LawFlash

CFTC, SEC Sign New Memorandum of Understanding on Information Sharing

July 17, 2018

The US Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC)— collectively the Commissions—announced that they had entered into a new Memorandum of Understanding (MOU) to facilitate information sharing on issues of common regulatory interest. This MOU replaces a similar one from 2008, with some notable differences.

PURPOSE OF MOU

Similar to the 2008 MOU between the Commissions, the purpose of this MOU is to share information and data concerning issues of common regulatory interest in matters deemed appropriate by the CFTC and SEC to fulfill their respective regulatory mandates. Information may be shared in connection with a specific incident, event, or activity. However, the Commissions note that they will generally seek data related to swaps and security-based swaps from swap data repositories and security-based swap data repositories. The Commissions explain that they will achieve the purpose of the MOU by having ongoing, informally, oral consultations; holding periodic meetings; responding to a commission’s written requests for information sharing; or through other arrangements that may be developed.

CHANGES FROM PREVIOUS MOUs

The mandate of the 2018 MOU has been expanded from that of the 2008 MOU, as illustrated below. The Commissions can use non-public information internally to inform examinations, proceedings, civil actions, rulemakings, research, or other activities or matters with the CFTC’s or SEC’s jurisdiction. In addition, the Commissions can use non-public information in enforcement investigations or, with advance notice to the commission that provided the information to the other commission, in any proceeding or civil action.

In connection with the new mandate, appropriate “points of contact” at each commission have been identified as relevant personnel who should endeavor to share information with each other. The 2018 MOU does not mandate quarterly meetings or the requirement that staff provide its respective commission with confidential written summaries of the key points of each such meeting, whereas the 2008 MOU required that meetings be held no less frequently than quarterly and written summaries of each meeting. Further, the 2018 MOU rescinds the 2008 MOU addendum and its principles related to novel derivative products, such as the encouragement of innovation and competition, and providing market neutrality (permitting novel derivative products to trade in either or both an SEC- or CFTC-regulated environment), legal certainty for market participants to encourage competing or complementary products to be expeditiously brought to market, and “predictable and efficient consideration of requests” relating to novel derivative products.

The 2018 MOU does not alter existing practices related to the sharing of information between the CFTC’s and SEC’s enforcement divisions, nor does it eliminate confidential protections afforded to information shared pursuant to the MOU. However, the 2018 MOU includes detailed uses of and protections afforded to “Non-Public Information” (any data, information or reports submitted, received or shared between the Commissions pursuant to the 2018 MOU), including steps a commission must take when it receives a request for information under the Freedom of Information Act or to comply with a request or demand from a Congressional committee or a subpoena or court order.

The 2018 MOU also does not alter the 2004 MOU Regarding the Oversight of Security Futures Product Trading and the Sharing of Security Futures Product Information, the goal of which is to avoid unnecessary regulatory duplication or undue regulatory burdens, and provide the Commissions with notice of their examinations of exchanges and intermediaries as such examinations relate to security futures products.

 

2008 MOU

2018 MOU

Mandate

To establish a permanent regulatory liaison and facilitate the discussion and coordination of regulatory action regarding issues of common regulatory interest, including, but not limited to, novel derivative products, portfolio margining, futures on foreign securities and foreign security indexes, examination and oversight of firms registered as both Investment Advisers with the SEC and as commodity pool operators with the CFTC, and security futures products.

 

To establish a regulatory liaison and facilitate the discussion and coordination of regulatory action, as well as information exchange and data sharing, regarding issues of common regulatory interest. The Commissions agree to exchange information about examinations and other supervisory information relating to firms who are of common regulatory interest to the Commissions, including:

  • firms registered both as investment advisers with the SEC and commodity pool operators and/or commodity trading advisors with the CFTC,
  • firms registered both as broker-dealers with the SEC and futures commission merchants or introducing brokers with the CFTC, firms registered both as clearing agencies and derivatives clearing organizations, and firms registered both as swap dealers and security-based swap dealers.

Key Points of Contact

Dual-registered IAs and CPOs:

  • SEC: Director of the Office of Compliance Inspections and Examination or his designee
  • CFTC: Director of the Division of Clearing and Intermediary Oversight, and two staff members

Novel derivative products:

  • SEC: Director of the Division of Trading and Markets, and two staff members
  • CFTC: Director of the Division of Market Oversight, and two staff members

All other purposes of the MOU:

  • SEC: Director of the Division of Trading and Markets
  • CFTC: General Counsel

Dual-registrants:

  • SEC: Director of the Office of Compliance Inspections and Examination or his designee
  • CFTC: Director of the Division of Swap Dealer and Intermediary Oversight, and two staff members

Product classification, including novel derivative products:

  • SEC: Director of the Division of Trading and Markets, and two staff members (also including matters related to security-based swaps)
  • CFTC: Director of the Division of Market Oversight, and two staff members (also including matters related to swap data reporting requirements and swap execution facilities)

Clearinghouse matters:

  • Director of the Division of Clearing and Risk, who must designate two staff members for matters related to clearinghouses

All other purposes of the MOU:

  • SEC: Director of the Division of Trading and Markets
  • CFTC: General Counsel

WHAT’S NEXT?

Although the SEC and CFTC have entered into this MOU, which largely replicates the 2008 MOU with certain modifications that expand the topics covered by the MOU, we do not expect much to change.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Chicago
Sarah Riddell
Michael Philipp

New York
David I. Miller

Washington, DC
Josh Sterling