THE SEC/CFTC REPORT ON HARMONIZATION: ENFORCEMENT
The SEC and the CFTC released “A Joint Report of the SEC and CFTC on Harmonization of Regulation” on Friday, October 16, 2009. The report was prepared pursuant to the Treasury White Papers released last June, and discussed here, which called for the two agencies to work together in an effort to harmonize their regulatory approaches. The report is supposed to be a part of comprehensive financial regulatory reform. The Administration sent proposed legislation up to Capitol Hill following the release of the White Paper. Various committees are considering the issues presented by that proposed legislation, as well as the market crisis.
Part of the Joint Report discusses enforcement, making recommendations for proposed legislation as part of the overall effort to harmonize the regulatory approaches of the two agencies. Overall the enforcement segment of the report focuses on manipulation, insider trading and aiding and abetting authority.
First, as to manipulation, the Report notes that both agencies have authority in this area. While there is some overlap in the types of cases brought, there are different issues in the futures markets involving activities such as corners and squeezes. The authority of the CFTC with respect to disruptive trading practices is, however, limited and needs to be enhanced.
Second, a key area of difference is insider trading. The market integrity provisions of the securities laws prohibit insider trading. In this regard there is a developed body of law regarding the use of corporate material non-public information and the duties of corporate officials and personnel.
The CEA’s insider trading prohibitions, in contrast, focus on employees and agents of the CFTC and of SROs and markets regulated by the agency. Historically, the markets have permitted hedgers to use their non-public material information to protect themselves against risks to their commodity positions. Counterparties to these transactions may not have access to the same kind of information. Corporate officials and personnel generally do not have a similar fiduciary duty with respect to those counterparties. Rather, their duty is to properly protect against risk. Some extension of the insider trading prohibitions under the futures laws is appropriate, according to the report. This would include an extension of the prohibitions applicable to CFTC and registered entity personnel to all SROs, government agencies and members of Congress.
Third, there are differences in enforcement remedies. For example, the CFTC has specific statutory authority for aiding and abetting all violations of the Act it administers and its regulations. The SEC in contrast does not. At the same time, neither agency has the ability to rely on whistleblowers to assist in detecting violations of the statutes.
The report makes five recommendations with respect to enforcement matters:
1) Whistleblowers: There should be legislation on whistleblower protections to encourage individuals to come forward with relevant information.
2) Restitution: There should be legislation to clarify that in CFTC civil actions that restitution is defined in terms of the losses sustained by persons as a result of the unlawful conduct.
3) Disruptive trading practices: There should be legislation to enhance the CFTC’s authority over disruptive trading practices.
4) Insider trading: There should be legislation to expand the scope of insider trading prohibitions under the CEA to make it unlawful to misappropriate and trade on the basis of material non-pubic information from any governmental authority.
5) Aiding and abetting: There should be legislation to expand the authority of the SEC to bring actions for aiding and abetting under each of the statutes it administers.