decisions, the anti-fraud provisions of the 

federal securities laws.239 The duty of best execution requires broker-dealers to execute 

 a “special duty, in view of its expert knowledge and proffered advice, not to take advantage of its 

customers’ ignorance of market conditions”; failure to disclose substantial mark-ups on OTC 

securities sold to unsophisticated customers thus constituted fraud). 

235 See supra note 233. 

236 See FINRA Rule 2010 (“Standards of Commercial Honor and Principles of Trade”). FINRA rules 

also generally require broker-dealer compensation for services to be fair and reasonable taking 

into consideration all relevant circumstances. See NASD (FINRA) Rule 2440. FINRA members 

are also prohibited from charging unfair or unreasonable underwriting compensation in connection 

with the distribution of securities. See FINRA Rule 5110(c). 

237 See, e.g., NASD (FINRA) Rule 2310 (“Recommendations to Customers (Suitability)”); NASD 

(FINRA) Rule 2010(d) (“Communications with the Public”); Securities Exchange Act Rule 10b10 (confirmation of transactions); MSRB Rule G-15 (confirmation of transactions); NASD Rule 

2230 (“Confirmations”); Securities Exchange Act Rule 15c3-2 (account statements); NASD 

(FINRA) Rules 2340 (“Customer Account Statements”); NASD (FINRA) Rule 2720 (“Public 

Offerings of Securities With Conflicts of Interest”); NASD (FINRA) Rule 3040 (“Private 

Securities Transactions of an Associated Person”); NASD (FINRA) Rule 2440 (“Fair Prices and 

Commissions”); FINRA Rule 5110(c); FINRA IM 12000. See also, infra note 241 for a 

discussion of the information a broker-dealer must obtain prior to executing a transaction 

recommended to a non-institutional customer. 

238 See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269-270 (3d Cir.), 

cert. denied, 525 U.S. 811 (1998); Certain Market Making Activities on Nasdaq, Securities 

Exchange Act Release No. 40900 (Jan. 11, 1999) (settled case) (citing Sinclair v. SEC, 444 F.2d 

399 (2d. Cir. 1971); In re Arleen Hughes, 27 S.E.C 629, 636 (1948), aff’d sub nom., Hughes v. 

SEC, 174 F.2d 969 (D.C. Cir. 1949). See also Order Execution Obligations, Securities Exchange 

Act Release No. 37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996) (“Order Handling Rules 

Release”). See also Regulation NMS, Securities Exchange Act Release No. 51808 (June 9, 2005), 

70 FR 37496 (June 29, 2005) (“Regulation NMS Release”). 

239 See Regulation NMS Release, supra note 238. 

62
customers’ trades at the most favorable terms reasonably available under the 

circumstances.240 

As noted above, a central aspect of a broker-dealer’s duty of fair dealing is the 

suitability obligation. The concept of suitability appears in specific SRO rules241 and has 

also been interpreted as an obligation under the anti-fraud provisions of the federal 

securities laws.242 In contrast to the concept of suitability under the federal securities 

laws, which is based in fraud, the SRO rules are grounded in concepts of professionalism, 

fair dealing, and just and equitable principles of trade. 

The anti-fraud provisions of the federal securities laws and the implied obligation 

of fair dealing thereunder prohibit broker-dealers from, among other things, making 

unsuitable recommendations and require broker-dealers to investigate an issuer before 

recommending the issuer’s securities to a customer.243 The fair dealing obligation also 

requires the broker-dealer to reasonably believe that its securities recommendations are 

suitable for its customer in light of the customer’s financial needs, objectives and 

circumstances (customer-specific suitability).244 

Like all other actions for violating anti-fraud provisions, the SEC must establish 

that the broker’s unsuitable recommendation was made with scienter (i.e. with a mental 

state embracing intent to deceive, manipulate or defraud). Scienter can be knowing 

misconduct as well as reckless misconduct: conduct that is “at the least, conduct which is 

‘highly unreasonable’ and which represents ‘an extreme departure from the standards of 

ordinary care...to the extent that the danger was either known to the defendant or so 

 

240 Id.

241 NASD members’ suitability obligations are set out in NASD Rule 2310, “Recommendations to 

Customers (Suitability),” and NASD Interpretive Materials (“IMs”), specifically, IM 2310-1 

(“Possible Application of SEC Rules 15g-1 through 15g-9”), 2310-2 (“Fair Dealing with 

Customers”), and 2310-3 (“Suitability Obligations to Institutional Customers”), as applicable. 

Suitability obligations of brokers, dealers, and municipal securities dealers in connection with 

transactions in municipal securities are set out in MSRB Rule G-19. Aside from the area of 

options (where there is a specific suitability requirement under NYSE Rule 723), the exchanges 

address suitability violations under rules imposing a duty of due diligence (e.g., Incorporated 

NYSE Rule 405 (“Diligence as to Accounts”, also known as the “Know Your Customer Rule”)). 

Specifically, NASD Rule 2310 requires that members “have reasonable grounds for believing that 

the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by 

such customer as to his other security holdings and as to his financial situation and needs.” In 

addition, before executing a recommended transaction for a non-institutional customer, members 

must “make reasonable efforts to obtain information concerning: (1) the customer's financial 

status; (2) the customer's tax status; (3) the customer's investment objectives; and (4) such other 

information used or considered to be reasonable by such member or registered representative in 

making recommendations to the customer.” 

242 See infra note 243. 

243 See Hanley v. SEC, 415 F.2d 589, 596 (2d Cir. 1969); see also Securities Exchange Act Release 

No. 26100, at n. 75 (Sept. 22, 1988), 53 Fed. Reg. 37778 (Sept. 28, 1988). 

244 See Richard N. Cea, Securities Exchange Act Release No. 8662 (Aug. 6, 1969); F.J. Kaufman and 

Co., Securities Exchange Act Release No. 27535 (Dec. 13, 1989). 

63
obvious that the defendant must have been aware of it.’” 245 In contrast to the federal 

anti-fraud provisions, FINRA and other SRO rules do not require proof of scienter to 

establish a suitability violation primarily enforced by the SROs.246 As noted above, 

while the concept of suitability under the federal securities laws is grounded in fraud, the 

SRO rules are grounded in concepts of professionalism, fair dealing, and just and 

equitable principles of trade, which gives SROs greater latitude in dealing with suitability 

issues.247 A violation of the suitability requirements as interpreted under the anti-fraud 

provisions can also give rise to a private cause of action and civil liability under Section 

10(b) of the Securities Exchange Act and Rule 10b-5 thereunder.248 Although the SROs

suitability rules do not similarly give rise to a private cause of action, violations of the 

rules can be addressed through arbitration pro

’ 

ceedings. 

 

In general, there are two approaches to suitability that have developed under both 

U.S. case law and FINRA and SEC enforcement actions – “reasonable basis” suitability 

and “customer-specific” suitability. Under reasonable basis suitability, a broker-dealer 

has an affirmative duty to have an “adequate and reasonable basis” for any 

recommendation that it makes.249 A broker-dealer, therefore, has the obligation to 

245 See Ernst & Ernst v. Hochfelder, 425 US 185 (1976), and Rolf v. Blyth, Eastman Dillon & Co., 

Inc., 570 F.2d 38, 47 (2d Cir. 1978) (holding that scienter can be reckless conduct). 

246 See, e.g., In re Jack H. Stein, Securities Exchange Act Release No. 47335 (Feb. 10, 2003) 

(“Scienter is not an element for finding a violation of the NASD suitability rule.”); In re John M. 

Reynolds, Securities Exchange Act Release No. 30036 (Dec. 4, 1991) (scienter unnecessary to 

establish excessive trading under NASD rules). 

247 When adopted, the SRO rules, particularly the NASD rule, were regarded primarily as ethical 

rules, stemming from concepts of “fair dealing” and notions of ‘‘just and equitable principles of 

trade.” Robert Mundheim, Professional Responsibilities of Broker-Dealers: The Suitability 

Doctrine, 1965 Duke L.J. 445-47; Stuart D. Root, Suitability—The Sophisticated Investor—and 

Modern Portfolio Management, 1991 Colum. Bus. L. Rev. 287, 290-300. 

248 See, e.g., Brown v. E.F. Hutton Group, Inc., 991 F.2d 1020, 1031 (2d Cir. 1993); O’Connor v. 

R.F. Lafferty & Co., 965 F.2d 893 (10th Cir. 1992); Vucinich v. Paine Webber, Jackson & Curtis, 

Inc., 803 F.2d 454 (9th Cir. 1986). 

249 See F.J. Kaufman and Co., 50 S.E.C. 164, 1989 WL 259961 (1989), in which a broker-dealer 

recommended a strategy that combined writing covered call options on a security along with 

margin purchases. The strategy was found to be unsuitable because it was an objectively inferior 

strategy: it was always more profitable for the customer simply to make margin purchases of the 

underlying stock. The broker’s recommendations violated suitability requirements because the 

broker did not have a reasonable basis for the strategy he recommended, wholly apart from any 

considerations relating to the particular customer’s portfolio. See also Hanly v. SEC, 415 F.2d 

589, 597 (2d Cir. 1969) (upholding Commission bar of individuals for failing to disclose “known 

or reasonably ascertainable adverse information” relating to the issuer, and holding that brokers 

are under a duty to investigate issuers and “cannot recommend a security unless there is an 

adequate and reasonable basis for such recommendation”); In re Walston & Co., Rel. No. 34-

8165, 43 S.E.C. 508, 1967 WL 87755 (1967) (broker lacked adequate basis for recommending 

municipal bonds whose issuer had no reasonable ability to service the bonds); Michael F. Siegel, 

2007 NASD Discip. LEXIS 20 (NAC May 11, 2007) (finding that registered representative lacked 

any reasonable basis for recommending securities because he did not have sufficient 

understanding of what he was recommending and his testimony demonstrated that the securities 

recommended were not suitable for any investor). 

64
investigate and have adequate information about the security it is recommending. Under 

customer-specific suitability, a broker-dealer must make recommendations based on a 

customer’s financial situation and needs as well as other security holdings, to the extent 

known.250 This requirement has been construed to impose a duty of inquiry on brokerdealers to obtain relevant information from customers relating to their financial 

situations251 and to keep such information current. 252 

In addition, more specific suitability, disclosure, and due diligence requirements 

apply to certain other securities products as well, including among other things penny 

stocks, options, mutual fund share classes, debt securities and bond funds, municipal 

securities, hedge funds, variable insurance products, and non-traditional products, such as 

structured products and leveraged and inverse exchange-traded funds. For example, 

certain broker-dealers selling penny stocks must comply with stringent suitability and 

disclosure obligations.253 

 

250 See Richard N. Cea, Securities Exchange Act Release No. 8662 (Aug. 6, 1969); F.J. Kaufman and 

Co., Securities Exchange Act Release No. 27535 (Dec. 13, 1989). See also, In re Luis Miguel 

Cespedes, Securities Exchange Act Release No. 59404 (February 13, 2009) finding that a 

registered representative recommendations that customers invest with significant concentrations in 

the technology sector, often using margin to purchase the securities, were unsuitable in light of the 

customers’ ages, financial situations and needs, investment experience, and personal 

circumstances of the customers); In re Maughan, NYSE Disc. Dec., 2004 WL 1801597 (June 30, 

2004) (purchases of aggressive and speculative technology, biotech, and internet stocks on margin, 

in addition to the frequency of trading and concentration in these stocks, unsuitable in view of 65-

year-old retiree’s age, investment objectives, and financial circumstances); Dep’t of Enforcement 

v. Stein, NASD Disc. Dec., 2001 WL 156957 (2001) (strategy of investing nearly 90% of 

customer’s funds in oil, gas, and precious metals stocks was qualitatively and quantitatively 

unsuitable for 56-year-old widow with annual income of $25,000 and net worth of $100,000, due 

to the speculative nature of the securities recommended, concentration of speculative securities 

placed in widow’s portfolio, the use of margin trading, and the excessive number of trades in the 

account); In re Glenzer, NYSE Disc. Dec., 1994 WL 721660 (Oct. 13, 1994) (finding transactions 

unsuitable in violation of NYSE Rule 476(a)(6) when a registered representative purchased high 

yield funds and engaged in aggressive option trading in the account of an elderly couple whose 

stated investment objective was “safety of principal and income” and who relied upon the 

registered representative’s recommendations due to a lack of financial sophistication). 

251 See NASD (FINRA) Rule 2310. 

Prior to the execution of a transaction recommended to a non-institutional customer, 

other than transactions with customers where investments are limited to money market 

mutual funds, a member shall make reasonable efforts to obtain information concerning: 

(1) the customer's financial status; (2) the customer's tax status; (3) the customer's 

investment objectives; and (4) such other information used or considered to be reasonable 

by such member or registered representative in making recommendations to the 

customer. 

Id. See also Gerald M. Greenberg, 40 S.E.C. 133 (1960) (holding that a broker cannot avoid the 

duty to make suitable recommendations simply by avoiding knowledge of the customer’s 

financial situation entirely). 

Securities Exchange Act Rule 17a-3(a)(17)(i) requires, subject to certain exceptions, brokerdealers to update customer records, including investment objectives, at least every 36 months. 

253 See Securities Exchange Act Rule 15g-9, 17 CFR 240.15g-9. 

65
In addition, SEC Rule 9b-1 under the Securities Exchange Act254 establishes a 

disclosure procedure for options markets to satisfy the information needs of investors in 

standardized options, foster better investor understanding of standardized options trading, 

and reduce the costs of issuer compliance with the registration requirements of the 

Securities Act of 1933. 255 Among other things, SEC Rule 9b-1 obligates an options 

market to prepare and file with the SEC an options disclosure document (“ODD”) that 

provides certain basic information about the options classes covered by the ODD.256 

Further, Rule 9b-1(d) provides that no broker or dealer shall accept an options order from 

a customer, or approve the customer’s account for the trading of such options, unless the 

broker or dealer furnishes or has furnished to the customer the options disclosure 

document.257

Activities such as excessive trading, churning, and switching by themselves also 

can violate obligations under the SRO suitability rules and federal anti-fraud provisions. 

Moreover, considerations related to suitability may be raised with regard to specific types 

of accounts such as discretionary accounts and day trading accounts. 

A broker-dealer’s suitability obligations are different for institutional customers 

than for non-institutional customers. NASD (FINRA) IM-2310-3 sets out factors that 

are relevant to the scope of a broker-dealer’s suitability obligations in making 

recommendations to an institutional customer.258 A broker-dealer fulfills its obligation to 

determine that a recommendation is suitable for an institutional customer if it has 

reasonable grounds for concluding that the institutional customer is making independent 

investment decisions and is capable of independently evaluating investment risk. 

Fiduciary Obligations

 

254 17 CFR 240.9b-1. 

255 See Securities Exchange Act Release Nos. 19055 (September 16, 1982), 47 FR 41950 (September 

23, 1982) (adopting Rule 9b-1); 23115 (April 10, 1986), 51 FR 14980 (April 22, 2986) (S7-41-

85); and 43461 (October 19, 2000), 65 FR 64137 (October 26, 2000) (adopting amendments to 

Rule 9b-1) (S7-18-98); see also 17 CFR 230.238 (exempting from application of the Securities 

Act standardized options issued by registered clearing agencies and traded on a registered national 

securities exchange or registered national securities association); 17 CFR 240.12a-9 (exempting 

from the registration requirements of the Securities Exchange Act standardized options issued by 

registered clearing agencies and traded on a registered national securities exchange or registered 

national securities association); and Securities Act Release No. 8171 and Securities Exchange Act 

Release No. 47082 (December 23, 2002), 68 FR 188 (January 2, 2003) (S7-29-02) (adopting 17 

CFR 230.238, 17 CFR 240.12a-9, and amending 17 CFR 240.9b-1and 17 CFR 240.12h-1). 

256 17 CFR 240.9b-1(c). 

257 17 CFR 240.9b-1(d). 

258 IM-2310-3 states that “for purposes of this interpretation, an institutional customer shall be any 

entity other than a natural person.” Furthermore, while the interpretation is potentially applicable 

to any institutional customer, the guidance is more appropriately applied to an institutional 

customer with at least $10 million invested in securities in the aggregate in its portfolio and/or 

under management. IM-2310-3. 

66
A broker-dealer may have a fiduciary duty under certain circumstances, at times 

under state common law, which varies by state.259 This has led courts to reach different 

conclusions with respect to the facts that create a fiduciary relationship between a brokerdealer and its customer. Generally, courts have held that broker-dealers that exercise 

discretion or control over customer assets, or have a relationship of trust and confidence 

with their customers, owe customers a broad fiduciary duty, similar to that imposed on 

investment advisers.260 Thus, even for nondiscretionary accounts, broker-dealers may 

have fiduciary duties with respect to the limited matters entrusted to their discretion.261 

Other intermediaries under the SEC’s regulatory regime, namely investment 

advisers, are considered fiduciaries. The Advisers Act262 broadly prohibits advisers from 

defrauding their clients, which the Supreme Court has construed to impose on them a 

fiduciary duty to their clients. That fiduciary duty, which is a central proposition of the 

Advisers Act, requires investment advisers to act in the best interest of clients and to 

avoid conflicts with clients or, if conflicts cannot be avoided, to provide appropriate 

disclosure of the conflicts and to obtain client consent. Much of the Advisers Act is 

designed to enforce that fiduciary duty. Investment advisers, unless exempt, are required 

to register with the SEC (or the states). All registered investment advisers must, among 

other things deliver a brochure to clients and prospective clients containing information 

about their conflicts, fees and business practices; maintain books and records; adopt and 

implement effective compliance controls administered by a chief compliance officer; 

 

259 See Davis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 906 F.2d 1206, 1215 (8th Cir. 1990). 

260 See, e.g., U.S. v. Skelly, 442 F.3d 94, 98 (2d Cir. 2006) (fiduciary duty found “most commonly” 

where “a broker has discretionary authority over the customer's account”); United States v. Szur, 

289 F. 3d 200, 211 (2d Cir. 2002) (“Although it is true that there ‘is no general fiduciary duty 

inherent in an ordinary broker/customer relationship,’ a relationship of trust and confidence does 

exist between a broker and a customer with respect to those matters that have been entrusted to the 

broker.”) (citations omitted); Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F. Supp. 

951, 953-954 (E.D. Mich. 1978), aff’d, 647 F.2d 165 (6th Cir. 1981) (recognizing that a broker 

who has de facto control over non-discretionary account generally owes customer duties of a 

fiduciary nature); Assoc. Randall Bank v. Griffin, Kubik, Stephens & Thompson, Inc., 3 F.3d 208, 

212 (7th Cir. 1993) (broker is not fiduciary “with respect to accounts over which the customer has 

the final say”); MidAmerica Fed. Savings & Loan Ass’n v. Shearson/American Express Inc., 886 

F.2d 1249, 1257 (10th Cir. 1989) (fiduciary relationship exists under Oklahoma law “where trust 

and confidence are placed by one person in the integrity and fidelity of another”); Arleen W. 

Hughes, Exch. Act Rel. No. 4048, 27 S.E.C. 629 (Feb. 18, 1948) (Commission Opinion), aff’d sub 

nom. Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949) (broker-dealer is fiduciary where she created 

relationship of trust and confidence with her customers); Paine Webber, Jackson & Curtis, Inc. v. 

Adams, 718 P.2d 508 (Colo. 1986); Cheryl Goss Weiss, A Review of the Historic Foundations of 

Broker-Dealer Liability for Breach of Fiduciary Duty, 23 J. Corp. L. 65 (1997). Restatement 

(Second) of Torts § 874 cmt. a (1979) (“A fiduciary relation exists between two persons when one 

of them is under a duty to act for or to give advice for the benefit of another upon matters within 

the scope of the relation.”). 

261 See Press v. Chemical Inv. Servs. Corp., 166 F.3d 529 (2d Cir. 1999) (“the fiduciary relationship 

that arises between a broker and a customer as a matter of New York common law is limited to 

matters relevant to the affairs entrusted to the broker.”). 

262 See Advisers Act, supra note 177. 

67
seek best execution of clients’ transactions; provide only suitable investment advice to 

their clients; and establish, maintain and enforce written policies and procedures to 

prevent the misuse of material, nonpublic information. Registered investment advisers 

that have custody of client assets must take prescribed steps to protect those assets. In 

addition, the Advisers Act limits the ability of investment advisers to engage in principal 

transactions with clients (without disclosure and consent before each transaction), or to 

charge them a performance fee (unless an exemption is available). 

 Even in those instances where a broker-dealer is not subject to a fiduciary duty, it 

is subject to a host of regulatory requirements, as explained above. 

 2. CFTC Regulatory Framework 

Customer Protection

Futures and options contracts typically are highly volatile and risky instruments. 

In the regulatory framework administered by the CFTC, customer protection is furthered 

by a combination of disclosure and “know your customer” requirements. 

CFTC regulations set forth requirements for futures and options risk disclosure 

statements,263 and they require disclosure, including similarly specified risk disclosure 

statements, to pool participants and advisory clients. In 1985, the National Futures 

Association’s (“NFA”) Board of Directors adopted a rule premised on the notion that the 

customer ultimately is in the best position to determine the suitability of commodity 

interest trading if it receives an understandable disclosure of risks that apply to futures 

trading from a professional who “knows the customer.”264 The rules require industry 

professionals to evaluate customer transactions on a customer-by-customer basis rather 

than on a contract-by-contract or transaction-by-transaction basis (e.g., not an evaluation 

that the purchase of heating oil futures is suitable for the customer, but the purchase of 

Treasury futures is not). NFA’s know-your-customer rule requires NFA Members to 

obtain extensive information about each customer’s experience, income, net worth and 

age before opening an account. Based on that information, the Member must make a 

judgment as to the amount of disclosure that is adequate and must decide whether the 

customer requires additional risk disclosures beyond the standard disclosures required by 

CFTC regulations.265 

Fiduciary Obligations

There are no duties explicitly defined as “fiduciary duties” under the CEA or the 

CFTC’s regulations. The CFTC’s case law, however, imposes a range of duties upon 

intermediaries consistent with their status as persons acting for or on behalf of customers, 

 

263 CFTC Regulations 1.55 and 33.7, 17 CFR 1.55 and 33.7. 

264 NFA Compliance Rule 2-30, Customer Information and Risk Disclosure. 

265 See generally Roth Testimony, supra, note 221. 

68
and the Commission’s Part 166 Customer Protection Rules266 function as fiduciary 

regulations. 

The CFTC has held that an FCM has an ongoing general duty to disclose material 

information to a customer, whether the customer asks for it or not.267 A FCM also has a 

fiduciary duty to perform any special tasks requested by a customer, unless he expressly 

disavows the duty.268 CFTC Regulation 166.2269 prohibits unauthorized trading, and 

Regulation 166.3270 requires CFTC registrants with supervisory duties to exercise them 

“diligently.” The CFTC’s churning standard imposes liability upon brokers who trade 

excessively contrary to the customer’s trading objective.271 

The common law as well imposes fiduciary duties upon those who make 

decisions regarding the assets of others, and the courts have extended this duty to 

intermediaries in the commodity futures and option markets, that is, FCMs, CPOs and 

CTAs. At common law, the extent of an FCM’s fiduciary duty ranges from being 

required to act as the client’s alter ego,272 to merely refraining from making any material 

misrepresentation and only trading with the prior approval of the client. The courts have 

determined what duty attaches on a case-by-case basis, depending on the facts, 

considering, inter alia, the nature of the account, the sophistication of the client, and the 

relationship between the FCM and the client.273 Although there is no bright-line rule, a 

discretionary account generally creates a higher level of duty than the obligations created 

by handling a nondiscretionary account. Because there is no federal standard, many 

federal courts have deferred to the common law of the state where the case was brought 

to determine if a fiduciary relationship exists.274 

The courts have found also that CPOs and certain CTAs may have a fiduciary 

duty toward their participants and clients.275 A CTA has a fiduciary duty if it is offering 

 

266 17 CFR Part 166. 

267 Madel v. Anspacher & Associates, Inc., [1987–1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) 

 ¶ 24,412 (CFTC Mar. 14, 1989). 

268 Avis v. Shearson Hayden Stone, Inc., [1980–1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 

 21,379 at 25,831 n.7 (CFTC Apr. 13, 1982). 

 

269 17 CFR 166.2. 

270 17 CFR 166.3. 

271 Fields v. Cayman Associates, Ltd. [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 

 22,688 at 30,928 (CFTC 1985); Smith v. Siegel Trading Co. [1980-82 Transfer Binder] Comm. 

 Fut. L. Rep. ¶ 21,105 at 24,452-53 (CFTC 1980). 

272 United States v. Dial, 757 F.2d 163, 168 (7th Cir. 1985). 

273 Romano v. Merrill Lynch, 834 F.2d 523, 530 (5th Cir. 1987). 

274 See e.g. Horn v. Ray E. Friedman & Co., 776 F.2d. 777, 779 (8th Cir. 1985). 

275 CFTC v. Savage, 611 F.2d 270, 285 (9th Cir. 1979); CFTC v. Equity Financial Group, 537 

F.Supp.2d 677, 697-98 (D.C.N.J. 2008). 

69
personal financial advice.276 Thus, the fiduciary duty of a CTA does not turn on whether 

the CTA holds customer funds. 

What actions constitute a breach of fiduciary duty are also analyzed on a case-bycase basis. The Seventh Circuit has held that a CTA’s failure to inform clients of price 

changes is not a breach in and of itself,277 but that an associated person’s (“AP”)278

trading ahead of customer accounts constitutes a breach because of an implicit promise to 

obtain the best price when trading on the behalf of another, which is frustrated by trading 

ahead of customer accounts, or “front running.”279 The Fifth Circuit has held that an AP 

had a fiduciary duty but did not breach it when the broker did not tell a financially 

sophisticated client that he held the opposite position from the client’s position.280 The 

Ninth Circuit has taken a similar position.281 The First Circuit has held that an 

intermediary’s failure to disclose material risks associated with trading futures and 

options was a breach of fiduciary duty to the customer.282 

3. Analysis of SEC/CFTC Regulatory Frameworks 

Customer Protection and Fiduciary Obligations

Financial intermediaries that offer financial advisory services to clients are subject 

to differing standards under the regulatory schemes of the CFTC and SEC. With respect 

to suitability, for example, the CFTC requires futures advisers to determine an 

appropriate level of disclosure particularized to the client based on the “know your 

customer” information they have obtained.283 Generally, the “know your customer” rule 

functions as a business conduct standard and sets forth certain minimum disclosures that 

would be required in any case.284 In explaining the rationale behind this disclosure 

regime, one speaker noted that futures contracts are highly volatile and risky instruments 

that merit appropriate disclosure at the beginning of the relationship, regardless of 

whether the customer will rely on recommendations by professional financial planners.285 

However, the speaker noted, because all futures contracts involve risk, the suitability 

determination is appropriately made on a customer-by-customer basis, rather than trade-

 

276 Commodity Trend Service, Inc. v. CFTC, 233 F.3d 981, 990 (7th Cir. 2000). 

277 Hlavinka v. CFTC, 867 F.2d 1029, 1033 (7th Cir. 1989). 

278 An AP is a natural person who is associated with an FCM, an IB, a CPO, a CTA, or a leverage 

 transaction merchant in certain capacities. See CFTC Regulation 1.3(aa), 17 CFR 1.3(aa). 

279 Dial, 757 F.2d at 168-69. 

280 Romano, 834 F.2d at 530. 

281 Marchese v. Shearson Hayden Stone, Inc., 734 F.2d 414, 418 (9th Cir. 1984). 

282 Schofield v. First Commodity Corp., 793 F.2d 28, 34-35 (1st Cir. 1986). 

283 NFA Interpretive Notice, NFA Compliance Rule 2-30; Customer Information and Risk Disclosure 

(June 1, 1986). 

284 Id. 

285 Id.; and Roth Testimony, supra note 221. 

70
by-trade.286 Generally, this approach to suitability is premised on the notion that the 

customer is in the best position to determine the propriety of futures trading and all that is 

needed is an understandable disclosure of risks from a futures professional who “knows 

the customer.” An inflexible standard would bar persons from using the futures 

markets.287

In contrast, the SEC’s suitability approach requires broker-dealers to determine 

whether a particular investment recommendation is suitable for a customer, based on 

customer-specific factors (e.g., the customer’s age, financial status, investment 

objectives, and level of sophistication in financial matters) and factors relating to the 

securities and investment strategy (e.g., the nature of the securities and the customer’s 

portfolio, the concentration of securities in the customer’s portfolio, the use of margin, 

and the frequency of trading). A broker-dealer must investigate and have adequate 

information regarding the security it is recommending and ensure that its 

recommendations are suitable based on the customer’s financial situation and needs, as 

well as other security holdings. In addition to these general suitability and due diligence 

requirements, particularized suitability, disclosure, and due diligence requirements apply 

to certain securities products. Generally, these enhanced obligations are intended to 

address the higher risks associated with these securities products. 

The suitability approach in the securities industry is premised on the notion that 

securities have varying degrees of risk and serve different investment objectives, and that 

a broker-dealer is in the best position to determine the suitability of a securities 

transaction for a customer. Disclosure of risks alone is not sufficient to satisfy a brokerdealer’s suitability obligation. As a result, the requirement that a suitability 

determination be made on a recommendation-by-recommendation basis attempts to 

address the varying risks and objectives of these products and the need to consider and 

evaluate the suitability of securities products for a customer on a transaction basis. 

One panelist at the joint meetings indicated that another reason for the existing 

differences in approach to customer suitability requirements in the securities and futures 

industries has to do with the customer base for the relevant products.288 Specifically, the 

panelist stated that futures customers are generally sophisticated institutional or 

commercial investors.289 Panelists also indicated that, by contrast, the securities markets 

have a large proportion of retail investors, each with varying levels of sophistication.290 

 

286 See Roth Testimony, supra note 221 (noting that it does not make sense to say that a customer is 

suitable for a recommendation to invest in heating oil futures but not in Treasury note futures). 

287 NFA Interpretive Notice, NFA Compliance rule 2-30: Customer Information and Risk Disclosure

(June 1, 1986). 

288 See Raisler Testimony, supra note 52 (“While the securities markets have many smaller, retail 

customers, commodity market participants tend to be larger, more sophisticated, institutional or 

commercial participants.”). 

289 Id. 

290 See id; see also Transcript of Oral Testimony of Craig Donohue, CME Group, CFTC/SEC Joint 

Meetings on Regulatory Harmonization, September 2, 2009, supra note 3 (“We tend to have a 

much larger retail component to the securities markets as well as the securities options markets.”); 

71
Accordingly, some panelists asserted that providing the customer with an appropriate 

level of disclosure at account opening may be sufficient with respect to futures products, 

but may not be appropriate for securities products.291 

However, some have noted that it is inconsistent for broker-dealers, FCMs and 

IBs to be subject to different standards in situations where the broker-dealers and FCMs 

are performing similar functions with regard to the customer.292 One market participant 

in both the futures and securities industries indicated at the joint meetings that she would 

support the development of a consistent suitability standard across industries that would 

protect investors from being sold unsuitable products, regardless of the type of product 

sold.293 

Promoting consistent standards is also relevant to the issue of whether financial 

advisers should be bound by fiduciary duties. Neither the CEA nor the CFTC’s 

regulations explicitly provide for fiduciary obligations. The CFTC’s case law, however, 

imposes a range of duties upon intermediaries consistent with their status as persons 

acting for or on behalf of customers, and the common law has imposed fiduciary duties in 

certain circumstances upon FCMs, CPOs and CTAs.294

Under the SEC’s regulatory regime, investment advisers are considered 

fiduciaries. While the statutes and regulations do not impose fiduciary obligations on a 

broker-dealer, a broker-dealer may have a fiduciary duty under certain circumstances 

under state common law, which varies by state.295 Generally, courts have held that 

broker-dealers that exercise discretion or control over customer assets owe customers a 

broad fiduciary duty, similar to that imposed on investment advisers.296

 Transcript of Oral Testimony of William Brodsky, Chicago Board Options Exchange, CFTC/SEC 

Joint meetings on Regulatory Harmonization, September 2, 2009, supra note 3 (noting that the 

securities markets have a broad retail component that he believed is much larger by percentage 

than what exists in the futures markets, but that the institutional investors are largely the same 

across the futures and securities markets). 

291 See Roth Testimony, supra note 221; see also FIA Comment Letter, supra note 59; and Transcript 

of Oral Testimony of Stephen Luparello, Vice Chairman, FINRA, September 2, 2009, supra note 

3. 

292 See Nazareth Testimony, supra note 141; see also SIFMA Comment Letter, supra note 52. 

293 Downs Testimony, supra note 139. 

294 See Section II.E.2, supra.

295 See Davis v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 906 F.2d 1206, 1215 (8th Cir. 1990). 

296 See, e.g., U.S. v. Skelly, 442 F.3d 94, 98 (2d Cir. 2006) (fiduciary duty found “most commonly” 

where “a broker has discretionary authority over the customer’s account”); Leib v. Merrill Lynch, 

Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 953-954 (E.D. Mich. 1978), aff’d, 647 F.2d 165 

(6th Cir. 1981); Assoc. Randall Bank v. Griffin, Kubik, Stephens & Thompson, Inc., 3 F.3d 208, 

212 (7th Cir. 1993) (broker is not fiduciary “with respect to accounts over which the customer has 

the final say”); Paine Webber, Jackson & Curtis, Inc. v. Adams, 718 P.2d 508 (Colo. 1986); 

Cheryl Goss Weiss, A Review of the Historic Foundations of Broker-Dealer Liability for Breach 

of Fiduciary Duty, 23 J. Corp. L. 65 (1997). 

72
In light of the current debate on whether to subject broker-dealers who provide 

personalized financial advice to a fiduciary standard, some have stated that it would be 

inconsistent for FCMs and IBs to be bound by a lesser standard than an investment 

adviser that provides a service to a customer that is substantially similar.297 Thus, if a 

fiduciary standard were imposed on broker-dealers who provide personalized financial 

advice, it would seem arbitrary for a different standard to govern FCMs or IBs that 

perform functionally equivalent services for a customer.298 

G. Registration and Recordkeeping Requirements of Intermediaries 

 The CFTC and SEC both have requirements that intermediaries register before 

conducting business with the public. Each agency imposes specific requirements 

regarding the procedure and form of application for registration. Thus, financial advisers 

who are engaged in advising on both futures and securities are subject to both CFTC and 

SEC registration requirements. In addition, the SEC and CFTC rules impose varying 

recordkeeping and reporting obligations on these registered intermediaries. Several 

panelists at the September Meeting suggested that the various requirements applicable to 

dual registrants should be harmonized and simplified. Below is a discussion of the SEC 

and CFTC regulatory frameworks for registration and recordkeeping of intermediaries. 

1. SEC Regulatory Framework

Generally, a broker-dealer may not begin business until (1) the SEC has granted 

its registration, (2) the broker-dealer has become a member of an SRO, and (with few 

exceptions) the SIPC, (3) the broker-dealer complies with applicable state registration 

and qualification requirements,299 and (4) its associated persons have satisfied applicable 

registration and qualification requirements.300 

The Securities Exchange Act generally requires broker-dealers that effect 

securities transactions to register with the SEC.301 In addition, broker-dealers are 

 

297 See Nazareth Testimony, supra note 141; and Coffee Testimony, supra note 218. 

298 See, e.g., Investor Protection Act of 2009, available at

http://www.treas.gov/press/releases/docs/tg205071009.pdf (draft legislation released by the 

Treasury Department which would give the SEC authority to require a fiduciary duty for any 

broker, dealer, or investment adviser who gives investment advice about securities). As discussed 

above, in some cases, such as discretionary accounts, broker-dealers are already held to a fiduciary 

standard. 

299 Every state has its own requirements for a person conducting business as a broker-dealer. 

300 See Securities Exchange Act Section 15(b)(1) and (b)(2), 15 U.S.C 78o(b)(1) and (b)(2), and 

Securities Exchange Act Rule 15b-7-1, 17 CFR 240.15b7-1; see also NASD IM-1000-3 Failure to 

Register Personnel; NASD (FINRA) Rule 1013 (“New Member Application and Interview”), 

NASD (FINRA) Rule 1021 (“Registration Requirements”), NASD (FINRA) Rule 1031 

(“Registration Requirements”); NASD (FINRA) Rule 1041 (“Registration Requirements”). 

301 Securities Exchange Act Section 15(a), 15 U.S.C. 78o.

73
required to become members of at least one SRO.302 Persons applying for broker-dealer 

registration must complete and file Form BD (Uniform Application for Broker-Dealer 

Registration) including the required Schedules and Disclosure Reporting Pages, with the 

Central Registration Depository system (“CRD”), which is used by the SEC, the SROs 

and the states.303 In general, Form BD requires information about the background of the 

applicant, its principals, controlling persons, and employees. Form BD requires 

information about the type of business in which the applicant proposes to engage, and the 

identity of the applicant’s direct and indirect owners, and other control persons including 

executive officers, as well as all affiliates engaged in the securities or investment 

advisory business. Form BD also requires the applicant to disclose whether it or any of 

its control affiliates has been subject to criminal prosecutions, regulatory actions, or civil 

actions in connection with any investment-related activity. The applicant also must 

disclose information about branch offices and arrangements to hold records/funds. In 

addition, the applicant must disclose whether it or any control affiliate has been subject to 

a bankruptcy petition, has had a trustee appointed under SIPA,304 has been denied a bond, 

or has any unsatisfied judgments or liens. 

Once registered, a broker-dealer must keep its Form BD current by amending it 

promptly when changes occur. Broker-dealers also have financial reporting obligations. 

As noted above, even if registered with the SEC, a broker-dealer may not 

commence business until it satisfies the membership requirements of at least the SRO 

that it seeks to join. Generally, all registered broker-dealers that deal with the public 

must become members of FINRA, a registered national securities association. They may 

also choose to become exchange members. 

 A broker-dealer generally must register each natural person who is an associated 

person, other than those persons whose functions are solely clerical or ministerial, with 

one or more SROs using a Form U4 via CRD. The Form U4 is used to register 

individuals and to disclose their employment and disciplinary histories. A registered 

representative must keep his or her Form U4 current by amending it promptly when 

changes occur. An associated person who effects or participates in effecting securities 

transactions also must meet qualification requirements, which may include passing a 

securities qualification exam.305 

 

302 Securities Exchange Act Section 15(b)(8), 15 U.S.C. 78o(b)(8), and Securities Exchange Act Rule 

15b9-1, 17 CFR 240.15b9-1. 

303 See Securities Exchange Act Rule 15b1-1, 17 CFR 240.15b1-1.

304 See supra note 104 and accompanying text. 

305 See Securities Exchange Act Rule 15b7-1, 17 CFR 240.15b7-1; see also NASD IM-100-3 

(“Failure to Review Personnel”); NASD (FINRA) Rule 1013 (“New Member Application and 

Interview”); NASD (FINRA) Rule 1021 (“Registration Requirements”); Rule 1031 (“Registration 

Requirements”); NASD (FINRA) Rule 1041 (“Registration Requirements”)

74
Investment advisers also have registration obligations. Section 202(a)(11) of the 

Advisers Act306 generally defines an “investment adviser” as any person or firm that: (1) 

for compensation; (2) is engaged in the business of; and (3) providing advice to others (or 

issuing reports of analyses) regarding securities. A person must satisfy all three elements 

to fall within the definition of “investment adviser.” These elements are construed 

broadly. Section 202(a)(11) of the Advisers Act excludes a number of persons from the 

definition of “investment adviser,” including brokers and dealers, if their performance of 

advisory services is “solely incidental” to the conduct of their business as broker-dealers, 

and they do not receive any “special compensation” for their advisory services. In 

addition, Section 203(b) of the Advisers Act307 provides a number of exceptions from the 

registration requirement. Further, pursuant to Section 203A(a) of the Adviser’s Act,308

an adviser is prohibited from registering with the Commission unless the adviser: (1) ha

assets under management of $25 million or more;

s 

 

309 (2) advises a registered investment 

company; (3) maintains its principal office and place of business in a state that does not 

have an investment adviser statute, or outside of the United States; or (4) is exempt from 

the prohibition by order or by rule.310 

An investment adviser registers with the Commission by filing an application for 

registration on Form ADV. Form ADV has two Parts, 1 and 2, and Part 1 is filed 

electronically. Form ADV requests information on the adviser’s background and 

business process. The adviser must keep Form ADV current. If material information in 

the adviser’s Form ADV becomes inaccurate, it must be amended promptly; other 

corrections or updates, including a required annual update, must be made within 90 days 

of the adviser’s fiscal year end.311

SEC regulations also impose requirements on registered broker-dealers and 

investment advisers with respect to recordkeeping and reporting. Section 17(a)(1) of the 

Securities Exchange Act and Section 204 of the Investment Advisers Act requires brokerdealers and investment advisers, respectively, to make, keep, furnish, and disseminate 

306 15 U.S.C. 80b-2(a)(11). 

307 15 U.S.C. 80b-3. 

308 15 U.S.C. 80b-3a(a). 

309 In order to avoid an investment adviser from having to switch its registration between the states 

and the SEC shortly after becoming registered, the Commission adopted rule 203A-1(a)(2) that 

provides a $5 million dollar window until registration is required with the SEC. State-registered 

advisers may elect to remain registered with the state(s) until they have assets under management 

of $30 million or more, but they are eligible and may choose to register with the Commission 

when they have assets under management of $25 million or more. See 17 CFR 275.203A-1(a)(2). 

310 The following categories of entities are exempt from the prohibition by Rule 203A-2: (1) 

nationally recognized statistical ratings organizations; (2) pension consultants with respect to plan 

assets totaling $50 million or more; (3) investment advisers controlling, controlled by, or under 

common control with an investment adviser registered with the Commission; (4) newly formed 

advisers expecting to be eligible for Commission registration with 120 days; (5) an investment 

adviser that would otherwise be required to register in 25 or more states; and (6) internet 

investment advisers. 17 CFR 275.203A-2. 

311 See 17 CFR 275.204-1.

75
reports the SEC deems “necessary or appropriate in the public interest” or “for the 

protection of investors.”312 Securities Exchange Act Rule 17a-3313 and Rule 17a-4314 and 

Advisers Act Rule 204-2315 specify minimum requirements with respect to the records 

that broker-dealers must make, and how long those records and other documents relating 

to a broker-dealer's business must be kept. For example, Securities Exchange Act Rule 

17a-4 specifies the required retention periods for the records, requiring most records to be 

retained for three years (the first 2 years in an easily accessible place), and others for six 

years,316 and Advisers Act Rule 204-2 generally specifies a five year retention period, the 

first two in an office of the adviser.317

2. CFTC Regulatory Framework 

The CEA requires that all persons who intermediate commodity interest 

transactions with members of the retail public register with the CFTC.318 As defined in 

the CEA, these persons include FCMs, IBs, CPOs, and CTAs. The primary purposes of 

registration are to screen an applicant’s fitness to engage in the futures business and to 

identify individuals and organizations whose activities are subject to federal regulation. 

Individuals and firms that wish to conduct futures-related business with the public must 

also apply for NFA membership or associate status. 

 While all applicants must meet certain minimum requirements, there may be 

additional requirements depending on the category of market intermediary – for example, 

FCMs and IBs have certain operational requirements because of their access to customer 

funds, APs have testing and background requirements because, as natural person 

salespersons, they have direct contact with customers, participants and clients. To 

register, FCMs, IBs, CPOs and CTAs must disclose business and financial information 

(including information regarding corporate affiliates), criminal and regulatory history, 

and contact persons.319 FCMs and IBs may also be required to submit for approval their 

procedures and/or materials concerning: (a) anti-money laundering; (b) business 

continuity; (c) electronic order routing systems (for FCMs) or automated order routing 

systems (for IBs); (d) promotional materials; (e) supervision of APs; (f) handling of 

customer complaints; and (g) margins and/or segregation procedures (for FCMs).320 

Similar registration requirements also extend to principals of a registrant, and to floor 

traders and floor brokers. 

 

312 15 U.S.C. 78q(a)(1), 15 U.S.C. 80b-4(a). 

313 17 CFR 240.17a-3. 

314 17 CFR 240.17a-4. 

315 17 CFR 275.204-2. 

316 17 CFR 275.17a-4. 

317 17 CFR 375.204-2(e). 

318 CEA Sections 4d(a)(1), 7 U.S.C. 6d(a)(1); 4k(1-3); 4m(1). 

319 7 U.S.C. 6n(1)(A)&(B), 7 U.S.C. 12a(2)(D)&(E); 17 CFR 3.10; 17 CFR 3.12.

320 CEA Section 4f(a)(1), 7 U.S.C. 6f(a)(1); 17 CFR 42.2. 

76
CFTC regulations also impose requirements with respect to capital, financial 

recordkeeping and reporting, transaction recordkeeping and reporting, and customer 

funds. Pursuant to Regulation 1.31, all books and records required by the CEA and 

CFTC regulations must be kept for a period of five years and be readily accessible during 

the first two years of the five-year period. All books and records must be open to 

inspection by any representative of the CFTC or the U.S. Department of Justice.321

3. Analysis of SEC/CFTC Regulatory Frameworks 

The CFTC and the SEC have worked in several areas to avoid duplicative 

regulations with respect to dual registrants. For example, the agencies have promoted 

uniform capital and related reporting requirements applicable to FCMs and IBs and 

broker-dealers. The regulations of both agencies require the same capital deductions to 

be applied to a registrant’s proprietary positions in securities and futures, which has 

enabled FCMs and IBs, if also registered as broker-dealers, to file with the CFTC copies 

of their SEC-required reports in satisfaction of CFTC reporting requirements. As of the 

most recent monthly financial reports filed with the CFTC (June 30, 2009), 

approximately 45% of the total 133 registered FCMs were also registered with the SEC 

as broker-dealers. 

Moreover, certain provisions in the CEA and its regulations provide exemptions 

for entities already registered with the SEC, and vice versa. For example, one speaker 

noted that both the Advisers Act322 and the CEA323 contain provisions exempting 

advisers that are registered with the other agency if their business does not 

“primarily” consist of activities under the supervision of the exempting agency and they 

do not advise any fund primarily engaged in activities under the supervision of that 

agency.324 In a similar vein, CFTC Regulation 4.5325 provides a definitional exclusion 

 

321 17 CFR 1.31 

322 See, e.g., U.S. v. Skelly, 442 F.3d 94, 98 (2d Cir. 2006) (fiduciary duty found “most commonly” 

where “a broker has discretionary authority over the customer's account”); Leib v. Merrill Lynch, 

Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 953-954 (E.D. Mich. 1978), aff’d, 647 F.2d 165 

(6th Cir. 1981) (recognizing that a broker who has de facto control over non-discretionary account 

generally owes customer duties of a fiduciary nature); Assoc. Randall Bank v. Griffin, Kubik, 

Stephens & Thompson, Inc., 3 F.3d 208, 212 (7th Cir. 1993) (broker is not fiduciary “with respect 

to accounts over which the customer has the final say”); Paine Webber, Jackson & Curtis, Inc. v. 

Adams, 718 P.2d 508 (Colo. 1986); Cheryl Goss Weiss, A Review of the Historic Foundations of 

Broker-Dealer Liability for Breach of Fiduciary Duty, 23 J. Corp. L. 65 (1997). 

323 7 U.S.C. 1 et seq. 

324 See Testimony of Richard Baker, President and Chief Executive Officer, Managed Funds 

Association, September 3, 2009 (“Baker Testimony”) and Letter from Richard Baker, MFA, to 

Elizabeth M. Murphy, Secretary, SEC, and David Stawick, Secretary, CFTC, dated September 25, 

2009 (“MFA Comment Letter”). 

325 17 CFR 4.5. 

77
from the CPO (and pool) definitions for certain “otherwise regulated persons,” wh

includes investment companies registered under the Investment 326

ich 

 Company Act. 

 

Some panelists at the September Meeting indicated that further efforts to 

rationalize regulation for dual registrants were in order. The comments generally raised 

two separate, inter-related concerns: on the one hand, there should be relief from the 

burden of complying with duplicative sets of registration, reporting and compliance 

requirements,327 but on the other hand, such relief should be appropriately tailored to 

policy goals such that regulatory gaps are not created.328

The CFTC and SEC have similar recordkeeping requirements for FCMs and 

broker-dealers. Both the SEC and CFTC have specific requirements as to which books 

and records must be made; how long they are kept; and the manner in which the records 

are stored. There are, however, distinct differences in the rules. Notably, CFTC 

regulations require that most records be kept for a period of 5 years, and readily 

accessible in the first 2 years.329 The SEC’s Rule 17a-4 generally requires that most 

records be preserved for a period of 3 years, the first 2 in an easily accessible manner, 

and others to be preserved for 6 years.330 Several panelists at the September Meetings 

and commentators urged the Commissions to consider harmonizing these recordkeeping 

requirements.331

326 See supra note 176. 

327 See Testimony of Eric Baggesen, Senior Investment Officer for Global Equity, CalPERS, 

September 2, 2009 (“Baggesen Testimony”) (recommending a single registration point for market 

participants); Baker Testimony, supra note 324 (suggesting harmonizing registration to avoid 

duplicate filings); Testimony of Michael Butowsky, Partner, Mayer Brown LLP, September 3, 

2009 (“Butowsky Testimony”) (questioning the need for completely different registration 

processes for investment advisers, commodity trading advisors, and commodity pool operators; 

suggesting that the Commissions should consider whether the books and records requirements of 

the two agencies should be aligned, whether regulatory examination protocols should be aligned, 

and whether there should be a common approach to securities and futures position reporting); 

Downs Testimony, supra note 139 (stating that all books and records requirements should be 

“simple, consistent, and identical across both agencies”); Newedge Comment Letter, supra note 

143 (suggesting that the CFTC’s five-year record retention requirement be adopted uniformly and 

that FCM electronic storage requirements be modified to conform to broker-dealer requirements); 

and SIFMA Comment Letter, supra note 52 (both agencies should coordinate their net capital rule 

changes, require the same records and reports where possible and not aggregate existing 

requirements, and better cooperate and coordinate examinations of dual registrants). 

328 See Raisler Testimony, supra note 52 and Roth Testimony, supra note 221.

329 CFTC Regulation 1.31(a)(1), 17 CFR 1.31(a)(1). 

330 17 CFR 240.17a-4. 

331 See Downs Testimony, supra note 139 (stating that all books and records requirements should be 

“simple, consistent, and identical across both agencies”); Newedge Comment Letter, supra note 

143 (suggesting that the CFTC’s five-year record retention requirement be adopted uniformly and 

that FCM electronic storage requirements be modified to conform to broker-dealer requirements); 

Butowsky Testimony, supra note 327 (suggesting that the Commissions should consider whether 

the books and records requirements of the two agencies should be aligned); and SIFMA Comment 

Letter, supra note 52 (stating that the Commissions should review their recordkeeping and 

reporting rules to require the same records and reports wherever possible). 

78
H. Regulation of Cross-Border Activity 

Increasing globalization of U.S. financial markets has made the agencies’ efforts 

regarding oversight of cross-border activity critically important. Both agencies have 

taken steps to encourage the cross-border flow of capital and trading while promoting 

robust regulatory standards throughout the world. While the basic objectives of the two 

agencies have been the same, their particular approaches with respect to certain crossborder access issues have differed. 

1. SEC Regulatory Framework 

Section 5 of the Securities Exchange Act makes it unlawful for any broker, dealer, 

or exchange “to make use of the mails or any means or instrumentality of interstate 

commerce for the purpose of using any facility of an exchange within or subject to the 

jurisdiction of the United States to effect any transaction in a security, or to report any 

such transaction,” unless such exchange is registered as a national securities exchange 

under Section 6 of the Securities Exchange Act or exempt from such registration upon 

application with the Commission, based on limited volume.332 Accordingly, an 

exchange333 that wishes to effect any securities transactions in the United States must 

apply to the SEC for registration as a national securities exchange consistent with Section 

6 of the Securities Exchange Act and obtain Commission approval before being able to 

commence exchange operations. Furthermore, upon approval of its application and 

thereafter, the exchange is required to operate in compliance with Sections 6 and 19,334 as 

well as other sections of the Securities Exchange Act and related rules applicable to 

registered national securities exchanges. As such, foreign exchanges must comply with 

the registration requirements under Section 5 and the ongoing regulatory requirements of 

the Securities Exchange Act if they choose to operate in the United States, absent an 

exemption. The SEC does not have a separate recognition scheme for foreign exchanges. 

Section 15(a) of the Securities Exchange Act generally requires that any broker or 

dealer using the mails or any means or instrumentality of interstate commerce must 

register as a broker-dealer with the Commission, unless it is subject to an applicable 

exception or exemption.335 Therefore, foreign broker-dealers that induce or attempt to 

induce securities transactions by any person in the United States, or that use the means or 

 

332 15 U.S.C. 78e. 

333 Section 3(a)(1) of the Securities Exchange Act defines an “exchange” as “any organization, 

association, or group of persons, whether incorporated or unincorporated, which constitutes, 

maintains, or provides a market place or facilities for bringing together purchasers and sellers of 

securities or for otherwise performing with respect to securities the functions commonly 

performed by a stock exchange as that term is generally understood, and includes the market place 

and the market facilities maintained by such exchange.” 15 U.S.C. 78c(a)(1). See also Securities 

Exchange Act Rule 3b-16, 17 CFR 240.3b-16, regarding the definition of “exchange” in Section 

3(a)(1) of the Securities Exchange Act. 

334 15 U.S.C. 78f and 78s. 

335 15 U.S.C. 78o(a)(1). 

79
instrumentalities of interstate commerce of the United States for this purpose, generally 

must register with the SEC. Foreign broker-dealers that limit their activities to those 

permitted under Rule 15a-6 of the Act, however, may be exempt from U.S. broker-dealer 

registration.336 This rule provides conditional exemptions from U.S. broker-dealer 

registration requirements for foreign brokers or dealers that: (1) effect unsolicited 

transactions; (2) provide research reports to certain institutional investors; (3) effect 

transactions for certain institutional investors through a U.S. registered broker or dealer; 

and (4) execute transactions directly with registered brokers or dealers and certain 

specified other persons. 

The SEC has undertaken many initiatives that have been designed to facilitate 

foreign issuer access to the U.S. securities markets and to U.S. investor’s ability to invest 

in foreign securities. The initiatives include the adoption of: 

(i) Rule 144A and Regulation S,337

(ii) new approaches governing the registration and deregistration of foreign 

securities under the Securities Exchange Act,338 

(iii) IOSCO International Disclosure Standards for foreign registrants,339 

(iv) accommodations for foreign companies that use International Financial 

Reporting Standards as issued by the International Accounting Standards 

Board,340 and 

(v) exemptions which permit certain public rights and exchange offers and 

business combinations involving foreign companies to proceed without 

registration or compliance with disclosure or procedural provisions.341

The SEC continually strives to enhance international cooperation, raise 

international regulatory standards, and build international consensus among financial 

regulators of what constitutes a highly developed, well-functioning marketplace. For 

instance, the IOSCO, whose membership includes securities regulators throughout the 

world, has set out 30 “core principles” of securities regulation to be used as a guide to the 

international regulatory community.342 In addition, the SEC has entered into over 30 

 

336 17 CFR 240.15a-6. See also Securities Exchange Act Release No. 27017 (effective August 15, 

1989), 54 FR 30013 

337 17 CFR 230.144A and 17 CFR 230.901 et seq, SEC Release Nos. 33-6862 (Apr 23, 1990) and 33-

6863 (Apr 24, 1990). 

338 17 CFR 240.12g3-2(b) and 17 CFR 240.12h-6, SEC Release Nos. 34-59465 (Sept 5, 2008) and 

34-55540 (Mar 27, 2007). 

339 Form 20-F, 17 CFR 249.220f, SEC Release No. 33-7745 (Sept 28, 1999). 

340 “Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with 

International Financial Reporting Standards without Reconciliation to U.S. GAAP”, SEC Release 

No. 33-8879 (Dec 21, 2007) and “First-Time Application of International Financial Reporting 

Standards,” SEC Release 33-8567 (Apr 12, 2005). 

341 17 CFR 230.801 and 802, 17 CFR 240.14d-1(c) and (d), SEC Release No 33-7759 (Oct 22, 1999). 

342 IOSCO Principles and Objectives of Securities Regulation, May 2003, available at 

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD154.pdf. 

80
bilateral information-sharing agreements, generally known as MOUs with foreign 

regulators, many of which are aimed at cooperating in the surveillance and enforcement 

of securities laws. In 2006, the SEC and UK Financial Services Authority (“FSA”) 

entered into a Memorandum of Understanding concerning consultation, cooperation and 

the exchange of information related to market oversight and the supervision of financial 

services firms (“2006 MOU”). The 2006 MOU contained terms for cooperation related 

to, among other things, inspections of financial services firms.343 Further, through a 

“multilateral” information-sharing MOU under the auspices of IOSCO, the SEC has in 

place an agreement with 55 foreign securities and derivatives regulators to cooperate in 

enforcement investigations and exchange enforcement and surveillance information.344 

 2. CFTC Regulatory Framework 

The CFTC uses a recognition approach in three areas: (1) foreign intermediaries; 

(2) foreign markets; and (3) foreign clearinghouses clearing OTC instruments. The CFTC 

does not register or regulate these entities and does not supervise their ongoing 

operations. The following chart summarizes the CFTC’s mutual recognition regime and 

the means by which it has been implemented. 

Foreign Entity Origin Mechanism General Standard 

Intermediaries 1987 Rulemaking Commission 

Order 

A person subject to a comparable 

regulatory scheme 

Markets 1996 Letter Staff NoAction Letter 

A bona fide board of trade subject to 

substantially equivalent regulatory 

objectives 

Clearinghouses CFMA Commission 

Order 

For clearing over-the-counter 

instruments, a clearinghouse regulated by 

a foreign regulator that satisfies 

appropriate standards 

 

343 In 2008, the SEC and FSA reached an understanding through a side letter to clarify that the terms 

of the 2006 MOU were extended to cover LCH. Clearnet Limited (“LCH”) with respect to its 

functions as a clearing agency for certain credit default swaps (“CDS”) in the U.S. Specifically, in 

connection with LCH’s exemptive relief from registration as a U.S. clearing agency under Section 

36 of the Securities Exchange Act, the SEC and the FSA reached an understanding concerning 

consultation, cooperation and the exchange of information between the FSA and the SEC related 

to LCH’s functions as a clearing agency for certain index-based CDS. In addition, the SEC and 

FSA expressed their intent to work together to amend the 2006 MOU to expand its scope and 

modify its terms as appropriate to cover cooperation in regards to clearing organizations and 

markets in the future.

344 A list of signatories is available on IOSCO’s website 

(http://www.iosco.org/library/index.cfm?section=mou_siglist). 

81
Intermediaries

The CEA gives the CFTC authority to “develop, if needed, a more formal 

regulatory program” for the offer and sale of foreign futures contracts in the United 

States. This statutory provision also states that the CFTC’s “rules and regulations may 

impose different requirements ... depending upon the particular foreign board of trade, 

exchange, or market involved.” 345

The CFTC promulgated regulations in 1987 to establish the regulatory framework 

for the offer and sale of foreign futures and option contracts in the United States.346 

Under these regulations, the CFTC may exempt from registration foreign brokers 

intermediating foreign futures and options transactions on behalf of customers located 

within the U.S. based on substituted compliance with a “comparable” regulatory 

program. Comparable does not mean identical: the CFTC may conclude that the 

regulatory program is comparable even though the offshore program does not contain 

elements precisely identical to that of the Commission’s regulatory program. 

CFTC Regulation 30.4347 requires any domestic or foreign person engaged in 

activities like those of a FCM, IB, CPO, or CTA to register in the appropriate capacity or 

seek one of the following exemptions from registration: 

• Regulation 30.5348 provides an exemption from registration for any person 

located outside of the United States who is required to be registered with the 

CFTC under Part 30 other than a person required to be registered as an FCM. 

Such a person is required, among other things, to consent to the jurisdiction of the 

United States courts and the CFTC with respect to dealings with United States 

customers. 

• Regulation 30.10349 permits a person affected by any of the requirements 

contained in Part 30 to petition the CFTC for an exemption from such 

requirements. If the CFTC determines that compliance with the foreign 

jurisdiction’s regulatory program would offer “comparable” protection to persons 

located in the U.S. and there is an information sharing arrangement between the 

CFTC and the firm’s home country regulator, the CFTC will consider whether to 

issue an order granting relief to the foreign regulator or exchange, subject to 

certain conditions. Elements for review include: (1) registration and fitness; (2) 

minimum financial requirements; (3) protection of customer funds; (4) 

recordkeeping and reporting requirements; (5) minimum sales practice standards; 

and (6) compliance. 

 

345 CEA Section 4(b), 7 U.S.C. 6(b). 

346 52 FR 28980 (Aug. 5, 1987). 

347 17 CFR 30.4. 

348 17 CFR 30.5. 

349 17 CFR 30.10. 

82
The CFTC has issued Orders granting exemptions pursuant to Regulation 30.10 to 

16 existing foreign exchanges or regulatory authorities.350 

Markets

The CEA excludes from coverage contracts traded on boards of trade that are 

“located outside the United States.”351 Accordingly, the CFTC is prohibited from 

adopting regulations to require registration by FBOTs even if they provide members or 

other participants located in the United States with direct foreign access to the FBOT’s 

electronic trading and order matching system.352 Section 4(b) of the Act directs the 

CFTC to refrain from adopting a regulation that either “requires Commission approval 

of” or “governs in any way” any FBOT contract, rule, regulation, or action. 

There are no statutory criteria that define when a board of trade, exchange, or 

market is “located outside the United States, its territories or possessions” such that it 

should not be required to register as a DCM. CFTC staff has been making such 

determinations through a no-action letter process. To date, CFTC staff has issued noaction letters to 21 FBOTs.353 Staff analyzes requests for no-action relief by analyzing 

whether the FBOT is a “bona fide” foreign exchange that is subject to a regulatory 

regime that enforces objectives that are substantially equivalent to those enforced by the 

CFTC. The criteria employed include whether the exchange has the attributes of an 

established and organized exchange, adheres to appropriate rules prohibiting abusive 

trading practices, has been authorized by a regulatory process that examines customer 

and market protections, and is subject to continued oversight by a regulator that has 

power to intervene and share information with the CFTC. 

The CFTC confirmed the no-action process in a Statement of Policy on FBOTs in 

2006,354 and some issues regarding FBOT contracts linked to contracts traded on CFTC-

 

350 These jurisdictions are: Australia, Brazil, Canada, France, Germany, Japan, New Zealand, 

Singapore, Spain, Taiwan, and the United Kingdom. See also 57 Fed. Reg. 49,644 (Nov. 3, 1992) 

(permitting limited marketing of foreign futures and foreign option products to certain 

governmental and institutional customers located in the U.S.); and 59 Fed. Reg. 42,156 (Aug. 17, 

1994) (expanding the 1992 relief to conduct directed toward SEC-accredited investors). 

351 CEA Section 4(a), 7 U.S.C. 6(a). 

352 The CFTC has supported legislative amendments to the Act to provide for such authority. The 

Administration presented Congress with the Over-the-Counter Derivatives Markets Act of 2009, a 

comprehensive package of financial regulatory reform legislation (focused primarily on the 

regulation of OTC derivatives), on August 11, 2009. The CFTC actively participated in the 

development of the legislation, which is posted on Treasury’s website at 

http://www.financialstability.gov/docs/regulatoryreform/titleVII.pdf. Section 725 of the 

legislation addresses FBOTs, particularly with respect to contracts linked to those traded on CFTC 

registered entities. 

353 The jurisdictions are: Australia, Brazil, Canada, Dubai, France, Germany, Hong Kong, Japan, 

Mexico, the Netherlands, Norway, Singapore, Spain, and the United Kingdom. 

354 Boards of Trade Located Outside of the United States and No-Action Relief from the Requirement 

to Become a Designated Contract Market or Derivatives Transaction Execution Facility, 71 Fed. 

Reg. 64,443 (November 2, 2006); see also Notice of Revision of Commission Policy Regarding 

83
regulated exchanges were further addressed in another Statement of Policy in 2009.355 

Most recently, the CFTC announced additional amendments to the terms under which an 

FBOT is permitted to make its electronic trading and order matching system available to 

exchange members and other participants located in the U.S.356 

Clearinghouses

The CFTC does not recognize foreign regulation in the context of non-U.S. 

clearinghouses operating as DCOs. Section 5b of the Act requires such entities to 

register as DCOs.357 The CEA does not exempt from registration, nor does it provide any 

alternate category of registration for, DCOs that are based outside the United States 

notwithstanding supervision by a foreign regulator. 

Under Section 409(b)(3) of the Federal Deposit Insurance Corporation 

Improvement Act of 1991 (as amended by the CFMA) (“FDICIA”),358 a clearinghouse 

may operate as a multilateral clearing organization (“MCO”) in the United States with 

respect to OTC instruments if it is supervised by a foreign financial regulator that the 

CFTC has determined satisfies “appropriate” standards. The CFTC has issued four MCO 

Orders.359 In addition to considering the clearinghouse’s risk management procedures 

and existing information-sharing arrangements with the foreign regulator, the CFTC 

primarily considers three factors: (1) whether the regulatory regime substantially 

corresponds with the Act, including the core principles for DCOs in Section 5b, and 

CFTC regulations; (2) whether the supervision provided by the regulator with respect to 

clearing activities substantially corresponds with the CFTC’s supervision of DCOs; and 

(3) whether the regulator’s supervision substantially comports with IOSCO’s Principles 

and Objectives of Securities Regulation. 

In addressing the oversight of cross-border clearinghouses, the CFTC has 

recognized that a tailored cooperative arrangement would provide the CFTC with an 

important tool in overseeing such entities. On September 14, 2009, the CFTC entered 

 the Listing of New Futures and Option Contracts by Foreign Boards of Trade that Have Received 

Staff No-Action Relief to Provide Direct Access to their Automated Trading Systems from 

Locations in the United States, 71 Fed. Reg. 19,877 (April 18, 2006); corrected at 71 Fed. Reg. 

21,003 (April 24, 2006). 

355 Notice of Additional Conditions on the No-Action Relief When Foreign Boards of Trade That 

Have Received Staff No-Action Relief to Permit Direct Access to Their Automated Trading 

Systems from Locations in the United States List for Trading from the U.S. Linked Futures and 

Option Contracts and a Revision of Commission Policy Regarding the Listing of Certain New 

Option Contracts, 74 Fed. Reg. 3,570 (January 21, 2009). 

356 CFTC Announces Amendments to ICE Futures Europe’s Foreign Access Relief – New Conditions 

Strengthen Oversight of Energy Markets, 

http://www.cftc.gov/newsroom/generalpressreleases/2009/pr5697-09.html. 

357 7 U.S.C. 7a-1. 

358 12 U.S.C. 4422(b)(3). 

359 The four jurisdictions are: Canada, Germany, Norway, and the United Kingdom. 

84
into a MOU Between the Commission and the FSA Concerning Cooperation and the 

Exchange of Information Related to the Supervision of Cross-Border Clearinghouses. 

The MOU establishes a framework for close cooperation, calls for sharing material 

information, provides for on-site visits, and contemplates ongoing discussions between 

the CFTC and FSA. In addition, the arrangement provides for the request of information 

related to each authority’s statutory functions and efforts to ensure compliance with its 

laws or regulations. 

International Cooperation

In a manner very similar to the SEC, the CFTC works on enhancing international 

cooperation, raising international regulatory standards, and building international 

consensus among financial regulators. The CFTC is an active participant in IOSCO and 

has entered into the MMOU for cooperating in enforcement investigations, and 

exchanging enforcement and surveillance information. In addition, the CFTC has entered 

into more than 30 bilateral information-sharing arrangements that support surveillance, 

enforcement, and regulatory cooperation. The CFTC also routinely has discussions and 

dialogue with its foreign counterparts. 

3. Analysis of SEC/CFTC Regulatory Frameworks 

As described above, under the SEC approach foreign exchanges wishing to 

engage in a securities business in the United States must comply with the registration 

requirements under Section 5 of the Securities Exchange Act before operating in the 

United States. The CFTC, however, when its staff makes certain findings in a request for 

no-action relief, permits FBOTs, subject to appropriate conditions, to provide their 

members or participants in the United States with access to their electronic trading 

systems without seeking designation under the CEA. As a result of concerns regarding 

the CFTC’s oversight capabilities over FBOTs that provide access to persons in the 

United States, legislation proposed by the Treasury Department contains provisions 

permitting the CFTC to require a statutory registration category for such entities. 

With regard to intermediaries, foreign broker-dealers’ interaction with United 

States investors in securities transactions is facilitated primarily through the exemptions 

from United States broker-dealer registration offered by Securities Exchange Act Rule 

15a-6. Foreign broker-dealers relying on such an exemption must comply with the 

conditions of the exemption and limit their activities to those permitted under Rule 15a-6. 

The CFTC’s regulatory regime allows for broader cross-border intermediary access. 

Under Part 30 of the CFTC’s regulations, the CFTC may grant an exemption from 

registration to any foreign broker offering or selling foreign futures or options based upon 

substituted compliance with a comparable regulatory program. 

Several panelists at the September Meeting raised the issue of international 

cooperation and cross-border access.360 In particular, panelists urged the agencies to 

 

360 See Leibowitz Testimony, supra note 51; Short Testimony, supra note 93; Reitz Testimony, supra

note 51; Raisler Testimony, supra note 52; Downs Testimony, supra note 139; and Testimony of 

85
continue to cooperate with their foreign counterparts and to seek global regulatory 

harmonization, especially with regard to the regulation of OTC derivatives. Some 

panelists also indicated a preference for aligning the SEC and CFTC regimes by 

expanding cross-border access with respect to securities transactions, while others 

suggested that this initiative need not be pursued as a top priority at this time. Another 

panelist highlighted the need to enhance cross-border harmonization to prevent regulatory 

arbitrage. 

Both agencies have engaged in numerous international cooperative efforts in 

recent years with the goal of improving regulatory coordination. The SEC and CFTC 

intend to continue to enhance their coordination and cooperation efforts with foreign 

regulators. The Administration’s initiatives to accomplish the objectives of raising 

international regulatory standards and improving international cooperation outlined in the 

Treasury’s White Paper will further enhance the agencies’ efforts. As the international 

community works towards reaching consensus on core areas of regulation, the agencies 

will work together to further their mutual goals of strengthening international regulatory 

standards and collaboration. 

III. Recommendations 

The SEC and the CFTC’s examination of each agency’s regulatory regime, and 

statements and commentary from the September Meeting have identified areas of 

difference between the two agencies’ regulatory frameworks. Many of these differences 

are due to specific attributes of the securities and futures markets. Thus, any effort to 

harmonize the two regulatory regimes must take into account the particular 

characteristics of the two markets and products that they offer. Regulations must be 

tailored for the purposes and objectives of the specific market in question. 

At the same time, the agencies share the common objectives of protecting 

investors, ensuring market integrity, and promoting price transparency. Accordingly, the 

Commissions present recommendations that will allow them to better coordinate and 

harmonize their regulatory systems. These recommendations, which address areas 

ranging from exchange rule-making, product review, enforcement and compliance by 

dual registrants, are designed to fill regulatory gaps, eliminate inconsistent oversight, and 

promote greater collaboration. 

A. Facilitate Portfolio Margining 

The Report recommends legislation to facilitate the holding of (i) futures products 

in an SRO securities portfolio margin account and (ii) securities options, SFPs, and 

certain other securities derivatives in a futures portfolio margin account. Panelists 

 Michael Connolly, Vice Chairman, Board of Directors, Association of Financial Professionals, 

September 3, 2009 (“Connolly Testimony”); see also Transcript of Oral Testimony from Craig 

Donohue, Chief Executive Officer, CME Group, Inc., September 2, 2009, supra note 3; see also

Newedge Comment Letter, supra note 143; FIA Comment Letter, supra note 59; and SIFMA 

Comment Letter, supra note 52. 

86
identified portfolio margining as a significant area for harmonization and agreed that 

portfolio margining is important to U.S. competitiveness. The Commissions 

acknowledge that industry participants are currently developing different approaches to 

achieving the benefits of portfolio margining, including the two account (or “two pot”) 

model. 

To achieve more fully the benefits of risk-based portfolio margining, the 

Commissions would support legislation that confers upon customers the choice of 

portfolio margining in a single futures or securities account at a dually-registered brokerdealer/FCM. Specifically, the Commissions would support legislation that: (i) clarifies 

that security options, SFPs, and certain other securities derivatives may be held in a 

futures account and that, in the event of FCM insolvency, customer claims would not be 

protected under SIPA, but would be resolved under the futures insolvency regime; (ii) 

clarifies that futures may be held in securities portfolio margin accounts and that the 

CFTC may waive its segregation requirements with respect to such futures; and (iii) 

extend SIPA protection to customer claims based on any futures and options on futures 

(and certain other securities-based derivatives) held in a securities portfolio margin 

account, together with the collateral held to margin those positions. The Commissions 

will work together to foster agreements among futures and options clearing houses that 

extend the benefits of portfolio margining to clearing house margin and, in that 

connection, will provide any appropriate exemptive relief. 

In addition, the Commissions should undertake to review their existing customer 

protection, margin and any other relevant regulations to determine whether any rule 

changes or exemptive relief would be necessary to achieve the full benefits of risk-based 

portfolio margining. The Commissions should also undertake, with input from experts, 

the industry, and the public, to explore whether further modifications to portfolio 

margining, including adoption of a one account model that would accommodate all 

financial instruments and all broker-dealers and FCMs, would be in the public interest. 

B. Facilitate Product Approval Process and Provide Legal Certainty 

The Report recommends legislation that would provide a process for expedited 

judicial review of jurisdictional matters regarding new products. Per the 2008 MOU, the 

Commissions “acknowledge that there may be instances in which novel derivative 

products may reflect elements of both securities and commodity futures or options.” The 

experience of past disagreement between the CFTC and SEC regarding jurisdiction over 

particular products was noted at the September Meeting. Despite the agencies best 

efforts, the potential for future disagreement exists. Accordingly, the SEC and the CFTC 

support legislation to establish and clarify: (i) legal certainty with respect to product 

listings and their use of exemptive authority; and (ii) a review process to ensure that any 

jurisdictional dispute is resolved by the Commissions against a firm timeline. 

1. The ability of the SEC and CFTC to resolve the legal uncertainty 

regarding particular products has been affected by the agencies’ statutory authority. The 

SEC and CFTC would support legislation that: (i) allows the CFTC to exercise 

87
jurisdiction over an instrument that the SEC exempts, conditionally or unconditionally, 

pursuant to its authority under the Securities Exchange Act; and (ii) clarifies that the SEC 

may exercise authority over a securities-related instrument that the CFTC has exempted 

pursuant to its power under the CEA. Exemptive orders issued by the SEC are not 

required to expressly state that a product is or is not a security. 

2. There should be a timeline for the two agencies either to use their 

exemptive authority or otherwise come to agreement on the status of a product. The 

CFTC and the SEC would support legislation that establishes a process along the 

following lines: (i) if either agency receives an application for listing of a novel 

derivative product that may have elements of both securities and commodity futures or 

options, agency staff shall immediately notify the other agency’s Secretary and forward a 

copy of such application; (ii) upon a request by the Chairman or Commission of either 

agency, the other agency’s Commission shall, within 120 days of such request, by order 

determine whether the Commission intends to assert jurisdiction; (iii) in the case that one 

agency does not agree with the other agency’s determination regarding the status of a 

product, it may petition a United States Court of Appeals for expedited review. 

Congress may also want to consider other methods for resolving disagreements 

between the agencies.

C. Enhance CFTC Authority Over Exchange Compliance with the CEA 

The Report recommends legislation to enhance CFTC authority over exchange 

and clearinghouse compliance with the CEA. The Commodity Futures Modernization 

Act significantly limited the CFTC’s authority over the rules of exchanges and 

clearinghouses subject to its oversight. The CFTC does not have clear authority, for 

example, to set rules for risk management for exchanges and clearinghouses. The 

CFTC’s authority contrasts with the authority of other regulators, such as the SEC or 

regulators in foreign jurisdictions. In the near future, however, the CFTC will be 

expected to regulate not only the futures markets, but also a large section of what 

currently is the over-the-counter market for derivatives and possibly emissions trading. 

Absent clear rulemaking authority, the CFTC is limited in its ability to enforce core 

principles, to adapt to market conditions and international standards, and to protect the 

public. To provide the CFTC with sufficient ability to ensure that exchanges and 

clearinghouses regulated under its authority are operating within the principles, rules and 

regulations established under the CEA, the CEA should be amended to provide the CFTC 

with clear authority with respect to exchange and clearinghouse rules that the CFTC finds 

are necessary for them to comply with the CEA. The CEA should be amended to: (i) 

clarify the CFTC’s rulemaking authority to determine the appropriate manner by which 

an exchange or clearinghouse may comply with the CEA; (ii) extend from one to ten 

business days, with a possible extension of another 90 days for novel or complex rules or 

products or in other appropriate circumstances, the period for the CFTC to review new 

and amended rules or products proposed by an exchange or clearinghouse; and (iii) 

provide the CFTC with clear authority to bring an enforcement action against an 

exchange or clearinghouse for violation of a core principle in the same manner as it 

88
would any other enforcement action alleging a violation of the CEA or CFTC rules. 

Provisions for these changes are part of Title VII of the Administration’s proposed 

financial regulatory reform legislation. In addition, the CEA currently provides that 

exchange rules shall be approved unless the CFTC concludes that the rule “would 

violate” the CEA. To provide greater oversight authority, the CEA should be amended to 

provide, as does Section 19(b) of the Securities Exchange Act with respect to the SEC’s 

authority, that the CFTC shall approve a proposed rule change if it finds that the change 

is consistent with the statute and regulations, but that the proposed rule change shall be 

disapproved in the absence of such a finding. 

D. Review Approach to Cross Border Access 

The Report recommends that the SEC review its approach to cross-border access 

to determine whether greater efficiencies could be achieved with respect to cross-border 

transactions in securities consistent with the protection of investors and the public 

interest. As described above, under the SEC approach foreign exchanges seeking to do 

business in the United States must comply with the applicable registration requirements 

under the Securities Exchange Act. In addition, foreign broker-dealers’ interaction with 

U.S. investors is facilitated primarily through the exemptions from U.S. broker-dealer 

registration offered by Securities Exchange Act Rule 15a-6. As noted above, several 

panelists at the agencies’ September Meeting indicated a preference for aligning the SEC 

and CFTC regimes by expanding cross-border access with respect to securities 

transactions. 

The SEC intends to undertake a focused review of its approach to cross-border 

access. In particular, the SEC intends to consider whether its current approach could be 

modified to achieve greater efficiencies regarding cross-border securities transactions 

without impairing investor protections. For instance, in connection with its review, the 

SEC would consider whether limited revisions to the provisions of Rule 15a-6 regarding 

the interaction of United States investors with foreign broker-dealers may be appropriate. 

E. Statutory Recognition Regime for Foreign Boards of Trade 

The Report recommends legislation to empower the CFTC to require foreign 

boards of trade to register with the CFTC. The CFTC has been concerned that some 

FBOTs that grant access to their trading facilities to persons located inside the United 

States may not have certain rules and protections that the CFTC considers necessary for 

maintaining the integrity of markets and orderly trading. The CFTC currently provides 

no action relief to FBOTs that have comparable regulatory requirements and is based on 

reliance of the foreign regulator. Because there is no statutory registration requirement 

under the CEA for FBOTs, the CFTC’s authority to oversee trading by United States 

entities abroad, and phenomena such as the so-called “London loophole,” is limited. 

Therefore, the CFTC recommends that the CEA be amended to grant the agency 

authority to require registration of any FBOT that seeks to provide direct access to 

members or other participants located in the United States and, when appropriate, relying 

on the foreign regulator to avoid duplicative regulation. The CFTC also recommends that 

89
the amendments to the CEA provide that FBOTs may not be registered unless they meet 

certain standards that enhance transparency and market integrity, including daily public 

dissemination of trading information, authority to set position limits to prevent 

manipulation and excessive speculation, enforcement authority over manipulative 

conduct, and provision of information to the CFTC. This recommendation is consistent 

with provisions in Title VII of the Administration’s proposed financial regulatory reform 

legislation. 

F. Establish a Uniform Fiduciary Standard for Those Providing 

Investment Advisory Services 

The Report recommends legislation that would impose a uniform fiduciary duty 

on intermediaries who provide similar investment advisory services regarding futures or 

securities. Whether regulated by the CFTC or by the SEC, intermediaries are subject to 

different standards in their interactions with clients. Although some are held to a 

fiduciary duty standard, others are not, except in certain particular circumstances defined 

by state common law. For instance, investment advisers are currently subject to a 

fiduciary standard. When providing similar investment advisory services, other 

intermediaries also should be subject to this standard. 

Therefore, consistent with Title IX of the Administration’s financial regulatory 

reform legislation, which seeks to establish a uniform standard of conduct for brokerdealers and investment advisers, the agencies recommend that a consistent standard apply 

to any CTA, FCM, IB, broker-dealer, or investment adviser who provides similar 

investment advisory services. The SEC and the CFTC support initiatives to align a high 

standard of customer care for intermediaries across financial products, recognizing that 

the behavior of an intermediary acting in the best interest of its client may vary based on 

facts and circumstances, including the nature of the customer relationship and the 

services provided. Robust customer protections should apply equally and uniformly 

across the securities and futures markets. 

 

G. Align Record Retention Requirements for Intermediaries 

The Report recommends that the SEC and the CFTC undertake to align their 

record retention requirements for intermediaries by harmonizing the length of time 

records are required to be maintained. The SEC and the CFTC have different record 

retention requirements for intermediaries. Panelists and commentators suggested that the 

record retention rules be harmonized to decrease burdens resulting from disparities and 

suggested that the agencies jointly review the governing rules in this area and consider 

aligning their requirements. The SEC intends to review its current three (3) and six (6) 

year record retention requirements and consider, as appropriate, rule changes that would 

harmonize these requirements with the five (5) year record retention requirements the 

CFTC makes applicable to CFTC registrants. 

H. Align Customer Risk Disclosure Documents 

90
The Report recommends that the agencies provide greater consistency in their 

customer risk disclosure documents. Pursuant to SEC rules, an equity options market 

must file an ODD that provides certain basic information about the options classes 

covered by the ODD. In addition, a broker-dealer must provide the ODD before 

accepting an options order from a customer or approving the customer’s account for the 

trading of options. CFTC regulations set forth requirements for commodity futures and 

options risk disclosure statements, and they require disclosure, including similarly 

specified risk disclosure statements, to pool participants and advisory clients. 

At the September Meeting, a panelist contrasted the CFTC and SEC disclosure 

documents, noting that whereas the former is between two (2) to three (3) pages in 

length, the latter can be over 100 pages. The CFTC’s disclosure documents were thus 

cited as a model to follow because of their brevity and accessibility. The SEC intends to 

review the current ODD to determine whether a customer disclosure document more akin 

to that which is used for futures products would be appropriate and consistent with the 

protection of investors and the public interest. The SEC anticipates considering what 

format and requirements may be necessary to promote a firm understanding of the 

characteristics and risks of various option products by investors. In doing so, the SEC 

plans to look to, among other things, disclosures provided in registered options offerings, 

including greater use of plain English, and to futures disclosure documents, to describe 

the products and their particular risks. 

I. Align Specific Private Fund Reporting Requirements 

The Report recommends efforts to align specific private fund reporting 

requirements. The CFTC and the SEC should review regulatory requirements applicable 

to investment advisers and commodity trading advisors/commodity pool operators with 

respect to private funds to eliminate, as appropriate, any inconsistent or conflicting 

provisions regarding: (i) the use of performance track records; (ii) requirements 

applicable to investor reports (including the financial statements often used by registered 

investment advisers to comply with the Advisers Act custody rule and the financial 

statements delivered to investors by commodity pool operators); and (iii) recordkeeping 

requirements.

J. Expand CFTC Conflict of Interest Prevention Authority 

The Report recommends legislation to expand the CFTC’s conflict of interest 

prevention authority. Legislation should be enacted to authorize the CFTC to require 

FCMs and IBs to implement conflict of interest procedures that would separate the 

activities of persons in a firm engaged in research or analysis of commodity prices from 

those involved in trading or clearing activities. Provisions for such change, patterned on 

those enacted for securities firms in Sarbanes-Oxley, are part of Title VII of the 

Administration’s proposed financial regulatory reform legislation. 

K. Enhance Whistleblower Protections 

91
The Report recommends legislation on whistleblower protections. Consistent 

with Title IX of the Administration’s proposed financial regulatory reform legislation, 

legislation should be enacted to encourage whistleblowers to come forward with relevant 

information to authorities in both SEC and CFTC registered markets. Specifically, the 

legislation should provide for: (i) rewards for legitimate whistleblowing; and (ii) 

protection of whistleblowers. 

L. Clarify the CEA’s Restitution Remedy 

The Report recommends legislation that would address customer restitution in 

CFTC enforcement actions. The CFTC currently has express authority to seek restitution 

for investor losses in administrative proceedings. However, the legislation should clarify 

that restitution in civil actions is defined in terms of the losses sustained by persons as a 

result of the unlawful conduct. 

M. Enhance the CFTC’s Disruptive Trading Practices Authority 

The Report recommends legislation to enhance the CFTC’s authority over 

disruptive trading practices. Experience shows that certain practices are so disruptive to 

trading in the futures markets that they should be presumptively prohibited. Accordingly, 

legislation should be enacted to enhance the CFTC’s enforcement authorities with respect 

to certain disruptive practices that undermine market integrity and the price formation 

process in the futures markets. 

N. Expand the Scope of Insider Trading Prohibitions Under the CEA 

The Report recommends legislation to expand the scope of insider trading 

prohibitions under the CEA. Legislation should be enacted to expand the scope of insider 

trading coverage under the CEA. Currently, for example, misuse of non-public 

information from many government agencies, including the Federal Reserve, the 

Treasury Department, the Department of Agriculture and other government bodies, to 

trade in the futures markets is not punishable. The CEA should be amended to make 

unlawful the misappropriation and trading on the basis of material non-public 

information from any governmental authority. 

O. Grant the SEC Specific Statutory Authority for Aiding and Abetting 

Under the Securities Act and the Investment Company Act 

The Report recommends legislation that would grant the SEC specific statutory 

authority for aiding and abetting under the Securities Act and the Investment Company 

Act. The CFTC has specific statutory enforcement authority for aiding and abetting all 

violations of the CEA and CFTC rules and regulations, while the SEC has specific 

statutory authority for aiding and abetting only under the Securities Exchange Act and the 

Investment Advisers Act and not under the Securities Act or the Investment Company 

Act. Expanding the SEC’s statutory authority to allow the SEC to bring actions for 

92
aiding and abetting violations of the Securities Act and the Investment Company Act 

would close the gap between the SEC and CFTC’s regulatory regimes. 

P. Create a Joint Advisory Committee 

The Report recommends legislation to authorize the SEC and the CFTC to jointly 

form, fund, and operate a Joint Advisory Committee that would be tasked with 

considering and developing solutions to emerging and ongoing issues of common interest 

in the futures and securities markets. Specifically, the Joint Advisory Committee would 

identify emerging regulatory risks and assess and quantify their implications for investors 

and other market participants, and provide recommendations for solutions. The 

committee would serve as a vehicle for discussion and communication on regulatory 

issues of mutual concerns affecting CFTC and SEC regulated markets, and the industry 

generally, and their effect on the SEC’s and CFTC’s statutory responsibilities. 

Members of the Joint Advisory Committee would be appointed by the Chairmen 

of the SEC and CFTC. Members would include both SEC and CFTC members, as well 

as experts and industry participants. A SEC and a CFTC member would serve as cochairmen of the committee. Such a Joint Advisory Committee would be a valuable 

resource for continuing to further the Administration’s recommendation on 

harmonization. 

Q. Create a Joint Agency Enforcement Task Force 

The Report recommends that the agencies create a Joint Agency Enforcement 

Task Force to harness synergies from shared market surveillance data, improve market 

oversight, enhance enforcement, and relieve duplicative regulatory burdens. A number 

of panelists at the September Meeting endorsed creation of a task force that would consist 

of staff from each agency to coordinate and develop processes for conducting joint 

investigations in response to events that affect both the securities and futures markets. 

The task force would prepare and offer training programs for the staffs of both agencies, 

develop enforcement and examination standards and protocols, and coordinate 

information sharing. The task force also would oversee temporary details of personnel 

between the agencies to assist in furthering the aforementioned objectives. The 

Commissions believe that the creation of a Joint Agency Enforcement Task Force will 

help eliminate inefficiencies, and ensure comprehensive and consistent fraud and 

manipulation detection across the two marketplaces. 

R. Establish a Cross-Agency Training Program 

The Report recommends that the SEC and the CFTC should establish a joint 

cross-agency training program for staff. The SEC recently enhanced its training for SEC 

staff and has been requiring its examiners to obtain certification through the Association 

of Certified Fraud Examiners training program. With rapidly evolving global financial 

markets and technology, and the convergence of marketplaces and market participants, 

the number and complexity of matters where both agencies have enforcement jurisdiction 

93
and interest will continue to grow. Accordingly, the Commissions believe that joint 

training programs for enforcement personnel would be highly beneficial. The training 

program would be for staff at both agencies, and would focus on enforcement matters. 

S. Develop a Program for Sharing Staff Through Detail Assignments 

The Report recommends to develop a program for the regular sharing of staff 

through detail assignments. The agencies anticipate that, through this program, each year 

several staff from each agency will have the opportunity to work at the other agency 

through temporary detail positions for a specified period of time. As financial products 

grow more complex, and as financial institutions and markets continue to consolidate and 

expand their global reach, it is becoming ever more imperative for the staffs of each 

agency to have a thorough understanding of both the securities and futures markets in 

order to perform effectively. Implementing a program where staff engages in a rotation 

between the two agencies will allow for greater collaboration and coordination between 

the two agencies. Further, it will help foster understanding and appreciation for the 

unique aspects of the markets and products for which both agencies are responsible. 

T. Create a Joint Information Technology Task Force 

The Report recommends that the agencies develop a Joint Information 

Technology Task Force to pursue linking information on CFTC and SEC regulated 

persons made available to the public and such other information as the Commissions 

jointly find useful and appropriate in the public interest. Linking publicly-filed 

information and such other information as the Commissions jointly find useful and 

appropriate in the public interest residing with the two agencies would promote 

transparency and facilitate the use and understanding of such information by providing a 

comprehensive, consolidated database on persons and entities regulated by the SEC and 

the CFTC. An integrated database would assist the staff of both agencies in conducting 

investigations, examinations, enforcement matters, and market surveillance activities. 

The task force should also explore linking or coordinating the NFA BASICdatabase and 

IARD, which would make it easier for investors and customers to find registration and 

disciplinary information for an adviser. Such linkage of information on the professional 

background of current and former securities and futures firms and brokers would further 

the same objectives. Accordingly, the CFTC and SEC recommend formation of a joint 

agency task force on information technology. 

 

 

94
95