Financial Regulation: Clearer Goals and Reporting Requirements Could Enhance Efforts by CFTC and SEC to Harmonize Their Regulatory Approaches
Published: 2010-04-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The conference report accompanying the Consolidated Appropriations Act of 2010 directed GAO to assess the joint report of the (SEC) and the Commodity Futures Trading Commission (CFTC) on harmonization of their regulatory approaches. In October 2009, CFTC and SEC issued this report in response to the Department of the Treasury's recommendation that the two agencies assess conflicts in their rules and statutes with respect to similar financial instruments. GAO's objectives were to review (1) how CFTC and SEC identified and assessed harmonization opportunities, (2) the agencies' progress toward implementing the joint report's recommendations, and (3) additional steps the agencies could take to reduce inconsistencies and overlap in their oversight. To meet these objectives, GAO reviewed the joint report and related documentation, interviewed agency officials, and obtained and analyzed written comments on the report from market participants.
section_title: What GAO Found
paragraphs: CFTC and SEC conducted joint analyses and sought public input to inform their efforts to identify and assess significant differences in their rules and statutes and develop recommendations to address such differences. The agencies obtained public input through joint public meetings and a public comment period and worked together to analyze this input. In drafting the joint report on harmonization of their regulatory approaches, CFTC and SEC focused their analysis on eight potential areas for harmonization and made at least one recommendation in all but one of these areas. The joint report also includes several recommendations to enhance coordination between the agencies. For example, the report recommended the creation of a Joint Advisory Committee to be tasked with considering and developing solutions to issues of common interest in the futures and securities markets. The joint report did not cover gaps in the agencies' authorities to oversee over-the-counter derivatives, which were the subject of congressional deliberation at the time of their study. The joint report's recommendations for statutory changes have yet to be enacted, and the recommendations for agency action remain in the planning stages. According to agency staff, since issuing the joint report in October 2009, the agencies have been focused on working with Congress on drafting legislation to address recommended statutory changes. Congress authorized CFTC and SEC to fund the Joint Advisory Committee, as requested in the joint report, and proposed legislation includes provisions that would partially address recommended statutory changes in areas including oversight of exchange rules and enforcement. CFTC and SEC have drafted a charter for the Joint Advisory Committee and expect to have this committee functioning by early summer 2010. Agency staff said the agencies have not set firm timelines for the implementation of the other recommendations for agency action. Additional harmonization opportunities exist beyond those addressed by the joint report's recommendations, and future efforts by CFTC and SEC to assess these opportunities could benefit from clearer goals and accountability requirements. With only a few months to complete their report, agency staff said the agencies could not address all differences in their rules and statutes through the joint report's recommendations. Market participants identified several areas they believe could benefit from additional harmonization efforts, including portfolio margining and investor definitions and categories. The agencies plan to coordinate future harmonization efforts through the Joint Advisory Committee, but they have not yet developed clear goals for harmonization or developed requirements for the agencies to evaluate and report their progress toward meeting such goals. Without a clearer vision to guide future harmonization efforts and mechanisms to ensure accountability for these efforts, CFTC and SEC may not be strategically positioned to implement the joint report's recommendations and address remaining harmonization opportunities.

section_title: Letter
paragraphs: When Congress created the Commodity Futures Trading Commission  (CFTC) in 1974 to oversee the commodity futures markets, the futures  markets were relatively distinct from the securities markets overseen by  the Securities and Exchange Commission (SEC). As early as the 1970s,  however, the emergence of derivative products with characteristics of  both futures and securities led to periodic disputes concerning which  agency should have regulatory jurisdiction over certain new products.  These jurisdictional disputes have at times consumed significant agency  resources and resulted in lengthy delays in introducing product  innovations to the markets. Moreover, the futures and securities markets  have increasingly overlapped in terms of market participants, raising  concerns about duplicative or inconsistent regulation of entities that  engage in similar activities. Despite efforts by CFTC and SEC in recent  decades to resolve these issues, concerns about remaining overlaps, gaps,  and inconsistencies in their oversight have led to calls for a merger of the  two agencies, or absent a merger, greater harmonization of their  regulatory approaches.
In its June 2009 white paper on financial regulatory reform, the  Department of the Treasury (Treasury) recommended that CFTC and SEC  report to Congress by September 30, 2009, on existing conflicts in their  rules and statutes with respect to similar types of financial instruments.  Treasury recommended that the agencies either explain why such  differences are essential to achieving underlying policy objectives or make  recommendations for changes to statutes and rules that would eliminate  the differences. In October 2009, CFTC and SEC responded to Treasury’s  recommendation by issuing a joint report in which the agencies examined  harmonization opportunities and made recommendations to reduce  inconsistencies in their oversight and enhance cooperation between them.
The conference report accompanying the Consolidated Appropriations Act  of 2010 mandated that GAO review the joint report of CFTC and SEC on  harmonization of their rules and statutes. Accordingly, in this report, we  examine (1) how CFTC and SEC identified and assessed significant  differences in their rules and statutes and developed recommendations to  address such differences, (2) what progress CFTC and SEC have made  toward implementation of the joint report’s recommendations, and (3)  what additional steps CFTC and SEC could take to eliminate or reduce  inconsistencies in regulatory oversight and to enhance regulatory  efficiency and effectiveness, as well as market transparency.
To satisfy our responsibility under the mandate to report the results of this  work by March 1, 2010, we provided an interim report in the form of a  briefing to the subcommittees’ staffs on February 26, 2010. Appendix II  contains the full briefing slides. This letter represents the final report.
To address our objectives, we reviewed and analyzed the joint report of  CFTC and SEC on harmonization (joint report), documentation of public  input collected by CFTC and SEC through joint public meetings and a  public comment period, CFTC and SEC analyses of relevant differences in  their statutes and regulations, and provisions of proposed legislation that  address statutory changes recommended in the joint report. We  interviewed CFTC and SEC staff about steps taken by the agencies to  identify and assess harmonization opportunities, progress the two  agencies have made toward implementing the joint report’s  recommendations, and additional harmonization opportunities that may  exist. In addition, to identify additional steps the agencies could take to  harmonize their rules and statutes, we obtained and analyzed written  comments on the joint report from representatives of securities and  futures market participants, the investor community, and other experts  who participated in the joint public meetings hosted by the agencies to  discuss harmonization opportunities. Finally, we reviewed prior GAO  work on futures and securities markets regulation, financial regulatory  reform, and practices that can enhance and sustain collaboration among  federal agencies.
We conducted this performance audit from January 2010 to April 2010 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives. A more extensive discussion of our scope  and methodology appears in appendix I.
subsections: section_title: Background
paragraphs: Prior to the 1930s, securities markets were overseen by various state  securities regulatory bodies and the securities exchanges themselves. In  the aftermath of the stock market crash of 1929, the Securities Exchange  Act of 1934 (SEA) created SEC as a new federal agency and gave it  authority to register and oversee securities broker-dealers, as well as  securities exchanges, to strengthen securities oversight and address  inconsistent state securities rules. SEC’s mission is to protect investors;  maintain fair, orderly and efficient markets; and facilitate capital  formation. In addition to regulation by SEC and state agencies, securities  markets and the broker-dealers that accept and execute customer orders  in these markets continue to be regulated by self-regulatory organizations  (SRO), including the Financial Industry Regulatory Authority, that are  funded by the participants in the industry. Among other things, these SROs  establish rules and conduct examinations related to market integrity and  investor protection. SEC also registers and oversees investment  companies and advisers, approves rules for the industry, and conducts  examinations of broker-dealers and mutual funds. State securities  regulators are generally responsible for registering certain securities  products and, along with SEC, investigating securities fraud. SEC is also  responsible for overseeing the financial reporting and disclosures that  companies issuing securities must make under U.S. securities laws.
Oversight of the trading of futures contracts has changed over the years in  response to changes in the marketplace. Under the Grain Futures Act of  1922, the trading of futures contracts was overseen by the Grain Futures  Administration, an office within the Department of Agriculture, reflecting  the nature of the products for which futures contracts were traded.  However, futures contracts were later created for nonagricultural  commodities, such as energy products like oil and natural gas, metals such  as gold and silver, and financial products such as Treasury bonds and  foreign currencies. In 1974, as a result of the Commodity Exchange Act  (CEA), CFTC was created as a new independent federal agency to oversee  the trading of futures contracts. CFTC’s mission is to protect market users  and the public from fraud, manipulation, and abusive practices related to  the sale of commodity and financial futures and options, and to foster  open, competitive, and financially sound futures markets. Like SEC, CFTC  oversees the registration of intermediaries, including futures commission  merchants (FCM), and relies on SROs, including the futures exchanges  and the National Futures Association, to establish and enforce rules  governing member behavior. The Commodity Futures Modernization Act  of 2000 (CFMA) established a principles-based structure for the regulation  of futures exchanges and derivatives clearing organizations, and clarified  that some off-exchange derivatives trading—and in particular trading on  facilities accessible only to large, sophisticated traders—was permitted  and would be largely unregulated or exempt from regulation.
In recent decades, CFTC and SEC have sought ways to resolve  jurisdictional disputes and address other emerging areas of overlap in  their respective oversight of futures and securities markets. For example,  in 1981, CFTC and SEC reached an agreement, called the Shad-Johnson  Jurisdictional Accord, to clarify their respective jurisdictions over  securities-based options and futures. The accord was enacted into law in  January 1983 and, among other things, confirmed SEC’s jurisdiction over  securities-based options, including stocks and stock indexes; provided  CFTC with jurisdiction over futures (and options thereon) on certain  securities and securities indexes; and prohibited futures trading on single  stocks, as well as on securities indexes that did not meet specific  requirements. In 2000, CFMA lifted the ban on futures on single stocks  and narrow-based securities indexes, allowing them to be traded on  securities or futures exchanges but subject to joint regulation of CFTC and  SEC. Pursuant to the CFMA, the two agencies worked together to jointly  create margin requirements for single stock futures. Exchanges that list  and trade security futures are subject to the jurisdiction of both CFTC and  SEC; this is one example of how the securities and futures markets have  overlapped in terms of regulated entities. In addition, financial  intermediaries must register with both CFTC and SEC if they serve  investors trading in instruments subject to the jurisdiction of the two  agencies. According to the joint report, approximately 45 percent of  futures commission merchants are also registered with SEC as broker- dealers. The joint report provides additional examples of the agencies’  efforts to collaborate in various areas. For example, in March 2008, the  two agencies entered into a memorandum of understanding with the goal  of creating a closer relationship between the agencies on a broad range of  issues affecting their jurisdictions. 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.
Despite efforts by the agencies to define their respective regulatory  jurisdictions, jurisdictional disputes have periodically delayed the  introduction of novel derivative products to the marketplace. The joint  report notes that the governing statutes do not definitively address the  fundamental question of whether certain derivative instruments qualified  as futures contracts or options. In one recent example, in January 2005 the  Chicago Board Options Exchange (CBOE) filed a proposal with SEC to list  and trade a new option on an exchange-traded fund holding investments  involving gold, but introduction of this product was delayed by over 3  years as CFTC and SEC could not reach agreement on jurisdiction. In  another instance, according to the Chief Executive Officer of CBOE, an  option on a credit default product was placed on hold for 7 months, while  a European derivatives exchange introduced a similar product within  weeks of the announcement of the proposal to list this similar product.  These examples illustrate the potential for such delays to create domestic  and international competitive disadvantages for U.S. exchanges and  clearinghouses attempting to introduce novel products.
In its June 2009 white paper on financial regulatory reform, Treasury  noted that the broad public policy objectives of futures and securities  regulation are the same and that many of the differences in the regulation  of the markets are no longer justified. Specifically, Treasury expressed the  following concerns:    Economically equivalent instruments may be regulated in different  manners, depending on which agency has jurisdiction. For example, many  futures products and financial options regulated as securities are similar,  and the returns to one can often be replicated with the other.
Jurisdictional disputes consume significant agency resources, and  uncertainty about the outcome of such disputes may impede innovation.
Jurisdictional distinctions may have unnecessarily limited competition  between markets and exchanges. Under existing law, financial instruments  with similar characteristics may be forced to trade on different exchanges  that are subject to different regulatory regimes.
The agencies follow different approaches to the regulation of exchanges,  clearing organizations, and intermediaries. Pursuant to the CEA, CFTC  employs a more principles-based approach to regulation, under which  market participants can have greater flexibility in complying with  regulatory requirements than under a more rules-based approach.  Treasury suggested that the two agencies seek agreement on principles of  regulation that are significantly more precise than the CEA’s current “core  principles.”
As noted earlier, Treasury recommended that the agencies make  recommendations to address differences in statutes and regulations that  are not justified by the agencies’ policy objectives. In the joint report, the  agencies note that broad differences in futures and securities regulation  reflect, in part, fundamental differences in the roles played by the two  markets. Because of the role of certain securities markets in capital  formation, for example, securities regulation is more concerned with  disclosure than commodities regulation is. For example, securities with  returns that depend on the issuer’s financial performance—such as stocks  issued by institutions to raise capital—require more detailed disclosure to  protect investors than futures products with returns that depend on  changes in the price of a physical commodity. The primary purpose of the  futures markets is to facilitate the management and transfer of risk, and  certain securities markets, such as securities options and other securities  derivatives markets, also facilitate the management and transfer of risk. As  noted above, Treasury expressed concern that certain securities options  and futures products are subject to different regulatory requirements  although they serve similar purposes.
section_title: CFTC and SEC Obtained Public Input and Conducted Joint Analyses to Identify and Assess Significant Differences in Their Statutes and Rules
paragraphs: To respond to Treasury’s recommendation, CFTC and SEC obtained  public input and conducted independent and joint analyses to identify and  assess significant differences in their statutes and rules. In July and August  2009, the agencies collaborated to prioritize and categorize issues on  which to solicit public input. Through joint public meetings held in early  September 2009 and a request for public comments, CFTC and SEC  collected views on harmonization opportunities from a range of market  participants and experts. The agencies worked together to analyze the  information collected, develop recommendations, and draft the joint  report. On the basis of their analysis of the public input, CFTC and SEC  grouped issues of regulatory conflict into eight areas, and in the joint  report made at least one recommendation in all but one of these  categories. The agencies also made five recommendations intended to  enhance operational coordination between them. The joint report focuses  on differences in the agencies’ existing authorities and does not cover  issues related to gaps in the agencies’ authorities to oversee over-the- counter derivatives, which were the subject of congressional deliberation  at the time of their analysis.
subsections: section_title: The Agencies Analyzed Differences in Statutes and Rules and Obtained Public Input to Help Identify Potential Areas for Harmonization
paragraphs: Given the tight time frame—Treasury recommended in June 2009 that the  agencies report to Congress by the end of September 2009—agency staff  said they focused on significant areas of difference and relied to a large  extent on public input to help identify significant regulatory differences  and, in turn, harmonization opportunities. As a first step, the agencies  worked separately and together in July and August 2009 to analyze  differences between them regarding their statutes and regulations. For  example, CFTC and SEC staff completed a side-by-side analysis of the  agencies’ respective statutes and rules in nine areas: (1) exchanges and  markets, (2) clearance and settlement, (3) trading practices, (4)  intermediaries, (5) Securities Act of 1933 and applicable provisions of the  Exchange Act, (6) financial responsibility rules, (7) enforcement, (8)  investment companies, and (9) investment advisers. According to CFTC  and SEC staff, the agencies used this analysis to identify significant  statutory and regulatory differences and to prioritize and categorize issues  on which to solicit public input.
Following these independent and joint analyses, CFTC and SEC sought  input from the public in two ways. First, the agencies jointly arranged and  hosted public meetings on September 2 and 3, 2009. For the joint public  meetings, CFTC and SEC invited members of the investor community,  academics, industry experts, and futures and securities market  participants to participate in a series of panel discussions and provide  their views on regulatory differences and harmonization opportunities.  The agencies organized the meetings into five panel discussions, with each  panel focused on one of five broad categories: (1) exchanges and markets,  (2) intermediaries, (3) clearance and settlement, (4) enforcement, and (5)  investment funds. Including the participation of all nine CFTC and SEC  Commissioners and 30 panelists, these joint public meetings were  unprecedented in the history of the two agencies, according to the joint  report. Second, CFTC and SEC provided an opportunity for public  comment from August 19 to September 14, 2009, on the issues to be  discussed at the joint public meetings. In addition to the statements  submitted by individuals who participated as panelists, the agencies  received over a dozen statements offering the views of individuals or  organizations not represented on the panels.
section_title: CFTC and SEC Staff Said the Two Agencies Collaborated to Assess Harmonization Opportunities and Develop Recommendations
paragraphs: According to CFTC and SEC staff, the agencies worked together to  analyze the collected information, develop their findings and  recommendations, and draft the joint report. On the basis of their analysis  of comments obtained from the joint public meetings and public comment  request, the agencies focused the joint report’s analysis on eight subject  areas covering issues the agencies believe emerged as the most relevant to  harmonizing their statutory and regulatory regimes: (1) product listing and  approval, (2) exchange/clearinghouse rule changes, (3) risk-based  portfolio margining and bankruptcy/insolvency regimes, (4) market  structure, (5) price manipulation and insider trading, (6) customer  protection standards applicable to financial advisers, (7) regulatory  compliance by dual registrants, and (8) cross-border regulatory matters.  For each of the eight areas, the joint report includes discussion of statutes  and regulations relevant to SEC oversight, followed by discussion of  statutes and regulations relevant to CFTC oversight. For each area, the  joint report also includes an analysis section in which the two agencies  analyze the differences between their regulatory approaches. Each agency  took responsibility for drafting the sections on its regulations and the  statutes relevant to its authority. The agencies divided initial drafting  responsibility for the analysis and recommendation sections, and CFTC  and SEC staff said that the agencies shared their drafts with each other  and incorporated each other’s comments. In the analysis sections, the  agencies also incorporated public input obtained through the joint public  meetings and the public comment period.
CFTC and SEC jointly issued their report in October 2009 and made 15  recommendations that cover harmonization opportunities in all but one of  the eight areas—market structure. Table 1 summarizes the joint report’s  recommendations for statutory change and agency action in these seven  areas. The recommendations for statutory change cover changes CFTC  and SEC believe require legislative action to amend one or both of the  agencies’ statutes, while the recommendations for agency action cover  changes the agencies believe they can implement without action from  Congress. In the joint report, the agencies note that market participants  and other experts offered mixed views about whether differences in the  futures and securities market structures are justified by the agencies’  policy objectives. Later in this report, we discuss opposing views on  whether Congress should legislate changes to the structure of the futures  industry to introduce features of the securities market structure.
In addition, the agencies made five recommendations to enhance  operational coordination between them:    create a Joint Advisory Committee to be tasked with considering and  developing solutions to emerging and ongoing issues of common interest  in the futures and securities markets;   create a Joint Agency Enforcement Task Force to share market  surveillance data, improve market oversight, enhance enforcement, and  relieve duplicative regulatory burdens;   establish a joint cross-agency training program for staff;    develop a program for the regular sharing of staff through detail    create a Joint Information Technology Task Force to pursue linking  information on CFTC- and SEC-regulated persons and other information  the agencies jointly find useful.
The joint report’s recommendation for the creation of a Joint Advisory  Committee included a request that Congress authorize CFTC and SEC to  form, fund, and operate this committee. The other four recommendations  for operational coordination did not identify a need for legislative action  prior to implementation.
The joint report does not cover issues related to gaps in the agencies’  regulatory authority with respect to over-the-counter derivatives. The  executive summary of the joint report notes that these gaps were  discussed in the Treasury white paper and were the subject of deliberation  before Congress at the time of the agencies’ harmonization study.  Consistent with Treasury’s request that the agencies identify existing  conflicts in their rules and statutes, CFTC and SEC staff said that they  chose to focus on their existing authorities in the report.
section_title: Most of the Joint Report’s Recommendations Have Yet to Be Enacted or Remain in the Planning Stages
paragraphs: The joint report’s recommendations for statutory changes have yet to be  enacted, and the recommendations for agency action remain in the  planning stages. Congress authorized funding for the Joint Advisory  Committee, as requested in the joint report, and has proposed legislation  including provisions that would address several recommended statutory  changes. CFTC and SEC staff told us they expect to have the Joint  Advisory Committee functioning by early summer 2010. The agencies have  not yet established time frames for implementing the joint report’s other  recommendations that do not require legislative action.
subsections: section_title: One Requested Legislative Action Has Been Taken, and Proposed Legislation Includes Provisions That Would Address Some Recommended Statutory Changes
paragraphs: According to CFTC and SEC staff, since issuing the joint report in October  2009, the agencies have been focused on working with Congress on  drafting legislation to address statutory changes recommended in the joint  report. To date, Congress has acted on a request in one of the agencies’  recommendations to enhance operational coordination: The Consolidated  Appropriations Act of 2010 authorized CFTC and SEC to fund the Joint  Advisory Committee. The joint report’s recommendations for changes to  one or both of the agencies’ statutes have yet to be enacted.
H.R. 4173, as passed by the House of Representatives, would address  statutory changes recommended by the report in five areas, if enacted (see  table 2). First, H.R. 4173 includes provisions that would enhance CFTC’s  authority over exchange and clearinghouse compliance with the CEA, as  recommended by the joint report. Second, by amending the Securities  Investor Protection Act (SIPA) to extend SIPA protection to margin  related to futures positions held in a securities portfolio margining  account, H.R. 4173 would address one of the statutory changes  recommended to facilitate portfolio margining. H.R. 4173 also includes  provisions that address recommended enhancements to a specific  enforcement authority for either CFTC or SEC. For example, Sections  7207 and 7208 would grant SEC specific statutory authority for aiding and  abetting under the Securities Act and the Investment Company Act. As  noted in table 2, several of the H.R. 4173 provisions would represent only  partial implementation of the joint report’s recommendations. For  example, with respect to enhancing CFTC’s authority over exchange and  clearinghouse rules, H.R. 4173 would not amend the CEA to allow CFTC to  reject proposed rule changes if it cannot make a finding that the change is  consistent with the CEA and regulations. In addition, H.R. 4173  provisions regarding fiduciary duty and whistleblower protections would  implement recommended statutory changes with respect to securities  market participants, but not futures market participants. Finally, the H.R.  4173 provision related to cross-border access would not empower CFTC  to require certain foreign boards of trade to register with CFTC, as  recommended in the joint report.
section_title: Recommendations for Agency Action Remain in the Planning Stages
paragraphs: According to CFTC and SEC staff, the joint report’s recommendations for  action by one or both agencies generally are in the initiation or planning  stage. As noted above, only one of the recommendations for enhanced  interagency coordination included a request for legislative action, and  Congress acted on this request to authorize funding for the Joint Advisory  Committee. The agencies have drafted a charter for the Joint Advisory  Committee, and CFTC and SEC staff told us they were working together to  finalize the charter and consider selection of individuals to sit on the  committee. The report’s other recommendations requiring agency action  include the other operational coordination recommendations and  recommendations for the agencies to align certain requirements and study  certain issues, such as portfolio margining and SEC’s approach to cross- border access. Agency staff said they expect to have the Joint Advisory  Committee functioning by late spring or early summer 2010 but have not  set firm time frames for implementing the joint report’s other  recommendations requiring agency action.
section_title: Additional Harmonization Opportunities Exist, and the Agencies’ Future Harmonization Efforts Could Benefit from Clearer Goals and Accountability Requirements
paragraphs: While the joint report’s recommendations would reduce or eliminate  certain inconsistencies in the two agencies’ regulatory approaches,  additional harmonization opportunities exist and the agencies’ future  harmonization efforts could benefit from clearer goals and accountability  requirements. The agencies acknowledge that the recommendations do  not address all differences that may not be justified by their policy  objectives, and market participants and other experts identified areas they  believe could benefit from additional harmonization efforts. Importantly,  some remaining differences in the agencies’ regulatory approaches could  create opportunities for regulatory arbitrage. CFTC and SEC staff told us  they may use the Joint Advisory Committee to further Treasury’s  recommendation on harmonization, but the agencies have not established  clear goals for harmonization or requirements to report and evaluate  progress toward such goals. Without a clear vision for future  harmonization efforts, the agencies may not be strategically positioned to  implement the joint report’s recommendations and assess remaining  opportunities for harmonization.
subsections: section_title: Joint Report’s Recommendations Do Not Address All Differences in Statutes and Rules with Respect to Similar Products and Entities
paragraphs: Given time and resource constraints, agency staff said they could not  address all differences through the joint report’s recommendations. As  noted earlier, CFTC and SEC relied heavily on public input to identify  areas of focus for the joint report. Although public input generally  indicated support for harmonization in several areas, on some issues,  significant disagreement existed at the joint public meetings as to whether  or how to achieve harmonization, presenting challenges to reaching  agreement in a short time. The joint report’s recommendations  acknowledge a need for further study in certain areas, including risk-based  portfolio margining and SEC’s approach to cross-border access. However,  with respect to certain other issues where disagreement existed, such as  the structure of the U.S. futures markets and SEC’s process for reviewing  and approving exchange and clearinghouse rules, the agencies did not  make any recommendations. Moreover, CFTC and SEC acknowledge that  some potential harmonization opportunities not covered in the report,  such as harmonizing the agencies’ investor definitions, merit consideration  by the agencies.
At the joint public meetings, the CFTC and SEC Chairmen both cited  reducing regulatory arbitrage as an objective of the harmonization effort.  Importantly, some remaining statutory and regulatory differences may  create opportunities for regulatory arbitrage—that is, the potential for  market participants to use a particular market or product instead of a  competing market or product to exploit regulatory differences. In its white  paper, Treasury expressed concern that economically equivalent  instruments may be regulated in different manners, depending on which  agency has jurisdiction, and consistent with this concern, we have  endorsed the goal of consistent regulation of similar products and  institutions to help minimize negative competitive outcomes. However,  the joint report’s recommendations do not address all inconsistencies in  oversight of similar products and institutions. For example, the joint  report’s recommendations do not explicitly address the potential for  different margin requirements for certain economically equivalent  instruments when used for similar purposes. In a joint comment letter  submitted to the agencies following the joint public meetings, several  securities options exchanges and the Options Clearing Corporation said  that differences between the agencies’ approaches to regulating margin  can result in significantly different margin requirements for comparable  securities options and futures products, creating a competitive  disadvantage for certain options regulated as securities. The joint report  notes that CFTC, unlike SEC, generally does not have authority to set  margin levels for futures contracts or options on futures, but does not  recommend a statutory change to harmonize the agencies’ authority over  margin requirements. In addition, SEC staff noted that all securities  transactions are subject to a small fee under the SEA and that there is no  comparable fee for futures transactions. The joint report did not include a  discussion of this difference, and according to SEC staff, a statutory  change would be required to achieve harmonization on this matter. As  discussed below, market participants identified other areas where  remaining differences could create the potential for regulatory arbitrage,  including differences in market structure and investor definitions.
CFTC staff said that recognizing that issues related to regulatory arbitrage  are often complicated is important because many factors, including  statutory goals, can drive differences in the rules applicable to similar  products and activities and because judgments about which regulatory  approach is more appropriate can be difficult. Moreover, regulatory  differences with respect to similar products or institutions do not  necessarily indicate that either futures or securities market requirements  provide insufficient investor protection or impose excessive burdens on  market participants. Nevertheless, when such differences exist, it is  important to consider whether they can create incentives for market  participants to engage in economically costly activities in order to take  advantage of more favorable regulations.
As part of our review, we contacted the 30 panelists who participated in  the joint public meetings to ask them about their views on the joint report  and its recommendations. We also requested input from four other  individuals, based on suggestions from CFTC and SEC. In their written  comments, respondents identified areas they believe could benefit from  additional harmonization efforts. These areas include (1) legal certainty  for new products, (2) oversight of exchange and clearinghouse rules, (3)  portfolio margining, (4) market structure, and (5) investor definitions.  Respondents provided other comments on the joint report and its  recommendations, but we focused on remaining areas for harmonization  most emphasized by respondents.
Greater legal certainty for new products: Many respondents  supported the joint report’s recommendation for having the U.S. Court of  Appeals expeditiously resolve a dispute between CFTC and SEC over their  jurisdiction over a new product in cases where the agencies do not reach  agreement within a prescribed time frame. However, several expressed  concern that implementation of this recommendation would not fully  resolve concerns related to establishing greater legal certainty for new  products.
Recent Example of the Reolution Process  for Juridictional Conflict On Juary 25, 2005, CBOE filed  propoed  rle chnge with SEC to lind trde option  on re in  trust holding invetment in  gold.  In 2004, SEC hpproved  ecritie  exchnge’s proposal to lind trde the gold  trusre nderlying the propoed option  prodct, but CFTC ff took the view tht the  gold trusre hold e viewed as  commodity trsaction (rther thecri- tie) nd tht, as such, CFTC hold hve  exclusive jridiction over the option on the  gold trusre. A  result of thi difference  in view, SEC deferred ction on the  propoed liting of the option on gold trusre for over three ye.  In the interim,  CBOE submitted mendment to it propoed  rle chnge, nd for other exchnge  submitted proposa to lind trde option  on gold trusre. staff expressed concern that an administrative body, depending on its  composition, could be subject to political influence. Second, two futures  market participants supported changes that would allow exchanges to  choose whether to list a product as a future or a security, but CFTC and  SEC staff said that agency review is needed to ensure that new products fit  within the legal definitions of the regime—futures or securities—under  which they are regulated.
In ddition, in Octoer 2007, OneChicgo,   ecrity fre exchnge, submitted   proposal to CFTC to lind trde fre on  gold trusre.  In Mrch 200, psuant to   memorndm of ndernding etween the  gencie nd diussion etween CFTC nd  SEC ff, SEC publihed the mended  CBOE proposal for comment in the Federl  Regiter.  In Mrch nd April 200, CFTC  publihed  notice eeking public comment on  exemption from CFTC’s exclusive jridiction  for the OneChicgo prodct nd the CBOE  prodct.  The finliztion of thee exemption  permitted the OneChicgo prodct to e  trded nd clered as  ecrity fre  subject to the joint jridiction of CFTC nd  SEC nd the gold trust option to e trded  nd clered as ecritie option subject to  exclusive SEC jridiction.  On My 29, 200,  SEC grnted pprovl to CBOE to lind  trde the gold trust option. report recommends legislation to enhance CFTC’s authority over  exchange and clearinghouse compliance with the CEA, it does not include  a recommendation for SEC in this area. Echoing views expressed at the  joint public meetings and discussed in the joint report, some respondents  recommended that SEC adopt or consider adopting a process similar to  CFTC’s more rapid process for reviewing and approving exchange and  clearinghouse rules, under which most proposed rules are immediately  effective upon self-certification by the exchange or clearinghouse that the  rule complies with the CEA. Exchanges noted that the self-certification  process is competitively important because it allows them to implement  rule changes quickly. A few respondents also urged the two agencies to  reach agreement on an overarching set of principles to govern their  oversight of exchange and clearinghouse rules. This view also was  reflected in the joint public meetings and the joint report. As noted in the  joint report, SEC recently approved a new process for streamlining review  of rule changes, and SEC staff noted that about two-thirds of rule changes  proposed by securities exchanges are effective immediately upon filing.  SEC staff acknowledged that despite the recent streamlining, differences  remain between the two agencies’ rule approval processes. Under the  SEA, for example, rule changes that are not effective under self- certification, in contrast to the approach under the CEA, must be approved  by SEC before they are effective. In addition, all proposed rule changes on  the securities side are published for comment. SEC staff noted that  differences in the agencies’ rule approval processes in part reflect  differences in the structures of the futures and securities markets. For  example, in the securities markets, multiple exchanges compete to provide  a trading venue for products that are fungible across the exchanges; thus  proposed securities exchange rules can have implications for competition  among the exchanges.
Portfolio margining and insolvency regimes: The joint report’s  recommendation to facilitate portfolio margining neither explicitly  addresses differences in the portfolio margining methods used for futures  and securities portfolio margining accounts nor fully addresses issues  related to the insolvency of an intermediary that is dually registered as a  broker-dealer and a futures commission merchant. Two respondents  suggested that the agencies adopt a uniform portfolio margining regime.  Currently, the portfolio margining method approved by SEC for securities  portfolio margining accounts is different from the method for futures  portfolio margining accounts. Agency staff said these differences could  result in different margin requirements for similar, or economically  equivalent, instruments when used for similar purposes. SEC staff said  they are aware of the potential for regulatory arbitrage as a result of these  different methods. CFTC and SEC staff agreed that there are issues related  to portfolio margining that merit further consideration. In addition, a few  market participants recommended that CFTC and SEC work with  Congress to harmonize the bankruptcy and customer protection rules  applicable to joint broker-dealer/FCMs. These respondents noted that  harmonization of these rules is needed to help ensure the orderly  unwinding of customer positions in the event of a joint broker-dealer/FCM  bankruptcy. One respondent observed that while addressing these  insolvency issues cannot be characterized as a “quick win,” CFTC and SEC  should begin the process soon considering its importance and the  volatility of today’s markets.
Market structure: At the joint public meetings, panelists presented  mixed views on the need to resolve differences in the futures and  securities market structures, and the joint report discusses these views.  Noting the absence of a joint report recommendation, a few respondents  recommended actions to promote greater competition in the U.S. futures  markets. Two respondents told us that Congress and CFTC should take  steps to introduce features of the securities market structure to the futures  markets to improve competition and lower costs for investors in these  markets. For example, one securities market participant recommended  that CFTC encourage listing of fungible products to allow trading of  products on multiple exchanges and mandate interoperability of clearing  organizations to permit market participants to clear trades at a  clearinghouse regardless of the facility on which the trade was executed.  Another respondent suggested that regulators take a more aggressive  stance in using their antitrust authorities to ensure that futures exchanges  and clearinghouses and their rules are not anticompetitive. In written  comments provided in response to our questions, one futures market  participant opposed mandated interoperability among futures  clearinghouses, citing the potential for interoperability to inhibit  innovation, eliminate competition among clearinghouses, and contribute  to greater systemic risk by linking and exposing futures clearinghouses to  one anothers’ risks. The joint report states that securities options  exchanges have been both competitive and innovative in developing new  products, notwithstanding the use of central clearing. Although the joint  report did not include a recommendation related to market structure, it  noted that the agencies have supported provisions for nondiscriminatory  access to clearing organizations for the over-the-counter derivatives  market. Moreover, in 2007, in response to Treasury’s request for  comments on the regulatory structure associated with financial  institutions, the Department of Justice expressed support for a review of  exchange-controlled clearing of financial futures, the regulatory structure  that underlies it, and its alternatives. The joint report notes that the  Futures Industry Association, in its comment letter to the agencies, stated  that it would welcome a comprehensive study of how best to improve  competition in the market structures for both futures and listed options  markets.
Investor definitions: Some market participants recommended that  CFTC and SEC harmonize their respective customer categories and  definitions with respect to oversight of intermediaries to help ensure  greater consistency in the application of customer protection rules. One  dually registered broker-dealer/FCM said that because essentially the same  entities transact business across asset classes, the agencies could simplify  definitions to include fewer categories based on net worth (rather than  financial assets) and investment experience. For example, this respondent  suggested that the agencies agree on the definition of “retail” investor. SEC  and CFTC staff said the agencies did not cover this issue for the purposes  of the joint report and that it merits further consideration by the agencies.
section_title: Clearer Goals and Reporting Requirements Could Enhance CFTC and SEC’s Future Harmonization Efforts
paragraphs: CFTC and SEC staff told us that the agencies may use the Joint Advisory  Committee to coordinate their efforts to address harmonization issues  involving differences between the two agencies’ approaches to regulation.  In prior work, we have identified practices that can help enhance and  sustain collaboration among federal agencies. These practices include  defining and articulating a common outcome; developing mechanisms to  monitor, evaluate, and report on results; and reinforcing agency  accountability for collaborative efforts through agency plans and reports.  Although the draft charter for the Joint Advisory Committee includes  furtherance of Treasury’s recommendation on harmonization as one  possible activity of the committee, the agencies have not established clear  goals for harmonization or requirements for the agencies to report and  evaluate progress toward such goals. For example, the agencies have not  created a plan for implementing the joint report’s recommendations or  established clearly defined objectives for addressing remaining  harmonization opportunities. Consistent financial oversight of similar  products and institutions—one of nine principles we have identified for  financial regulatory reform—could be used to guide the agencies’ efforts  to define objectives that would allow them to readily determine which  issues fall within or outside the scope of harmonization. Without clear  goals and accountability requirements to guide future coordination efforts,  the agencies may not be strategically positioned to implement the joint  report’s recommendations and address remaining harmonization  opportunities.
section_title: Conclusions
paragraphs: The October 2009 joint report of CFTC and SEC on harmonization  represents a substantial positive step toward reducing and eliminating  inconsistencies in the agencies’ regulatory approaches. The two agencies’  efforts to identify and assess harmonization opportunities are notable for  the unprecedented dialogue held at the joint public meetings and the  agencies’ development of 20 recommendations in just over 3 months.  However, the agencies could not address all harmonization opportunities  through this time-constrained study, and additional areas for  harmonization may emerge as the markets continue to evolve. With the  joint report completed, sustained coordination between CFTC and SEC is  crucial as the agencies work to implement the report’s recommendations  and to assess remaining harmonization opportunities. Indeed, several of  the report’s recommendations direct the agencies to create a joint body or  program to facilitate operational coordination.
Although agency staff told us that they plan to use the Joint Advisory  Committee to coordinate future harmonization efforts, CFTC and SEC  have not yet established goals with respect to harmonization or developed  requirements to report and evaluate their progress toward these goals.  With regard to the status of the joint report’s recommendations, the  agencies expect to have the Joint Advisory Committee functioning within  months, but have not yet set time frames for implementing the report’s  other recommendations for agency action, which generally remain in the  planning stages. We recognize that relatively little time has passed since  the joint report was issued and that other agency priorities, such as  working with Congress on drafting legislation, may delay action toward  implementing these recommendations. As the agencies continue to work  toward implementation, setting appropriate goals, including time frames,  and reporting progress toward these goals could help to ensure that the  agencies take timely actions to address these recommendations.  Moreover, the agencies have not established a formal plan for identifying  and assessing remaining harmonization opportunities as well as additional  areas for harmonization that may emerge as a result of regulatory reform  and market developments. Such a plan could establish clear objectives for  assessing remaining harmonization opportunities, such as eliminating  inconsistencies and gaps in oversight of similar products and entities.  Without such a plan, ongoing harmonization efforts may become stalled  and the agencies may not continue the process of determining which  issues fall within or outside the scope of harmonization and what actions  are needed to address them.
section_title: Recommendation for Executive Action
paragraphs: To help ensure that CFTC and SEC are strategically positioned to  implement the joint report’s recommendations and address remaining  harmonization opportunities, we recommend that as CFTC and SEC  continue to develop the charter for the Joint Advisory Committee, the  Chairmen of CFTC and SEC take steps to establish, with associated time  frames, clearer goals for future harmonization efforts and requirements for  reporting and evaluating progress toward these goals. Specifically, the  agencies could benefit from formalizing a plan to assess implementation of  the joint report’s recommendations and harmonization opportunities that  may not have been fully addressed by the joint report, such as differences  in market structure and investor definitions. Such a plan could include  goals for future harmonization efforts, such as time frames for  implementing the recommendations; assessment of whether remaining  differences in statutes and regulations result in inconsistent regulation of  similar products and entities that could lead to opportunities for  regulatory arbitrage; and periodic reports to Congress on their progress,  including the implementation and impact of the recommendations.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided the Chairmen of CFTC and SEC with a draft of this report for  their review and comment. CFTC and SEC provided us with written  comments, which appear in appendixes III and IV. In their comments, both  agencies agreed to take steps to implement our recommendation. CFTC  stated that, consistent with this recommendation, the charter for the Joint  Advisory Committee now provides that “he committee shall work to  develop clear and specific goals toward identifying and addressing  emerging regulatory risks, protecting investors and customers, and  furthering regulatory harmonization, and to recommend processes and  procedures for achieving and reporting on those goals.” SEC agreed that  the agencies should work to define specific goals for harmonization,  including setting time frames for implementing the joint report’s  recommendations and developing periodic reports to evaluate their  progress in this area. SEC also agreed that developing a formal plan for  identifying and assessing remaining and emerging harmonization  opportunities would be beneficial to furthering the agencies’ efforts. Both  agencies noted their appreciation of our recognition of the joint report as a  substantial positive step and commented that they are continuing to work  toward implementing the joint report’s recommendations. Finally, we  received technical comments from CFTC and SEC that we have  incorporated into the report, as appropriate.
We are sending a copy of this report to the Chairman and the Ranking  Member of the Subcommittee on Agriculture, Rural Development, Food  and Drug Administration, and Related Agencies of the House Committee  on Appropriations. We are also sending copies to the Chairman of the  Commodity Futures Trading Commission, the Chairman of the Securities  and Exchange Commission, and other interested parties. In addition, the  report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact me at (202) 512-8678 or williamso@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff who made major contributions to this  report are listed in Appendix V.
section_title: Appendix I: Scope and Methodology
paragraphs: To describe how the Commodity Futures Trading Commission (CFTC) and  the Securities and Exchange Commission (SEC) identified and assessed  significant differences in their statutes and rules, we reviewed and  analyzed the joint report of CFTC and SEC on harmonization (joint  report); transcripts of the panel discussions held at the joint public  meetings hosted by the agencies on September 2 and 3, 2009; statements  submitted to CFTC and SEC in response to the agencies’ request for public  comment on opportunities for harmonization; CFTC and SEC analyses of  relevant differences in their statutes and regulations; and other agency  documentation related to the joint report. We also interviewed CFTC and  SEC staff who participated in the agencies’ efforts to collect public input  and draft the joint report.
To describe the status of the agencies’ efforts to implement the joint  report’s recommendations, we reviewed and analyzed relevant provisions  of proposed and enacted legislation that address legislative actions,  including statutory changes, recommended in the joint report. Specifically,  we analyzed and summarized provisions of H.R. 4173, as passed by the  House of Representatives, that would address, at least in part,  recommendations in the joint report. We reviewed the provision of the  Consolidated Appropriations Act, 2010, that authorized funding for the  Joint Advisory Committee as well as the agencies’ draft charter for this  committee. Finally, we spoke with CFTC and SEC staff about the status of  statutory changes and agency actions recommended in the joint report.
To identify additional steps CFTC and SEC could take to harmonize their  regulatory approaches, we interviewed CFTC and SEC staff and obtained  and analyzed written comments on the joint report from representatives of  securities and futures market participants, the investor community, and  other experts who participated in the joint public meetings. Specifically, in  January and February 2010, we developed and implemented a brief e-mail  questionnaire to collect feedback on the joint report and its  recommendations from market participants and other experts. On the  basis of our review of the list of panelists who participated in the joint  public meetings and our discussions with CFTC and SEC about how these  panelists were selected, we determined that the 30 individuals who served  as panelists were an appropriate group of respondents for this  questionnaire. We also e-mailed this questionnaire to four other  individuals, based on suggestions from CFTC and SEC. These individuals  included former CFTC Commissioners and a representative of the  Securities Industry and Future Markets Association who did not  participate in the joint public meetings but submitted comments to the  agencies on harmonization. In January 2010, we e-mailed our  questionnaire to the 34 individuals and requested written comments by  early February 2010. We received 22 responses and analyzed these  responses to identify areas that respondents believed could benefit from  additional harmonization. Finally, we reviewed our prior work on futures  and securities markets regulation, financial regulatory reform, and  practices that can enhance and sustain collaboration among federal  agencies.
We conducted this performance audit from January 2010 to April 2010 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Appendix II: Briefing to Congressional Staff
subsections: section_title: Briefing Outline
subsections: section_title: Objectives Scope and Methodology Background Summary CFTC and SEC Conducted Joint Analyses and Considered Public
section_title: Objectives
subsections: section_title: 1. How did the Commodity Futures Trading Commission
paragraphs: (CFTC) and the Securities and Exchange Commission  (SEC) identify and assess conflicts between their laws and  regulations and develop recommendations to address such  conflicts? 2. What progress have CFTC and SEC made towards  implementation of the joint report’s recommendations? 3. What additional steps, if any, could CFTC and SEC take to  eliminate or reduce inconsistencies in oversight, and  enhance regulatory efficiency and effectiveness, as well as  market transparency?
section_title: Scope and Methodology
subsections: section_title: To accomplish our objectives, we
paragraphs: reviewed and analyzed the SEC/CFTC harmonization report,  documentation of public input obtained by CFTC and SEC through  joint public meetings and a public comment period, and preliminary  analyses conducted by CFTC and SEC on relevant differences in  their statutes and regulations; interviewed CFTC and SEC officials about how they identified and assessed harmonization opportunities and developed  recommendations; progress made on the report’s recommendations;  and additional harmonization opportunities that may exist; reviewed provisions in proposed legislation that may address  SEC/CFTC recommendations for statutory changes; obtained the views of market participants and other experts on the  report’s recommendations and additional opportunities for  harmonization; and  reviewed prior GAO work and other relevant studies.
section_title: Background
paragraphs: CFTC was created in 1974 with the mandate to regulate commodity futures and  commodity options markets.
CFTC’s mission is to protect market users and the public from fraud,  manipulation, and abusive practices related to the sale of commodity and  financial futures and options, and to foster open, competitive and financially  sound futures and options markets.
Futures markets serve to provide a means for risk management and price  discovery.
SEC was created in 1934 to oversee the securities markets.
SEC’s mission is to protect investors, maintain fair, orderly, and efficient markets,  and facilitate capital formation.
While both CFTC and SEC seek to promote market integrity and transparency,  securities markets are concerned with capital formation. Certain securities  markets, such as securities options and other securities derivatives markets, also  facilitate the transfer of risk.
Although CFTC and SEC generally oversee separate markets, their jurisdiction has  overlapped in several areas.  These areas have included:  Futures on single stocks and the Shad-Johnson Accord;  Innovative products that have features of both futures and securities; and  Dually registered broker-dealers and futures commission merchants.
section_title: Background (continued)
paragraphs: In its June 2009 White Paper on financial regulatory reform, the Department of the Treasury (Treasury) noted that the broad public  policy objectives of futures and securities regulation are the same,  and that many differences in regulation exist between the markets  that are no longer justified.
Treasury expressed the following concerns:  Economically equivalent instruments may be regulated in a  different manner, depending on which agency has jurisdiction;  Jurisdictional disputes consume significant agency resources,  and uncertainty about the outcome of such disputes may  impede innovation; and  The agencies follow different approaches to regulation of  exchanges, clearing organizations, and intermediaries.
section_title: Background (continued)
subsections: section_title: In October 2009, CFTC and SEC responded to this request
paragraphs: with a joint report on harmonization of their regulatory  approaches.
section_title: Summary (continued)
subsections: section_title: Agencies Conducted Joint Analyses and Sought Public Input to Inform Report
paragraphs: CFTC and SEC conducted joint analyses and obtained public input to  identify significant conflicts in statutes and regulations.
In July and August 2009, CFTC and SEC worked together on a  preliminary side-by-side analysis of their statutes and regulations.
The agencies sought input from market participants and other  experts by hosting joint public meetings in early September 2009 and providing an opportunity for public comment from August 19 to  September 14, 2009.
At the joint public meetings, CFTC and SEC held panel  discussions to address differences in five broad categories: (1) regulation of exchanges and markets; (2) regulation of  intermediaries; (3) regulation of clearance and settlement; (4)  enforcement; and (5) regulation of investment funds.
CFTC and SEC officials said that given the short timeline, they  focused on identifying significant areas of difference and  developing actionable recommendations.
section_title: Agencies Conducted Joint Analyses and Sought Public Input to Inform Report
paragraphs: CFTC and SEC worked together to analyze the public input and to develop  the report’s recommendations. In drafting the joint report, the agencies grouped issues into eight potential  areas for harmonization and made at least one recommendation in all but  one of these areas.
The agencies also made several recommendations to enhance   Create a Joint Advisory Committee to be tasked with considering  and developing solutions to emerging and ongoing issues of  common interest in the futures and securities markets;  Create a Joint Agency Enforcement Task Force;  Establish a cross-agency training program;  Develop a program for sharing staff through detail assignments;   Create a Joint Information Technology Task Force.
section_title: Overview of Recommendations
subsections: section_title: Overview of Recommendations (continued)
section_title: Most Recommendations Have Yet to Be Enacted or Remain in Planning Stages
subsections: section_title: Status of recommendations for statutory changes:
paragraphs: SEC and CFTC officials said that since the report issued  in October 2009, they have focused on assisting  Congress with drafting language for statutory changes.
Congress has authorized funding for the Joint Advisory  Committee, but other recommended statutory changes  have not been enacted.
Provisions in H.R. 4173, as passed by the House of  Representatives, would address some of these  recommendations.
section_title: Most Recommendations Have Yet to Be Enacted or Remain in Planning Stages
subsections: section_title: Area of Difference Exchange Rules
paragraphs: Provision in H.R. 4173 Section 3114 would partially implement this recommendation  by expanding the time period allowed for CFTC review of  new rules and by repealing certain procedural requirements  for CFTC to file an enforcement action for violation of core  principles.  Sections 3103 and 3111 include amended core  principles for clearinghouses and contract markets,  respectively, clarifying the CFTC’s rulemaking authority to  determine the appropriate manner of compliance with the  CEA.  H.R. 4173 would not amend the CEA to provide for  agency approval of proposed rule changes based on a  finding that the change is consistent with the CEA and  regulations. Section 7509 would partially implement this recommendation  by amending the Securities Investor Protection Act to extend  insurance protection to futures held in a securities portfolio  margin account. Section 7103 would partially implement this recommendation  by amending the Securities Exchange Act (SEA) and the  Investment Advisors Act to create a fiduciary duty for  brokers, dealers, and investment advisors.
section_title: Most Recommendations Have Yet to Be Enacted or Remain in Planning Stages
subsections: section_title: Area of Difference Trading Practices
paragraphs: Provision in H.R. 4173 Section 3108 would authorize CFTC to require futures  commission merchants and introducing brokers to implement  conflict of interest procedures separating research and  analysis from trading and clearing activities.
Section 7203 would partially implement this recommendation  by amending the SEA to enhance whistleblower protections.
Section 3118 would amend the CEA to expand CFTC’s authority over certain disruptive trading practices.
Grant SEC specific statutory authority for  aiding and abetting under the Securities  Act and the Investment Company Act Empower CFTC to require certain foreign  boards of trade to register with CFTC and  to meet certain standards that enhance  transparency and market integrity.
Sections 7207 & 7208 would grant SEC specific statutory  authority for aiding and abetting under the Securities Act and  the Investment Company Act. Section 3115 would amend the CEA to authorize CFTC to  require foreign boards of trade seeking to provide direct  access to persons in the U.S. to meet certain standards for  transparency and market integrity with respect to contracts  where the price is linked to a contract trading on a U.S.  exchange, but does not require registration in the U.S.
section_title: Most Recommendations Have Yet to Be Enacted or Remain in Planning Stages
subsections: section_title: Status of recommendations for agency action: CFTC and SEC have drafted a charter for the Joint Advisory
paragraphs: Committee.
The report’s other recommendations for agency action  generally are in the planning or initiation stages.
The agencies plan to have the Joint Advisory Committee  functioning by late spring or early summer 2010, but have not  set timelines for implementing the other recommendations  that do not require statutory changes.
section_title: Additional Opportunities for Harmonization Exist
subsections: section_title: Given time and resource constraints, agency officials said that they
paragraphs: could not address all areas of difference through the joint report’s  recommendations.
CFTC and SEC officials said they did not explicitly define the term  “harmonization” and focused on jurisdictional disputes and broad differences in regulation, which agency officials viewed as  encompassing differences in the regulation of economically  equivalent products.
The report does not recommend changes to address some  differences that may create incentives for regulatory arbitrage—that  is, some remaining differences in rules and statutes may influence  market participants’ incentives to invest in a particular product or  have a product regulated as a security or future.
section_title: Additional Opportunities for Harmonization Exist
paragraphs: In written comments provided to GAO, market participants and other experts  identified areas they believe could benefit from additional harmonization  efforts.
Greater legal certainty for new products: Some market participants  called for an administrative body to resolve disputes, but agency officials  cited precedents and pending legislation in which courts serve as venues  for deciding questions concerning the legal definitions of securities and  futures.
Oversight of exchange and clearinghouse rules: Some market  participants recommended that SEC move towards greater self- certification of new exchange rules. SEC officials noted that recent  changes streamlined SEC’s process, but acknowledged that differences  remain.
Portfolio margining:  Agency officials agreed that there are issues  related to portfolio margining that merit further consideration.
Market structure:  Market participants had mixed views on the need to  resolve differences in market structure.
Harmonizing investor definitions:  Agency officials agreed that this is  an area for potential harmonization.
section_title: Clearer Goals and Accountability Requirements Could Enhance Future Harmonization Efforts
subsections: section_title: CFTC and SEC officials told us that the agencies may use the Joint Advisory
paragraphs: Committee to identify and address harmonization issues involving conflicts between  the two agencies’ approaches to regulation.
However, the draft charter for the Joint Advisory Committee does not establish clear  goals for harmonization and requirements for reporting and evaluating progress  towards such goals.
GAO has identified practices that can help enhance and sustain coordination among  federal agencies.  These practices include:  defining and articulating a common outcome;  developing mechanisms to monitor, evaluate, and report on results; andreinforcing agency accountability for collaborative efforts through agency plans  and reports.  (GAO-06-15)
Consistent financial oversight of similar products and institutions – one of GAO’s  nine principles for financial regulatory reform – could be used to guide CFTC/SEC  efforts to define and articulate a common outcome.  (GAO-09-216)
Without clear goals and accountability requirements to guide future coordination  efforts, the agencies may not be strategically positioned to address remaining  harmonization opportunities.  Furthermore, without clearly defined objectives for  harmonization, CFTC and SEC cannot readily determine which issues fall within or  outside the scope of harmonization.
section_title: Recommendation
subsections: section_title: To ensure that CFTC and SEC are strategically positioned to
paragraphs: implement the joint report’s recommendations and address  remaining harmonization opportunities, we recommend that as  CFTC and SEC continue to develop the charter for the Joint  Advisory Committee, they take steps to establish clearer goals for  future harmonization efforts and requirements for reporting and  evaluating progress towards these goals.  Specifically, the agencies  could benefit from formalizing a plan to assess implementation of  the joint report’s recommendations and harmonization opportunities  that may not have been fully addressed by the joint report, such as  differences in market structure and investor definitions.  Such a  plan could include assessment of whether remaining differences in  statutes and regulations result in inconsistent regulation of similar  products and entities that could lead to opportunities for regulatory  arbitrage, and periodic reports to Congress on their progress,  including the implementation and impact of the recommendations.
section_title: Appendix III: Comments from the Commodity Futures Trading Commission
section_title: Appendix IV: Comments from the Securities and Exchange Commission
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Karen Tremba (Assistant  Director), John Fisher, Matt McDonald, Omyra Ramsingh, Jennifer  Schwartz, Andrew Stavisky, and Richard Tsuhara made significant  contributions to this report.
section_title: Related GAO Products
paragraphs: Financial Regulation: A Framework for Crafting and Assessing  Proposals to Modernize the Outdated U.S. Financial Regulatory System.  GAO-09-216. Washington, D.C.: January 8, 2009.
Commodity Futures Trading Commission: Trends in Energy  Derivatives Markets Raise Questions about CFTC’s Oversight.  GAO-08-25. Washington, D.C.: October 19, 2007.
Financial Regulation: Industry Trends Continue to Challenge the  Federal Regulatory Structure. GAO-08-32. Washington, D.C.: October 12,  2007.
Results-Oriented Government: Practices That Can Help Enhance and  Sustain Collaboration among Federal Agencies. GAO-06-15. Washington,  D.C.: October 21, 2005.
Financial Regulation: Industry Changes Prompt Need to Reconsider U.S.  Regulatory Structure. GAO-05-61. Washington, D.C.: October 6, 2004.
CFTC and SEC: Issues Related to the Shad-Johnson Jurisdictional  Accord. GAO/GGD-00-89. Washington, D.C. April 6, 2000.
The Commodity Exchange Act: Issues Related to the Commodity Futures  Trading Commission’s Reauthorization. GAO/GGD-99-74. Washington,  D.C.: May 5, 1999.
The Commodity Exchange Act: Legal and Regulatory Issues Remain.  GAO/GGD-97-50. Washington, D.C.: April 7, 1997.
Financial Market Regulation: Benefits and Risks of Merging SEC and  CFTC. GAO/T-GGD-95-153. Washington, D.C.: May 3, 1995.