Introduction

7. An assessment of the level of implementation of the IOSCO Objectives and Principles of Securities Regulation (IOSCO Principles) was conducted in the United States from October 27 to November 19, 2014. The assessment was made as part of the IMF FSAP by Ana Carvajal, IMF (currently seconded to the World Bank Group), Eija Holttinen, IMF, and Malcolm Rodgers, external expert working for the IMF. The previous IOSCO assessment of the United States was conducted in 2009.

Information and Methodology Used for Assessment

8. The assessment was made on the basis of the IOSCO Principles approved in 2010 and the Assessment Methodology adopted in 2011. As has been the standard practice, Principle 38 was not assessed due to the existence of separate standards for securities settlement systems and central counterparties. A review of the regulatory and supervisory framework in place at the state level was outside of the scope of this assessment. Given the relatively limited role played by state regulation and supervision (as described below), the assessors do not consider that this limitation in the scope of the assessment has materially affected the overall judgment of the U.S regime.

9. The IOSCO Assessment Methodology requires that assessors not only look at the legal and regulatory framework in place, but also at how it has been implemented in practice. The ongoing global financial crisis has reinforced the need for assessors to make a judgment about supervisory and other operational practices and to determine whether they are sufficiently effective. Among other things, such a judgment involves a review of the inspection programs for different types of supervised entities, the cycle, scope and quality of inspections, as well as how the relevant authorities follow up on findings, including by using enforcement actions. Given that the IOSCO Principles and Methodology do not specifically address OTC derivatives, the adoption and implementation status of the U.S. OTC derivatives framework has not impacted the grades given.

10. The assessment was based on several sources. These comprise (i) self-assessments and additional written responses prepared by the CFTC and SEC; (ii) reviews of the relevant legislation and regulations; (iii) meetings with the management and staff of the CFTC, SEC, PCAOB, and the criminal authorities; and (iv) meetings with industry associations and market participants, including exchanges, broker-dealers (BDs), IAs, futures commission merchants (FCMs), commodity pool operators (CPOs), audit firms, and credit rating agencies (CRAs).

11. The assessors want to thank the U.S. authorities and market participants for their cooperation and willingness to share information. The views of authorities and market participants on the current status and the best way forward for the regulation and supervision of the U.S. securities and derivatives markets provided an essential input to the conclusions of the mission.

Institutional and Market Structure—Overview

B. Market Structure

Issuers

17. The U.S. equity markets continue to be the largest in the world. As of end 2013 there were 5,655 issuers listed on the three largest exchanges (the majority of them either on the New York Stock Exchange (NYSE) or NASDAQ) with a total market capitalization of approximately 150 percent of GDP. The number of new listings remained high, with 614 new issues listed in 2013. (Table 1).

Table 1.

Key Equity Market Information

Source: NYSE, NASDAQ, BATS

Table 1.

Key Equity Market Information

	2011			2012			2013
	NYSE	NASDAQ	BATS	NYSE	NASDAQ	BATS	NYSE	NASDAQ	BATS
Number of issuers	2,995	2,680	−	2,989	2,577	2	3,016	2,637	2
Market capitalization (billion USD)	11,796	4,421	−	14,086	5,149	0.5	17,950	6,974	1.4
Market capitalization as percent of GDP	70	28	−	87	32	0.0	107	42	0.0
Market capitalization of top 10 issuers (billion USD)	2,210	1,544	−	2,338	1,750	36	2,683	2,151	54
Number of new listings	497	151	−	376	158	17	369	239	6
Annual turnover (trillion USD)	19.3	NA	−	14.7	NA	1	15.3	NA	3.5
Average daily turnover (billion USD)	75.9	NA	−	59	NA	5.6	60.7	NA	17.4

Source: NYSE, NASDAQ, BATS

View Table

Table 1.

Key Equity Market Information

	2011			2012			2013
	NYSE	NASDAQ	BATS	NYSE	NASDAQ	BATS	NYSE	NASDAQ	BATS
Number of issuers	2,995	2,680	−	2,989	2,577	2	3,016	2,637	2
Market capitalization (billion USD)	11,796	4,421	−	14,086	5,149	0.5	17,950	6,974	1.4
Market capitalization as percent of GDP	70	28	−	87	32	0.0	107	42	0.0
Market capitalization of top 10 issuers (billion USD)	2,210	1,544	−	2,338	1,750	36	2,683	2,151	54
Number of new listings	497	151	−	376	158	17	369	239	6
Annual turnover (trillion USD)	19.3	NA	−	14.7	NA	1	15.3	NA	3.5
Average daily turnover (billion USD)	75.9	NA	−	59	NA	5.6	60.7	NA	17.4

Source: NYSE, NASDAQ, BATS

18. Municipal securities are an important component of the U.S. securities markets. The outstanding amount of municipal securities as of end-2014 was approximately $ 3.7 trillion (around one third of the size of the corporate and foreign bonds market). There are roughly 45,000 different municipalities issuing debt, and some 12,000 bond issues on an annual basis. Average issue size is $25 million. Retail investors account for a significant portion of this market. Direct retail holdings are estimated at roughly 45–50 percent of total outstanding debt, and indirect holdings (through mutual funds) at about 25 percent. Historical rates of default have been low (less than 1 percent compared to 11–13 percent for issuers of corporate debt, although the rate of default for non-municipal conduit borrowers has been higher).

19. Almost all asset-backed securities (ABS) markets experienced historic downturns following the crisis, and the recovery of these markets has not been uniform.² Private label (non-U.S. agency) ABS issuers held $2.6 trillion in assets in 2004, which grew to $4.5 trillion in 2007, and declined to $1.6 trillion in 2013. This distinction is most stark in the case of private-label residential mortgage-backed securities (RMBS), including home equity lines of credit. Prior to the crisis the overwhelming majority of these securities were registered issuances. In 2004 new issuances of registered private-label RMBS totaled $746 billion. This dropped to $12 billion in 2008 and $4 billion in 2013, 0.5 percent of the 2004 issuance level. As of the time of the assessment the private-label RMBS market remained weak and consisted almost exclusively of unregistered RMBS offerings. Registered commercial mortgage-backed securities (CMBS) experienced a similar drop. In 2004 new issuances totaled $74 billion, declining to $11 billion in 2008, and $53 billion in 2013. The consumer finance ABS market, including credit card and auto securitizations, also declined drastically both in terms of number of deals and issuance volume after the financial crisis. For example, $85 billion of Auto ABS were issued in 2005, but after the crisis issuance dropped to $32 billion in 2008. However, unlike RMBS, issuance of consumer finance ABS, especially Auto ABS, has since 2008 steadily increased to $62 billion in 2013.

Trading venues

20. Trading in the U.S. equity markets is divided between national securities exchanges, alternative trading systems (ATS), and over-the-counter (OTC). At the end of December 2014, there were 11 national securities exchanges and 39 ATS operating equity trading systems. There are no official statistics on the distribution of trading between exchanges, ATS, and OTC. Some market sources estimate the latter two to amount up to approximately 40 percent of the total value of equity trading in the U.S.³ According to a paper published by SEC staff,⁴ ATSs executed 11.3 percent of the total value of trading in National Market System (NMS) stocks during a one week period in May 2012. Another SEC staff paper⁵ estimates that 17 percent of the total value of trading in NMS stocks was executed OTC (excluding ATS trading) during one week in May 2012. During May 2014–September 2014, ATSs accounted for 15 percent of the trading volume for NMS stocks (by number of shares).

21. While futures and options trading volumes continue to increase, the majority of derivatives are traded in the OTC derivatives (swaps) markets. 15 Designated Contract Markets (DCMs) currently organize trading in futures and options, with the number of contracts traded estimated to amount to 3.7 billion at the end of 2014. At the same time, swap trading volumes were estimated to amount to 13.5 billion contracts. The majority of swap trading still takes place OTC rather than on the 24 SEFs.

Collective Investment Schemes

22. The U.S. securities CIS market is the largest in the world. At the end of 2013, there were 4,168 registered collective investment scheme (CIS) funds with more than $17 trillion assets under management (AUM). The market for securities CIS is dominated by mutual funds, which at end 2013 accounted for 88 percent of all securities CIS assets. ETFs’ share of overall AUM has grown significantly over the last five years, while closed end funds and unit investment trusts (UITs) account for only a small proportion of total assets. At the end of 2013, retail investors held over 65 percent of assets in mutual funds.

Table 2.

Investment Company Total Net Assets by Type

$ billions

Source: 2014 Investment Company Fact Book

Table 2.

Investment Company Total Net Assets by Type

$ billions

	Mutual Funds	Closed-end funds	ETFs	UITs	Total
2009	11,113	223	777	38	12,152
2010	11,831	238	992	51	13,112
2011	11,626	243	1,048	60	12,978
2012	13,044	264	1,337	72	14,717
2013	15,018	279	1,675	87	17,058

Source: 2014 Investment Company Fact Book

View Table

Table 2.

Investment Company Total Net Assets by Type

$ billions

	Mutual Funds	Closed-end funds	ETFs	UITs	Total
2009	11,113	223	777	38	12,152
2010	11,831	238	992	51	13,112
2011	11,626	243	1,048	60	12,978
2012	13,044	264	1,337	72	14,717
2013	15,018	279	1,675	87	17,058

Source: 2014 Investment Company Fact Book

Table 3.

Institutional and Retail Ownership of Mutual Funds

Source: ICI

Table 3.

Institutional and Retail Ownership of Mutual Funds

$ billions				Retail Investors			Institutional Investors			Total
	End-year			2011	2012	2013	2011	2012	2013	2011	2012	2013
Mutual Funds
		Equity		4,713	5,351	6,988	501	589	776	5,214	5,940	7,764
		Bond		2,513	2,981	2,875	326	398	391	2,838	3,379	3,265
		Hybrid		851	996	1,220	32	35	50	883	1,031	1,270
			Money Market	1,805	1,795	1,775	886	899	944	2,691	2,694	2,718
Total				9,882	11,123	12,857	1,745	1,921	2,161	11,627	13,044	15,018

Source: ICI

View Table

Table 3.

Institutional and Retail Ownership of Mutual Funds

$ billions				Retail Investors			Institutional Investors			Total
	End-year			2011	2012	2013	2011	2012	2013	2011	2012	2013
Mutual Funds
		Equity		4,713	5,351	6,988	501	589	776	5,214	5,940	7,764
		Bond		2,513	2,981	2,875	326	398	391	2,838	3,379	3,265
		Hybrid		851	996	1,220	32	35	50	883	1,031	1,270
			Money Market	1,805	1,795	1,775	886	899	944	2,691	2,694	2,718
Total				9,882	11,123	12,857	1,745	1,921	2,161	11,627	13,044	15,018

Source: ICI

23. As of September 2014, 2,691 IAs registered with the SEC advised at least one HF. Registered IAs to HFs manage approximately $5.4 trillion in cumulative reported regulatory assets under management (RAUM). As of May 7, 2014 there were 544 IAs classified as large HF managers (i.e., with 1.5 billion HF AUM), with a total of 3,835 HFs under management. In addition to IAs registered with the SEC, there are also exempted reporting advisers (ERAs), which are exempted from registration with the SEC, but are subject to limited reporting on their business and their private fund clients. There are approximately 2,693 ERAs with 875 advisers or 32 percent of them managing HFs that account for approximately $846 billion in RAUM.

24. Both the number of commodity pool operators (CPOs) and their total AUM has grown dramatically over the past four years. This resulted from the inclusion of swaps in the definition of commodity under the Dodd-Frank Act. Many CIS investing in swaps are therefore now regulated as commodity pools (CPs) for the first time. Retail participation in swaps-based CIS is small and largely confined to traditional CPs, with the CFTC estimating that retail investors hold approximately 10 to 15 percent of total AUM in those pools.

Table 4.

Number of Commodity Pool Operators and their AUM

Source: CFTC

Table 4.

Number of Commodity Pool Operators and their AUM

$ billions	Total Number of NFA Member CPOs	Number of Foreign CPOs	Number of U.S. CPOs	Total AUM reported
end-2011	1,078	83	995	348
end-2012	1,105	76	1,029	493
end-2013	1,686	255	1,431	2,809
Aug. 6, 2014	1,658	267	1,391	2,928

Source: CFTC

View Table

Table 4.

Number of Commodity Pool Operators and their AUM

$ billions	Total Number of NFA Member CPOs	Number of Foreign CPOs	Number of U.S. CPOs	Total AUM reported
end-2011	1,078	83	995	348
end-2012	1,105	76	1,029	493
end-2013	1,686	255	1,431	2,809
Aug. 6, 2014	1,658	267	1,391	2,928

Source: CFTC

Market intermediaries

25. There are separate regimes for securities and derivatives market intermediaries. BDs registered under the Exchange Act and FCMs and introducing brokers (IBs) registered under the CEA trade as principals or agents. Advisers are registered as IAs or commodity trading advisers (CTAs) under the securities or futures legislation. Operators of CIS are registered as IAs under the Advisers Act or CPOs under the CEA. The number of registered BDs has fallen over the last five years. As a result of changes introduced by the Dodd-Frank Act, IAs that previously were not subject to registration (such as IAs to HFs) are now required to register with the SEC, while smaller IAs are now subject to registration by the state regulators only. Overall, these changes resulted in a small decline in the number of IAs registered with the SEC, while the total AUM for SEC registered IAs has increased (the SEC estimates total AUM for IAs, including mutual funds, is approximately $63 trillion). The number of FCMs is relatively small and many of the larger FCMs are also registered as BDs.

Table 5.

Registered Broker-Dealers

(by SRO membership)

Source: SEC

^*Formerly AMEX

^**UNA - unassigned (not a member of any self-regulatory organization)

Table 5.

Registered Broker-Dealers

(by SRO membership)

	ARCA	CBOE	CHX	FINRA	NYSE	NYSE MKT*	PHLX	SEC	UNA**	Total
January 1, 2010	28	237	26	4,775	46	46	33	5	57	5,253
January 1, 2011	21	190	27	4,664	0	28	28	5	66	5,029
January 1, 2012	18	155	26	4,515	0	21	20	5	42	4,802
January 1, 2013	14	132	22	4,351	1	21	18	5	48	4,612
January 1, 2014	14	104	16	4,196	0	18	18	5	39	4,410
July 1, 2014	15	92	17	4,097	0	15	18	5	48	4,307

Source: SEC

^*Formerly AMEX

^**UNA - unassigned (not a member of any self-regulatory organization)

View Table

Table 5.

Registered Broker-Dealers

(by SRO membership)

	ARCA	CBOE	CHX	FINRA	NYSE	NYSE MKT*	PHLX	SEC	UNA**	Total
January 1, 2010	28	237	26	4,775	46	46	33	5	57	5,253
January 1, 2011	21	190	27	4,664	0	28	28	5	66	5,029
January 1, 2012	18	155	26	4,515	0	21	20	5	42	4,802
January 1, 2013	14	132	22	4,351	1	21	18	5	48	4,612
January 1, 2014	14	104	16	4,196	0	18	18	5	39	4,410
July 1, 2014	15	92	17	4,097	0	15	18	5	48	4,307

Source: SEC

^*Formerly AMEX

^**UNA - unassigned (not a member of any self-regulatory organization)

Table 6.

SEC Registered Investment Advisers

Source: SEC

Table 6.

SEC Registered Investment Advisers

At January 2	2012	2013	2014
SEC-registered investment advisers	11,658	10,754	10,920
SEC exempt reporting advisers	0	2,331	2,594

Source: SEC

View Table

Table 6.

SEC Registered Investment Advisers

At January 2	2012	2013	2014
SEC-registered investment advisers	11,658	10,754	10,920
SEC exempt reporting advisers	0	2,331	2,594

Source: SEC

Table 7.

Derivatives Market Intermediaries Registered with the CFTC

Source: CFTC

Table 7.

Derivatives Market Intermediaries Registered with the CFTC

Type of Person	Number of Registered Persons
	as of July 31, 2014
Futures Commission Merchant	78
Introducing Broker	1,354
Commodity Pool Operator	1,770
Commodity Trading Advisor	2,539
Retail Foreign Exchange Dealer	7
Swap Dealer	102
Major Swap Participant	2
Floor Broker	4,495
Floor Trader	827
Notice-Registered IB	46
Notice-Registered FCM	14

Source: CFTC

View Table

Table 7.

Derivatives Market Intermediaries Registered with the CFTC

Type of Person	Number of Registered Persons
	as of July 31, 2014
Futures Commission Merchant	78
Introducing Broker	1,354
Commodity Pool Operator	1,770
Commodity Trading Advisor	2,539
Retail Foreign Exchange Dealer	7
Swap Dealer	102
Major Swap Participant	2
Floor Broker	4,495
Floor Trader	827
Notice-Registered IB	46
Notice-Registered FCM	14

Source: CFTC

Preconditions for Effective Securities Regulation

26. All the preconditions for effective securities markets regulation appear to be in place in the United States.

• No barriers to entry: Registration requirements for all categories of regulated activities are based on objective criteria, which are clearly set up by laws and regulations. Foreign investors can invest in the securities and derivatives markets under the same conditions as domestic investors.

• Taxation: There do not appear to be distortions in market structure created by the tax regime.

• Company law: Companies are free to determine the state where they want to be incorporated. The majority of companies choose Delaware, as it is considered to provide significant freedom for companies to organize their business. As many aspects of corporate governance rely on state company law, the Delaware company law and the jurisprudence of the Delaware courts are key components of securities markets framework.

• Insolvency law: The Bankruptcy Code provides two primary routes for business bankruptcy: (i) Chapter 11, where the company usually attempts to reorganize its business and become profitable again; management usually continues to run day-to-day business operations, but all significant business decisions must be approved by a bankruptcy court; and (ii) Chapter 7, where the company stops all operations and goes out of business; a trustee is appointed to liquidate the company’s assets and the money is used to pay off creditors and investors in accordance with the federal bankruptcy rules. Public companies generally file under Chapter 11 rather than Chapter 7 because they can continue to run their business and control the bankruptcy process.

• Competition law: The U.S. has strong and vigorously enforced anti-trust legislation, which applies to all economic sectors, including the financial sector.

• Accounting and auditing standards: Accounting and auditing standards are globally recognized as of high international quality.

• Protection of investors’ rights: The judiciary is acknowledged to be independent from political influence. There are private rights of action under company, securities and derivatives laws, which are actively exercised by investors, including through class action suits. The SROs have mechanisms, obligatory for all members, for alternative resolution of disputes between intermediaries and their clients.

Main Findings

27. Principles for the regulator. The SEC and the CFTC are independent agencies, with clear mandates stemming from the law. Both have sufficient powers to fulfill their mandates, including rulemaking, registration, examination and enforcement powers. They operate under a high level of accountability, which is supported by public transparency of a wide range of regulatory actions and decisions. Strong ethics rules apply to Commissioners and staff of both the SEC and CFTC. The current level of resources poses challenges for the SEC and CFTC to effectively discharge their functions, particularly in light of their expanded mandates. The agencies are taking an increasingly forward looking risk-based approach to supervision and enhancing their risk identification processes, which in turn is helping them to contribute more effectively to the FSOC. Both have processes to review the perimeter of regulation.

28. Principles for self-regulation. The U.S. system relies strongly on SROs, such as FINRA and the NFA, for supervision of markets and intermediaries. SROs are subject to oversight, including approval or notification of rules, and ongoing monitoring of their self-regulatory activities via reporting and examinations.

29. Principles for enforcement. The SEC and CFTC have broad inspection powers over regulatees and investigative and enforcement powers over regulated entities, regulated individuals, and third parties. Overall, the agencies, along with the SROs, have put in place robust supervisory programs to monitor ongoing compliance by regulated entities and individuals and to monitor market activity. The programs for regulated entities are risk-based. In most cases, the coverage of the examination program is such that no entity goes without inspection for a long period of time, even if it is low risk. The situation is different for IAs, as the coverage of their examination program is more limited. Market surveillance relies primarily on SROs’ automated tools. Both agencies make extensive use of their enforcement powers. The SEC, the CFTC and criminal authorities are active in pursuing securities and derivatives violations.

30. Principles for cooperation. The SEC and CFTC have the ability and capacity to share information and cooperate with other authorities domestically and internationally. They are signatories to many Memoranda of Understanding (MOU), including the IOSCO Multilateral MOU (MMOU) and a number of bilateral MOUs with domestic and foreign authorities, and have records of active cooperation. The SEC and CFTC do not need the permission of any outside authority or an independent interest to share or obtain information. Access to the financial records of individuals and small partnerships requires notifying the customer; delaying such notice is also possible in certain circumstances.

31. Principles for issuers. Generally issuers of public offerings, including ABS, are subject to strong disclosure requirements both at the moment of registration and on a periodic basis, except for municipal securities which are exempt from those registration and reporting requirements. The current framework provides reporting companies with significant freedom to decide on their structure, and the classes of shares to be offered to the public. However, they are subject to strong disclosure obligations, and any limitations to the rights of shareholders must be clearly disclosed in the prospectus. Federal laws allow the acquisition of control without triggering an obligation to make a tender offer. However, a number of features in the legal system, mainly state corporate laws, create disincentives from doing so. The current regime requires reporting of insiders’ holdings and substantial holdings, as well as reporting of beneficial ownership. The SEC has developed an active program to monitor and enforce issuers’ compliance with their disclosure obligations. High quality accounting standards, the U.S. Generally Accepted Accounting Principles (GAAP), are set through an open and transparent process.

32. Principles for auditors, credit rating agencies, and other information service providers. Auditors of reporting companies must be registered with the PCAOB. The PCAOB has developed a credible examination program for audit firms. Audit standards are considered of high quality. The PCAOB is responsible for the enforcement of compliance with audit standards, and the SEC can also exercise its enforcement powers over auditors and has done so in an active manner. CRAs that wish their credit ratings to be used for regulatory purposes must elect to register with the SEC as Nationally Recognized Statistical Rating Organizations (NRSROs). In practice, ratings are currently used for regulatory purposes by the SEC in very limited cases, mainly in connection with money market funds (MMFs). The registration process subjects NRSROs to appropriate requirements. The SEC conducts NRSRO examinations on an annual basis. BDs on the securities side and FCMs, IBs, swap dealers (SDs) and major swap participants (MSPs) on the derivatives side are subject to obligations in connection with the provision of research analysis that aim at managing potential conflicts of interest.

33. Principles for collective investment schemes. IAs to mutual funds (MFs) and commodity pool operators (CPOs) are subject to registration with the SEC and CFTC, which focuses mainly on their integrity and disclosure to investors. MFs and CPs are subject to disclosure obligations both at the moment of registration and on a periodic basis. Self-custody and related party custody of MF and CP assets is allowed, however additional safeguards apply in the case of MFs. MF and CP assets must be valued according to the U.S. GAAP. MF and CP shares and units must be valued at net asset value (NAV), except MMFs. IAs to HFs are subject to registration requirements that are based on disclosure. Standards of organizational and operational conduct apply to them. The SEC conducts only limited examinations of IAs to MFs, although it has implemented a presence examination program for newly registered IAs, including those that manage HFs.

34. Principles for market intermediaries. The registration regime combined with the relevant SRO’s membership regime subjects all categories of participants except IAs and CTAs to comprehensive eligibility criteria that include integrity, capital requirements, and adequacy of internal controls. All categories of intermediaries except IAs and CTAs are subject to capital requirements and periodic reporting of their financial position and capital adequacy. IAs and CTAs’ registration regime is based on integrity criteria and disclosure. However, they are not permitted to hold clients assets nor deal on behalf of customers, though they may have discretion to make investment decisions. Early warning systems are in place. There are well-developed processes to deal with the failure of intermediaries that have been applied in practice.

35. Principles for secondary markets. Exchanges and DCMs are subject to detailed registration requirements. ATSs are subject to the SEC broker-dealer registration and FINRA membership processes along with SEC disclosure obligations. Limited public information is available on ATS operations, subscribers and market models. The exchanges and FINRA share the responsibility for market surveillance and member supervision in securities markets, and the DCMs and NFA in commodity futures and options markets. The exchanges and DCMs are subject to active SEC and CFTC supervision. Pre-and post-trade transparency requirements apply in both securities and derivatives markets, subject to certain derogations that may lead to less than optimal pre-trade transparency. Market abuse is addressed by the Exchange Act and CEA and subject to administrative, civil and criminal sanctions. Open positions in commodity futures and options markets are closely monitored by the SROs and CFTC, while position information is available in securities markets through a DTCC service. Default procedures apply in both clearing agencies and Derivatives Clearing Organizations (DCOs) and are disclosed through their rules. Short selling is subject to disclosure and “locate” requirements, and the SEC and SROs monitor compliance.

Summary Implementation of the Iosco Principles

Table 8.

Summary Implementation of the IOSCO Principles—Detailed Assessments

Fully Implemented (FI), Broadly Implemented (BI), Partly Implemented (PI), Not Implemented (NI), Not Applicable (NA)

Table 8.

Summary Implementation of the IOSCO Principles—Detailed Assessments

Principle	Grade	Findings
Principle 1. The responsibilities of the Regulator should be clear and objectively stated.	BI	The mandates of the SEC and CFTC are stated by law. The agencies can and do interpret the laws under their jurisdiction. There is a high level of public transparency on interpretations, guidance and no action letters. In general, like products and entities are treated in a consistent manner. However, the CPO and CTA regimes may lead to different investor protection consequences than that applied to IAs. The legal framework requires the agencies to consult and coordinate in specific areas. In addition, the agencies communicate on a regular basis. In a few areas the SEC and CFTC have been able to streamline obligations of dually registered entities by establishing single reporting or substituted compliance mechanisms. In a few cases, joint inspections in areas of common interest have taken place.
Principle 2. The Regulator should be operationally independent and accountable in the exercise of its functions and powers.	BI	The SEC and CFTC have been established as independent agencies separate from any office of the Government. Rules governing the appointment of Commissioners seek to balance political affiliations. As per judicial precedents, Commissioners can be removed only for cause. The Congressional budget approval process has the potential to materially affect the agencies’ ability to decide on their priorities, and the annual nature of the budget can affect long term planning. In general, on a day to day basis the agencies do not require approval of or consultation with other authorities to exercise their functions. There is a strong accountability regime to Congress and the public, supported by a high level of transparency of a wide range of regulatory actions and decisions, as well as judicial review of rules and regulatory decisions.
Principle 3. The Regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.	PI	The SEC and CFTC have sufficient powers to fulfill their respective mandates, including rulemaking, registration, examination, investigation and enforcement powers. The agencies have been recruiting staff with diverse skill-sets. However, the current level of funding poses challenges for the proper discharge of their functions, in particular given their expanded mandates.
Principle 4. The Regulator should adopt clear and consistent regulatory processes.	FI	Requirements for the provision of regulated activities are available on the agencies’ websites. The legal framework requires the rulemaking process to include public consultation and an analysis of costs. In practice the agencies have also used other mechanisms, such as roundtables, to gather views from stakeholders on complex topics. Regulatory decisions are subject to due process, including generally a need for notice of proposed decisions, opportunity for affected parties to be heard, and judicial review.
Principle 5. The staff of the Regulator should observe the highest professional standards, including appropriate standards of confidentiality.	FI	The SEC and CFTC are bound by general rules on ethics applicable to government officials. In addition, both agencies have established specific ethics rules that include additional restrictions for staff, in particular in the area of holding and trading securities and commodities. Both agencies are subject to strict rules of confidentiality. There are appropriate mechanisms to monitor potential breaches of ethics and confidentiality obligations.
Principle 6. The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate.	BI	The supervisory programs of the different divisions of both agencies to monitor entities, products and markets are the main mechanisms to identify emerging and systemic risks. At the SEC, regular meetings take place between division staff and the SEC Chair, between division staff and individual Commissioners, and between the SEC Chair and individual Commissioners. Through these meetings, the SEC Chair obtains the views of the other Commissioners and informs them on issues of concern, including on emerging and systemic risks. Additionally, through these meetings the Chair and the other Commissioners are informed by the staff, and they share their views with the staff, on these same issues. CFTC staff has informal meetings to discuss risk issues. Weekly closed door surveillance meetings of staff with the Commission are also scheduled; these are used to discuss emerging risks, take decisions on how to tackle them, and follow up. Both agencies have made significant improvements to data collection and analysis, but enhancements are needed, particularly on asset management and swaps data. Through the participation of their chairs as voting members at the FSOC and of staff members in the subcommittees, the SEC and CFTC contribute to the process of identifying emerging and systemic risks in the financial sector.
Principle 7. The Regulator should have or contribute to a process to review the perimeter of regulation regularly.	FI	Various processes allow the SEC and CFTC to review the perimeter of regulation, both in regard to a specific sector, entity or product, and in a more holistic manner. Examples of the former are reviews prompted by concerns identified through their supervisory programs, market events, or law. Examples of the latter are the strategic plans the agencies develop on a five year cycle, which require them to take a view on priorities. Types of action taken to address the regulatory perimeter include taking supervisory actions, issuing guidance or new rules, and proposing changes to the legal frameworks.
Principle 8. The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed.	FI	The regulatory framework to address issuers’ conflicts of interest is based on strong disclosure obligations, including on related party transactions. Extensive disclosure obligations apply to the underlying assets of ABS. New disclosure requirements for asset level data and retention requirements will become effective over the next two years. The regime for regulated entities relies on a combination of prohibitions and management and disclosure of conflicts of interest. The SEC and CFTC monitor compliance primarily through their supervisory programs.
Principle 9. Where the regulatory system makes use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.	FI	The current regime relies extensively on the use of SROs for the supervision of the majority of the categories of intermediaries (FCMs, IBs, BDs), as well as for market surveillance. There are two main categories of SROs: the exchanges and DCMs and associations (FINRA and NFA). All SROs are subject to SEC or CFTC ongoing oversight. This includes approval or notification of rules, with appropriate tools to prevent rule implementation in case of non-compliance with the statutes; reporting requirements; and risk-based on-site examinations.
Principle 10. The Regulator should have comprehensive inspection, investigation and surveillance powers.	FI	The SEC and CFTC have broad powers to inspect all categories of regulated entities and individuals, require information from them, and conduct investigations into their activities for potential breaches of their statutory and regulatory obligations. They also have the power to conduct market surveillance. The CFTC and NFA conduct front line surveillance for markets under their jurisdiction. For the securities markets, the SEC and the SROs work cooperatively to conduct surveillance of those markets.
Principle 11. The Regulator should have comprehensive enforcement powers.	FI	The SEC and CFTC have robust powers to access information from any person, including subpoena powers over records and testimony, where a breach of law is suspected. Both agencies have a wide variety of enforcement tools at their disposal, including the use of administrative and civil proceedings and the ability to refer matters to the criminal authorities. A wide range of sanctions can be sought in administrative and civil proceedings, including monetary penalties and disgorgement and, for the CFTC, restitution.
Principle 12. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.	BI	The agencies and the SROs have put in place robust supervisory programs to monitor markets and the ongoing compliance of registered entities and individuals. The program for regulated entities is risk-based. In most cases, the examination program covers all entities so that none goes without inspection for a long period of time, even if it is low risk. However, the coverage of the IA examination program is limited in spite of the importance of the sector. Market surveillance for derivatives markets is carried out by the DCMs and directly by the CFTC; for securities markets, front line surveillance is largely the responsibility of the exchanges and FINRA. Both agencies make extensive use of their enforcement powers. In recent years, the SEC has made important improvements to its enforcement program, including case management, the use of settlements that include an admission of breaches, and the constitution of specialized units and task forces. The agencies and criminal authorities are active in pursuing securities and derivatives violations.
Principle 13. The Regulator should have authority to share both public and non-public information with domestic and foreign counterparts.	FI	Subject to compliance with relevant legal requirements, the SEC and CFTC can share information with other domestic and foreign authorities without the need for external approval. Access to the financial records of individuals and small partnerships covered by the Right to Financial Privacy Act (RFPA) requires notifying the customer; delaying such notice is also possible in certain circumstances. The IOSCO MMOU requirement on prior consultation of the requesting foreign authority before notifying the customer is followed.
Principle 14. Regulators should establish information sharing mechanisms that set out when and how they will share both public and nonpublic information with their domestic and foreign counterparts.	FI	The SEC and CFTC have concluded some domestic MOUs and are signatories to the IOSCO MMOU. Ad hoc information sharing arrangements and access request letters are used in the absence of an MOU with sufficient coverage. The agencies also have several bilateral MOUs with foreign authorities. Both have responded to a significant number of information requests from foreign authorities.
Principle 15. The regulatory system should allow for assistance to be provided to foreign Regulators who need to make inquiries in the discharge of their functions and exercise of their powers.	FI	The SEC and CFTC have assisted foreign authorities on numerous occasions through their ability to use their extensive powers to obtain and compel documents and testimony.
Principle 16. There should be full, accurate and timely disclosure of financial results, risk and other information that is material to investors’ decisions.	BI	The regulatory regime generally subjects issuers to strong initial and periodic disclosure obligations, including the submission of annual reports that must contain audited financial statements, quarterly reports, and disclosure of material events. However, municipal securities are exempted from the registration and reporting requirements. Through indirect mechanisms, the SEC has established disclosure obligations applicable to municipal securities. The SEC currently lacks direct authority to ensure issuers’ compliance with these obligations, except for enforcement authority based on antifraud provisions. The current statutory thresholds for the suspension of periodic reporting obligations on issuers of publicly offered securities are high. The SEC has an active program to monitor issuers’ compliance with their disclosure obligations.
Principle 17. Holders of securities in a company should be treated in a fair and equitable manner.	FI	The current legal and regulatory framework generally allows companies significant freedom to decide on their structure, the classes of shares to be offered to the public and the rights associated with the shares. Reporting issuers are subject to strong disclosure obligations, including requiring disclosure of shareholder rights in the prospectus. This is complemented by strong fiduciary duties, and shareholders can (and do) exercise actively their private rights in the courts. Federal laws allow the acquisition of control of a reporting company without triggering tender offer obligations. There are a number of features of the legal system, principally state corporate laws, that create disincentives for parties seeking to acquire control from doing so other than by negotiating with the board of directors or making a tender offer for all shares. The current regime requires reporting of insiders’ holdings, substantial holdings (over 10 percent), and holdings of most beneficial owners within stipulated deadlines.
Principle 18. Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality.	FI	Reporting issuers must prepare their financial statements in accordance with the U.S. GAAP, which are considered of high quality. Foreign issuers can use International Financial Reporting Standards (IFRS), and other accounting standards, the latter with reconciliation. The U.S. GAAP are set by the Financial Accounting Standards Board (FASB), which is overseen by the Financial Accounting Foundation (FAF), an independent, non-profit organization run by a Board of Trustees. The FASB is funded by fees assessed against issuers. The standard setting process is open, provides for consultation of stakeholders, and is actively monitored by the SEC. As part of its program to monitor issuers’ compliance with their disclosure obligations, the SEC examines financial statements and their compliance with the U.S. GAAP. The SEC enforcement program has renewed its focus on accounting and financial fraud through the creation of a specialized task force.
Principle 19. Auditors should be subject to adequate levels of oversight.	FI	Auditors of reporting companies must register with the PCAOB, which was created by law as a non-profit corporation under the oversight of the SEC. The PCAOB is composed of five members selected by the SEC, including two certified public accountants (CPAs). All members serve on a full time basis and must be independent from the audit profession. The PCAOB is funded by fees assessed to issuers, BDs, and other entities that are required to register with it. The PCAOB has established an inspection program for audit firms, where the inspection frequency depends on the number of issuers the audit firm audits. In addition to remediation of deficiencies, the PCAOB can impose enforcement actions on audit firms and individual auditors for breaches of their obligations and has done so in practice. SEC’s own enforcement actions have complemented PCAOB efforts.
Principle 20. Auditors should be independent of the issuing entity that they audit.	FI	There are specific SEC rules on auditor independence that impose restrictions on financial relations, and address issues such as self-interest, advocacy, familiarity, intimidation, provision of non-audit services, and rotation of the lead auditor every five years. The PCAOB requires audit firms to have a system of quality controls that provides reasonable assurance that personnel maintain independence in fact and appearance. Audit committees of listed companies are required to oversee the selection and work of audit firms. The PCAOB inspection program, along with its enforcement actions, is the key external mechanism to monitor compliance with the independence obligations. SEC enforcement actions over auditors have complemented PCAOB efforts.
Principle 21. Audit standards should be of a high and internationally acceptable quality.	FI	Audit standards are set by the PCAOB and are considered of high quality. The standard setting process involves public consultation with stakeholders. The PCAOB inspection program, along with its enforcement actions, is the main mechanism to monitor audit firms’ compliance with the audit standards. SEC enforcement actions have complemented PCAOB efforts.
Principle 22. Credit rating agencies should be subject to adequate levels of oversight. The regulatory system should ensure that credit rating agencies whose ratings are used for regulatory purposes are subject to registration and ongoing supervision.	FI	A U.S. or foreign CRA that wishes its credit ratings to be used for regulatory purposes in the U.S. must elect to register with the SEC. In practice, credit ratings are currently used for limited regulatory purposes by the SEC, most notably in connection with MMFs. The registration process and the ongoing examinations of NRSROs address the relevant integrity, transparency, timeliness, confidentiality and conflict of interest management aspects. The SEC conducts examinations of each NRSRO at least annually. If needed, it can recommend remedial action or bring enforcement actions against an NRSRO. Sanctions may range from fines to suspension or revocation of registration as an NRSRO. In practice the SEC has sanctioned at least one CRA.
Principle 23. Other entities that offer investors analytical or evaluative services should be subject to oversight and regulation appropriate to the impact their activities have on the market or the degree to which the regulatory system relies on them.	FI	The provision of equity research by BDs is subject to comprehensive SRO rules designed to increase an analyst’s independence and manage conflicts of interest. The large BDs were subject to a settlement in 2003-2004 that required them to strengthen the independence of their research analysis, including by establishing information barriers. The settlement covers BDs accounting for approximately 80 to 90 percent of the U.S. equity underwriting business and is still in effect. Both equity and debt research are subject to SEC rules that require analysts to certify that their reports accurately reflect their views and disclose certain conflicts; in addition antifraud provisions apply. On the commodities side, CFTC rules impose information barriers and disclosure requirements in connection with research analysis conducted by FCMs, IBs, SDs and MSPs.
Principle 24. The regulatory system should set standards for the eligibility, governance, organization and operational conduct of those who wish to market or operate a CIS.	PI	IAs to MFs and CPOs are subject to registration by the SEC and the CFTC respectively; the latter has delegated this function to the NFA. Both registration requirements focus on statutory disqualifications and extensive disclosure requirements to the regulator and investors. On an ongoing basis, IAs to MFs and CPOs are subject to certain organizational and operational conduct obligations, in particular the implementation of a compliance program. Monitoring of CPOs’ ongoing compliance is conducted by the NFA on the basis of a risk-based supervisory program. MF boards have the responsibility of selecting and overseeing the IAs and in practice exercise this role in a proactive manner both at the moment of the initial selection and on an on-going basis through reporting and meetings. The SEC has in place a risk-based supervisory program for ongoing monitoring of IAs to MFs. However, its coverage is limited despite the importance of the sector.
Principle 25. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.	BI	MFs and CPs can adopt different legal structures; these structures and the rights of investors must be disclosed in the prospectus. MF assets must be segregated. Custody by an IA or related entity is allowed, but in both cases additional safeguards apply, in particular the requirement for additional inspections by an auditor (two unannounced). In practice few MFs have self-custody by the IA or its related entity. The CFTC’s current regime requires CP assets to be segregated, but does not require the use of a custodian or depository. There are no additional safeguards in place when assets are held by the CPO or a related custodian. In practice most CPs do have separate custodians, which however are often related entities.
Principle 26. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a CIS for a particular investor and the value of the investor’s interest in the scheme.	FI	MFs and CPs that are offered to the public are subject to the Securities Act prospectus obligations (MFs are also subject to the ICA). MFs and CPs that issue prospectuses are required to provide periodic information to investors including both annual and semiannual reports. The CEA framework requires CPOs to provide a detailed disclosure document to prospective participants. In addition, the CPOs must provide annual audited financial statements and an annual report to their participants and the regulator. Quarterly or monthly reporting is also required. Delegation of activities by IAs and CPOs is permitted, but must be entrusted to entities that are also registered with the SEC and/or CFTC.
Principle 27. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a CIS.	BI	MFs and CPs are required to value their portfolios according to the U.S. GAAP. The MF prospectus and the CP disclosure document require disclosure of the frequency, timing and manner in which a participant may redeem its units. Sales and redemptions must be effected at the current net asset value (NAV). MMFs are not required to price their units at market value and may use fixed prices; however strict rules apply on eligible assets and duration of the portfolio. Federal laws do not require disclosure of NAV to investors on a periodic basis, but the price of MFs and CPs offered to the public is generally available through financial publications and websites There are no specific requirements that govern pricing errors, but market practices on the securities side address compensation of losses to investors in certain circumstances. Suspensions and deferrals of redemptions are dealt with via disclosure (and pursuant to specific rules under the ICA with respect to MFs and MMFs); however, the SEC and CFTC have the authority to take action if necessary.
Principle 28. Regulation should ensure that hedge funds and/or hedge funds managers/advisers are subject to appropriate oversight.	FI	Federal laws do not define HFs, but HF managers that operate HFs are required to register with the SEC and/or the CFTC as IAs or CPOs depending on the type of assets that the HF invests in. Similar to any other IA or CPO, current registration requirements focus on statutory disqualifications and disclosure to investors of extensive information about the manager, which must be kept up-to-date. Standards of organization and operational conduct apply to both IAs and CPOs of HFs on an ongoing basis. HF managers with RAUM above a certain threshold are subject to additional periodic reporting obligations to the SEC and CFTC on the funds they manage, including their assets, exposures and leverage. These reports can be shared with domestic authorities, including the FSOC, as well as with foreign regulators under the frameworks described in Principles 13-15. Capital requirements and other prudential requirements could be established on IAs and CPOs that manage HFs, if FSOC designated any such entity as systemically important.
Principle 29. Regulation should provide for minimum entry standards for market intermediaries.	FI	The statutory registration regime combined with the SRO membership regime subjects all categories of participants except IAs and CTAs to a comprehensive set of eligibility criteria that includes integrity, capital requirements, and adequacy of internal controls. IAs and CTAs are not permitted to hold customer assets or deal for customers, though they may have discretion to make investment decisions. As a result, the registration regime focuses on statutory disqualifications and disclosure to the regulators and investors of extensive information about the IAs or CTAs. Organizational and conduct obligations, including the obligation to implement a compliance program, apply on an ongoing basis to IAs and CTAs.
Principle 30. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.	FI	All categories of intermediaries except IAs and CTAs are subject to capital requirements based on a net capital formula. Assets are subject to deductions for liquidity and market risks, and additional charges apply to concentration risk. Some large BDs apply an alternative net capital (ANC) framework that allows them to use models to calculate their haircuts, but ANC firms have higher minimum capital requirements, and their use of models is approved by the SEC. The ANC framework does not include separate concentration charges, but uses value-at-risk to measure concentration risk. Intermediaries must report their financial position including net capital on a periodic basis, with frequency varying depending on the activities of the intermediary. They are also required to notify the authorities, if their capital falls below certain thresholds established in the regulatory framework. The SEC, CFTC and the SROs have mechanisms in place for ongoing monitoring of the financial position of firms.
Principle 31. Market intermediaries should be required to establish an internal function that delivers compliance with standards for internal organization and operational conduct, with the aim of protecting the interests of clients and their assets and ensuring proper management of risk, through which management of the intermediary accepts primary responsibility for these matters.	BI	With the exception of IAs and CTAs, intermediaries are explicitly required to have adequate internal controls and risk management systems. Segregation obligations apply to all types of intermediaries. Both in the securities and commodity futures side, intermediaries are required to know their customers. Intermediaries are required to manage conflicts of interest, although in the commodity futures side the framework relies more extensively on disclosure. The coverage of the examination program for IAs is limited, in spite of the importance of the sector.
Principle 32. There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.	FI	The CFTC has a plan to deal with market disruption events, including the failure of a firm. The SEC has a clearly defined process to deal with failures of regulated entities. In both cases there are early warning systems for intermediaries with a minimum capital requirement, which includes reporting requirements when their capital falls below certain thresholds. Active monitoring of the firms’ financial positions is conducted by both agencies and the SROs. To the extent a BD is in or approaching financial difficulty, SEC staff informs the Securities Investor Protection Corporation (SIPC), so that the SIPC can assess whether it should initiate a Securities Investor Protection Act (SIPA) proceeding. If a SIPA proceeding is initiated, a SIPA trustee is appointed with power to transfer clients’ accounts. If the BD’s assets are not sufficient to cover customers’ claims, the SIPC Fund compensates up to a limit. If a failed FCM’s assets are not sufficient to cover all losses, customers are compensated on a pro rata basis. There is no equivalent to a SIPC fund. Under the Dodd-Frank Act, systemically important intermediaries may be placed into a Title II receivership with the Federal Deposit Insurance Corporation (FDIC) as receiver.
Principle 33. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.	BI	Exchanges and boards of trade are required to be registered, and the registration criteria and processes are set out in the Exchange Act, CEA, and related rules and regulations. Before commencing operations, an ATS must register as a brokerdealer, become a member of an SRO (in practice FINRA), and file an initial Form ATS with the SEC. Form ATS provides the SEC with information on the ATS’ subscribers, access to its services, and operations. Fair access requirements apply after an ATS’s market share exceeds a five percent threshold; currently there are no such ATS. Limited public information is available on ATSs’ order execution rules and procedures, subscribers, and market models on the basis of voluntary disclosures.
Principle 34. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.	FI	The national securities exchanges and FINRA share the responsibility for market surveillance and member supervision in securities markets, while the DCMs and NFA carry out these functions for commodity futures and options markets. Most SEFs have outsourced their market surveillance to the NFA. The SEC and CFTC can investigate improper market conduct referred by the SROs or at their own initiative. They supervise exchanges primarily through rule approval/review and on-site examinations of exchanges’ self-regulatory functions. Examining the exchanges’ technological systems and system safeguards has become an increased focus of both the SEC and CFTC.
Principle 35. Regulation should promote transparency of trading.	BI	The statutory pre- and post-trade transparency requirements in equity markets are based on Regulation National Market System (NMS). In practice, exchanges’ proprietary feeds are also available to subscribers. Pre-trade transparency is not available in case of exchanges’ dark order types and trading on dark pool ATS. Post-trade transparency information has to be disclosed as soon as practicable, but within a maximum delay of 10/90 seconds; in practice information is disclosed within milliseconds of trades. In commodity futures and options markets, block trades and bona fide exchanges of futures for related positions are exempted from pre-trade transparency through DCM rules. The block trade thresholds set by DCM rules have decreased over the past years. The CFTC regulation on harmonized block trade requirements has not been finalized.
Principle 36. Regulation should be designed to detect and deter manipulation and other unfair trading practices.	FI	Fraudulent and manipulative practices are prohibited in the Exchange Act, CEA and SRO rules. Insider trading prohibition applies on securities markets. Trading in commodity futures and options on the basis of material nonpublic information in breach of a pre-existing duty to disclose may be a violation of the CEA. Market abuse is subject to administrative, civil and criminal sanctions. The potential for market abuse is monitored by the SROs that may take action under their rules or refer cases to the SEC, CFTC and criminal authorities. A range of administrative, civil and criminal sanctions has been imposed.
Principle 37. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.	FI	DCMs and DCOs closely monitor open positions in commodity futures and options markets. This is complemented by CFTC monitoring. Action can be taken, if a clearing member is not able to meet its obligations or post required margin. Individual clearing agencies monitor member exposures in securities markets. Cross-market post-trade monitoring is facilitated through the DTCC Limit Monitoring system. Default procedures are in place in both clearing agencies and DCOs and disclosed through their rules. Short selling is subject to disclosure and locate requirements. Both the SEC and SROs monitor compliance with the regulatory requirements on short selling.
Principle 38. Securities settlement systems and central counterparties should be subject to regulatory and supervisory requirements that are designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.		Not assessed.

Fully Implemented (FI), Broadly Implemented (BI), Partly Implemented (PI), Not Implemented (NI), Not Applicable (NA)

View Table

Table 8.

Summary Implementation of the IOSCO Principles—Detailed Assessments

Principle	Grade	Findings
Principle 1. The responsibilities of the Regulator should be clear and objectively stated.	BI	The mandates of the SEC and CFTC are stated by law. The agencies can and do interpret the laws under their jurisdiction. There is a high level of public transparency on interpretations, guidance and no action letters. In general, like products and entities are treated in a consistent manner. However, the CPO and CTA regimes may lead to different investor protection consequences than that applied to IAs. The legal framework requires the agencies to consult and coordinate in specific areas. In addition, the agencies communicate on a regular basis. In a few areas the SEC and CFTC have been able to streamline obligations of dually registered entities by establishing single reporting or substituted compliance mechanisms. In a few cases, joint inspections in areas of common interest have taken place.
Principle 2. The Regulator should be operationally independent and accountable in the exercise of its functions and powers.	BI	The SEC and CFTC have been established as independent agencies separate from any office of the Government. Rules governing the appointment of Commissioners seek to balance political affiliations. As per judicial precedents, Commissioners can be removed only for cause. The Congressional budget approval process has the potential to materially affect the agencies’ ability to decide on their priorities, and the annual nature of the budget can affect long term planning. In general, on a day to day basis the agencies do not require approval of or consultation with other authorities to exercise their functions. There is a strong accountability regime to Congress and the public, supported by a high level of transparency of a wide range of regulatory actions and decisions, as well as judicial review of rules and regulatory decisions.
Principle 3. The Regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.	PI	The SEC and CFTC have sufficient powers to fulfill their respective mandates, including rulemaking, registration, examination, investigation and enforcement powers. The agencies have been recruiting staff with diverse skill-sets. However, the current level of funding poses challenges for the proper discharge of their functions, in particular given their expanded mandates.
Principle 4. The Regulator should adopt clear and consistent regulatory processes.	FI	Requirements for the provision of regulated activities are available on the agencies’ websites. The legal framework requires the rulemaking process to include public consultation and an analysis of costs. In practice the agencies have also used other mechanisms, such as roundtables, to gather views from stakeholders on complex topics. Regulatory decisions are subject to due process, including generally a need for notice of proposed decisions, opportunity for affected parties to be heard, and judicial review.
Principle 5. The staff of the Regulator should observe the highest professional standards, including appropriate standards of confidentiality.	FI	The SEC and CFTC are bound by general rules on ethics applicable to government officials. In addition, both agencies have established specific ethics rules that include additional restrictions for staff, in particular in the area of holding and trading securities and commodities. Both agencies are subject to strict rules of confidentiality. There are appropriate mechanisms to monitor potential breaches of ethics and confidentiality obligations.
Principle 6. The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate.	BI	The supervisory programs of the different divisions of both agencies to monitor entities, products and markets are the main mechanisms to identify emerging and systemic risks. At the SEC, regular meetings take place between division staff and the SEC Chair, between division staff and individual Commissioners, and between the SEC Chair and individual Commissioners. Through these meetings, the SEC Chair obtains the views of the other Commissioners and informs them on issues of concern, including on emerging and systemic risks. Additionally, through these meetings the Chair and the other Commissioners are informed by the staff, and they share their views with the staff, on these same issues. CFTC staff has informal meetings to discuss risk issues. Weekly closed door surveillance meetings of staff with the Commission are also scheduled; these are used to discuss emerging risks, take decisions on how to tackle them, and follow up. Both agencies have made significant improvements to data collection and analysis, but enhancements are needed, particularly on asset management and swaps data. Through the participation of their chairs as voting members at the FSOC and of staff members in the subcommittees, the SEC and CFTC contribute to the process of identifying emerging and systemic risks in the financial sector.
Principle 7. The Regulator should have or contribute to a process to review the perimeter of regulation regularly.	FI	Various processes allow the SEC and CFTC to review the perimeter of regulation, both in regard to a specific sector, entity or product, and in a more holistic manner. Examples of the former are reviews prompted by concerns identified through their supervisory programs, market events, or law. Examples of the latter are the strategic plans the agencies develop on a five year cycle, which require them to take a view on priorities. Types of action taken to address the regulatory perimeter include taking supervisory actions, issuing guidance or new rules, and proposing changes to the legal frameworks.
Principle 8. The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed.	FI	The regulatory framework to address issuers’ conflicts of interest is based on strong disclosure obligations, including on related party transactions. Extensive disclosure obligations apply to the underlying assets of ABS. New disclosure requirements for asset level data and retention requirements will become effective over the next two years. The regime for regulated entities relies on a combination of prohibitions and management and disclosure of conflicts of interest. The SEC and CFTC monitor compliance primarily through their supervisory programs.
Principle 9. Where the regulatory system makes use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.	FI	The current regime relies extensively on the use of SROs for the supervision of the majority of the categories of intermediaries (FCMs, IBs, BDs), as well as for market surveillance. There are two main categories of SROs: the exchanges and DCMs and associations (FINRA and NFA). All SROs are subject to SEC or CFTC ongoing oversight. This includes approval or notification of rules, with appropriate tools to prevent rule implementation in case of non-compliance with the statutes; reporting requirements; and risk-based on-site examinations.
Principle 10. The Regulator should have comprehensive inspection, investigation and surveillance powers.	FI	The SEC and CFTC have broad powers to inspect all categories of regulated entities and individuals, require information from them, and conduct investigations into their activities for potential breaches of their statutory and regulatory obligations. They also have the power to conduct market surveillance. The CFTC and NFA conduct front line surveillance for markets under their jurisdiction. For the securities markets, the SEC and the SROs work cooperatively to conduct surveillance of those markets.
Principle 11. The Regulator should have comprehensive enforcement powers.	FI	The SEC and CFTC have robust powers to access information from any person, including subpoena powers over records and testimony, where a breach of law is suspected. Both agencies have a wide variety of enforcement tools at their disposal, including the use of administrative and civil proceedings and the ability to refer matters to the criminal authorities. A wide range of sanctions can be sought in administrative and civil proceedings, including monetary penalties and disgorgement and, for the CFTC, restitution.
Principle 12. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.	BI	The agencies and the SROs have put in place robust supervisory programs to monitor markets and the ongoing compliance of registered entities and individuals. The program for regulated entities is risk-based. In most cases, the examination program covers all entities so that none goes without inspection for a long period of time, even if it is low risk. However, the coverage of the IA examination program is limited in spite of the importance of the sector. Market surveillance for derivatives markets is carried out by the DCMs and directly by the CFTC; for securities markets, front line surveillance is largely the responsibility of the exchanges and FINRA. Both agencies make extensive use of their enforcement powers. In recent years, the SEC has made important improvements to its enforcement program, including case management, the use of settlements that include an admission of breaches, and the constitution of specialized units and task forces. The agencies and criminal authorities are active in pursuing securities and derivatives violations.
Principle 13. The Regulator should have authority to share both public and non-public information with domestic and foreign counterparts.	FI	Subject to compliance with relevant legal requirements, the SEC and CFTC can share information with other domestic and foreign authorities without the need for external approval. Access to the financial records of individuals and small partnerships covered by the Right to Financial Privacy Act (RFPA) requires notifying the customer; delaying such notice is also possible in certain circumstances. The IOSCO MMOU requirement on prior consultation of the requesting foreign authority before notifying the customer is followed.
Principle 14. Regulators should establish information sharing mechanisms that set out when and how they will share both public and nonpublic information with their domestic and foreign counterparts.	FI	The SEC and CFTC have concluded some domestic MOUs and are signatories to the IOSCO MMOU. Ad hoc information sharing arrangements and access request letters are used in the absence of an MOU with sufficient coverage. The agencies also have several bilateral MOUs with foreign authorities. Both have responded to a significant number of information requests from foreign authorities.
Principle 15. The regulatory system should allow for assistance to be provided to foreign Regulators who need to make inquiries in the discharge of their functions and exercise of their powers.	FI	The SEC and CFTC have assisted foreign authorities on numerous occasions through their ability to use their extensive powers to obtain and compel documents and testimony.
Principle 16. There should be full, accurate and timely disclosure of financial results, risk and other information that is material to investors’ decisions.	BI	The regulatory regime generally subjects issuers to strong initial and periodic disclosure obligations, including the submission of annual reports that must contain audited financial statements, quarterly reports, and disclosure of material events. However, municipal securities are exempted from the registration and reporting requirements. Through indirect mechanisms, the SEC has established disclosure obligations applicable to municipal securities. The SEC currently lacks direct authority to ensure issuers’ compliance with these obligations, except for enforcement authority based on antifraud provisions. The current statutory thresholds for the suspension of periodic reporting obligations on issuers of publicly offered securities are high. The SEC has an active program to monitor issuers’ compliance with their disclosure obligations.
Principle 17. Holders of securities in a company should be treated in a fair and equitable manner.	FI	The current legal and regulatory framework generally allows companies significant freedom to decide on their structure, the classes of shares to be offered to the public and the rights associated with the shares. Reporting issuers are subject to strong disclosure obligations, including requiring disclosure of shareholder rights in the prospectus. This is complemented by strong fiduciary duties, and shareholders can (and do) exercise actively their private rights in the courts. Federal laws allow the acquisition of control of a reporting company without triggering tender offer obligations. There are a number of features of the legal system, principally state corporate laws, that create disincentives for parties seeking to acquire control from doing so other than by negotiating with the board of directors or making a tender offer for all shares. The current regime requires reporting of insiders’ holdings, substantial holdings (over 10 percent), and holdings of most beneficial owners within stipulated deadlines.
Principle 18. Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality.	FI	Reporting issuers must prepare their financial statements in accordance with the U.S. GAAP, which are considered of high quality. Foreign issuers can use International Financial Reporting Standards (IFRS), and other accounting standards, the latter with reconciliation. The U.S. GAAP are set by the Financial Accounting Standards Board (FASB), which is overseen by the Financial Accounting Foundation (FAF), an independent, non-profit organization run by a Board of Trustees. The FASB is funded by fees assessed against issuers. The standard setting process is open, provides for consultation of stakeholders, and is actively monitored by the SEC. As part of its program to monitor issuers’ compliance with their disclosure obligations, the SEC examines financial statements and their compliance with the U.S. GAAP. The SEC enforcement program has renewed its focus on accounting and financial fraud through the creation of a specialized task force.
Principle 19. Auditors should be subject to adequate levels of oversight.	FI	Auditors of reporting companies must register with the PCAOB, which was created by law as a non-profit corporation under the oversight of the SEC. The PCAOB is composed of five members selected by the SEC, including two certified public accountants (CPAs). All members serve on a full time basis and must be independent from the audit profession. The PCAOB is funded by fees assessed to issuers, BDs, and other entities that are required to register with it. The PCAOB has established an inspection program for audit firms, where the inspection frequency depends on the number of issuers the audit firm audits. In addition to remediation of deficiencies, the PCAOB can impose enforcement actions on audit firms and individual auditors for breaches of their obligations and has done so in practice. SEC’s own enforcement actions have complemented PCAOB efforts.
Principle 20. Auditors should be independent of the issuing entity that they audit.	FI	There are specific SEC rules on auditor independence that impose restrictions on financial relations, and address issues such as self-interest, advocacy, familiarity, intimidation, provision of non-audit services, and rotation of the lead auditor every five years. The PCAOB requires audit firms to have a system of quality controls that provides reasonable assurance that personnel maintain independence in fact and appearance. Audit committees of listed companies are required to oversee the selection and work of audit firms. The PCAOB inspection program, along with its enforcement actions, is the key external mechanism to monitor compliance with the independence obligations. SEC enforcement actions over auditors have complemented PCAOB efforts.
Principle 21. Audit standards should be of a high and internationally acceptable quality.	FI	Audit standards are set by the PCAOB and are considered of high quality. The standard setting process involves public consultation with stakeholders. The PCAOB inspection program, along with its enforcement actions, is the main mechanism to monitor audit firms’ compliance with the audit standards. SEC enforcement actions have complemented PCAOB efforts.
Principle 22. Credit rating agencies should be subject to adequate levels of oversight. The regulatory system should ensure that credit rating agencies whose ratings are used for regulatory purposes are subject to registration and ongoing supervision.	FI	A U.S. or foreign CRA that wishes its credit ratings to be used for regulatory purposes in the U.S. must elect to register with the SEC. In practice, credit ratings are currently used for limited regulatory purposes by the SEC, most notably in connection with MMFs. The registration process and the ongoing examinations of NRSROs address the relevant integrity, transparency, timeliness, confidentiality and conflict of interest management aspects. The SEC conducts examinations of each NRSRO at least annually. If needed, it can recommend remedial action or bring enforcement actions against an NRSRO. Sanctions may range from fines to suspension or revocation of registration as an NRSRO. In practice the SEC has sanctioned at least one CRA.
Principle 23. Other entities that offer investors analytical or evaluative services should be subject to oversight and regulation appropriate to the impact their activities have on the market or the degree to which the regulatory system relies on them.	FI	The provision of equity research by BDs is subject to comprehensive SRO rules designed to increase an analyst’s independence and manage conflicts of interest. The large BDs were subject to a settlement in 2003-2004 that required them to strengthen the independence of their research analysis, including by establishing information barriers. The settlement covers BDs accounting for approximately 80 to 90 percent of the U.S. equity underwriting business and is still in effect. Both equity and debt research are subject to SEC rules that require analysts to certify that their reports accurately reflect their views and disclose certain conflicts; in addition antifraud provisions apply. On the commodities side, CFTC rules impose information barriers and disclosure requirements in connection with research analysis conducted by FCMs, IBs, SDs and MSPs.
Principle 24. The regulatory system should set standards for the eligibility, governance, organization and operational conduct of those who wish to market or operate a CIS.	PI	IAs to MFs and CPOs are subject to registration by the SEC and the CFTC respectively; the latter has delegated this function to the NFA. Both registration requirements focus on statutory disqualifications and extensive disclosure requirements to the regulator and investors. On an ongoing basis, IAs to MFs and CPOs are subject to certain organizational and operational conduct obligations, in particular the implementation of a compliance program. Monitoring of CPOs’ ongoing compliance is conducted by the NFA on the basis of a risk-based supervisory program. MF boards have the responsibility of selecting and overseeing the IAs and in practice exercise this role in a proactive manner both at the moment of the initial selection and on an on-going basis through reporting and meetings. The SEC has in place a risk-based supervisory program for ongoing monitoring of IAs to MFs. However, its coverage is limited despite the importance of the sector.
Principle 25. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.	BI	MFs and CPs can adopt different legal structures; these structures and the rights of investors must be disclosed in the prospectus. MF assets must be segregated. Custody by an IA or related entity is allowed, but in both cases additional safeguards apply, in particular the requirement for additional inspections by an auditor (two unannounced). In practice few MFs have self-custody by the IA or its related entity. The CFTC’s current regime requires CP assets to be segregated, but does not require the use of a custodian or depository. There are no additional safeguards in place when assets are held by the CPO or a related custodian. In practice most CPs do have separate custodians, which however are often related entities.
Principle 26. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a CIS for a particular investor and the value of the investor’s interest in the scheme.	FI	MFs and CPs that are offered to the public are subject to the Securities Act prospectus obligations (MFs are also subject to the ICA). MFs and CPs that issue prospectuses are required to provide periodic information to investors including both annual and semiannual reports. The CEA framework requires CPOs to provide a detailed disclosure document to prospective participants. In addition, the CPOs must provide annual audited financial statements and an annual report to their participants and the regulator. Quarterly or monthly reporting is also required. Delegation of activities by IAs and CPOs is permitted, but must be entrusted to entities that are also registered with the SEC and/or CFTC.
Principle 27. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a CIS.	BI	MFs and CPs are required to value their portfolios according to the U.S. GAAP. The MF prospectus and the CP disclosure document require disclosure of the frequency, timing and manner in which a participant may redeem its units. Sales and redemptions must be effected at the current net asset value (NAV). MMFs are not required to price their units at market value and may use fixed prices; however strict rules apply on eligible assets and duration of the portfolio. Federal laws do not require disclosure of NAV to investors on a periodic basis, but the price of MFs and CPs offered to the public is generally available through financial publications and websites There are no specific requirements that govern pricing errors, but market practices on the securities side address compensation of losses to investors in certain circumstances. Suspensions and deferrals of redemptions are dealt with via disclosure (and pursuant to specific rules under the ICA with respect to MFs and MMFs); however, the SEC and CFTC have the authority to take action if necessary.
Principle 28. Regulation should ensure that hedge funds and/or hedge funds managers/advisers are subject to appropriate oversight.	FI	Federal laws do not define HFs, but HF managers that operate HFs are required to register with the SEC and/or the CFTC as IAs or CPOs depending on the type of assets that the HF invests in. Similar to any other IA or CPO, current registration requirements focus on statutory disqualifications and disclosure to investors of extensive information about the manager, which must be kept up-to-date. Standards of organization and operational conduct apply to both IAs and CPOs of HFs on an ongoing basis. HF managers with RAUM above a certain threshold are subject to additional periodic reporting obligations to the SEC and CFTC on the funds they manage, including their assets, exposures and leverage. These reports can be shared with domestic authorities, including the FSOC, as well as with foreign regulators under the frameworks described in Principles 13-15. Capital requirements and other prudential requirements could be established on IAs and CPOs that manage HFs, if FSOC designated any such entity as systemically important.
Principle 29. Regulation should provide for minimum entry standards for market intermediaries.	FI	The statutory registration regime combined with the SRO membership regime subjects all categories of participants except IAs and CTAs to a comprehensive set of eligibility criteria that includes integrity, capital requirements, and adequacy of internal controls. IAs and CTAs are not permitted to hold customer assets or deal for customers, though they may have discretion to make investment decisions. As a result, the registration regime focuses on statutory disqualifications and disclosure to the regulators and investors of extensive information about the IAs or CTAs. Organizational and conduct obligations, including the obligation to implement a compliance program, apply on an ongoing basis to IAs and CTAs.
Principle 30. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.	FI	All categories of intermediaries except IAs and CTAs are subject to capital requirements based on a net capital formula. Assets are subject to deductions for liquidity and market risks, and additional charges apply to concentration risk. Some large BDs apply an alternative net capital (ANC) framework that allows them to use models to calculate their haircuts, but ANC firms have higher minimum capital requirements, and their use of models is approved by the SEC. The ANC framework does not include separate concentration charges, but uses value-at-risk to measure concentration risk. Intermediaries must report their financial position including net capital on a periodic basis, with frequency varying depending on the activities of the intermediary. They are also required to notify the authorities, if their capital falls below certain thresholds established in the regulatory framework. The SEC, CFTC and the SROs have mechanisms in place for ongoing monitoring of the financial position of firms.
Principle 31. Market intermediaries should be required to establish an internal function that delivers compliance with standards for internal organization and operational conduct, with the aim of protecting the interests of clients and their assets and ensuring proper management of risk, through which management of the intermediary accepts primary responsibility for these matters.	BI	With the exception of IAs and CTAs, intermediaries are explicitly required to have adequate internal controls and risk management systems. Segregation obligations apply to all types of intermediaries. Both in the securities and commodity futures side, intermediaries are required to know their customers. Intermediaries are required to manage conflicts of interest, although in the commodity futures side the framework relies more extensively on disclosure. The coverage of the examination program for IAs is limited, in spite of the importance of the sector.
Principle 32. There should be a procedure for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.	FI	The CFTC has a plan to deal with market disruption events, including the failure of a firm. The SEC has a clearly defined process to deal with failures of regulated entities. In both cases there are early warning systems for intermediaries with a minimum capital requirement, which includes reporting requirements when their capital falls below certain thresholds. Active monitoring of the firms’ financial positions is conducted by both agencies and the SROs. To the extent a BD is in or approaching financial difficulty, SEC staff informs the Securities Investor Protection Corporation (SIPC), so that the SIPC can assess whether it should initiate a Securities Investor Protection Act (SIPA) proceeding. If a SIPA proceeding is initiated, a SIPA trustee is appointed with power to transfer clients’ accounts. If the BD’s assets are not sufficient to cover customers’ claims, the SIPC Fund compensates up to a limit. If a failed FCM’s assets are not sufficient to cover all losses, customers are compensated on a pro rata basis. There is no equivalent to a SIPC fund. Under the Dodd-Frank Act, systemically important intermediaries may be placed into a Title II receivership with the Federal Deposit Insurance Corporation (FDIC) as receiver.
Principle 33. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.	BI	Exchanges and boards of trade are required to be registered, and the registration criteria and processes are set out in the Exchange Act, CEA, and related rules and regulations. Before commencing operations, an ATS must register as a brokerdealer, become a member of an SRO (in practice FINRA), and file an initial Form ATS with the SEC. Form ATS provides the SEC with information on the ATS’ subscribers, access to its services, and operations. Fair access requirements apply after an ATS’s market share exceeds a five percent threshold; currently there are no such ATS. Limited public information is available on ATSs’ order execution rules and procedures, subscribers, and market models on the basis of voluntary disclosures.
Principle 34. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.	FI	The national securities exchanges and FINRA share the responsibility for market surveillance and member supervision in securities markets, while the DCMs and NFA carry out these functions for commodity futures and options markets. Most SEFs have outsourced their market surveillance to the NFA. The SEC and CFTC can investigate improper market conduct referred by the SROs or at their own initiative. They supervise exchanges primarily through rule approval/review and on-site examinations of exchanges’ self-regulatory functions. Examining the exchanges’ technological systems and system safeguards has become an increased focus of both the SEC and CFTC.
Principle 35. Regulation should promote transparency of trading.	BI	The statutory pre- and post-trade transparency requirements in equity markets are based on Regulation National Market System (NMS). In practice, exchanges’ proprietary feeds are also available to subscribers. Pre-trade transparency is not available in case of exchanges’ dark order types and trading on dark pool ATS. Post-trade transparency information has to be disclosed as soon as practicable, but within a maximum delay of 10/90 seconds; in practice information is disclosed within milliseconds of trades. In commodity futures and options markets, block trades and bona fide exchanges of futures for related positions are exempted from pre-trade transparency through DCM rules. The block trade thresholds set by DCM rules have decreased over the past years. The CFTC regulation on harmonized block trade requirements has not been finalized.
Principle 36. Regulation should be designed to detect and deter manipulation and other unfair trading practices.	FI	Fraudulent and manipulative practices are prohibited in the Exchange Act, CEA and SRO rules. Insider trading prohibition applies on securities markets. Trading in commodity futures and options on the basis of material nonpublic information in breach of a pre-existing duty to disclose may be a violation of the CEA. Market abuse is subject to administrative, civil and criminal sanctions. The potential for market abuse is monitored by the SROs that may take action under their rules or refer cases to the SEC, CFTC and criminal authorities. A range of administrative, civil and criminal sanctions has been imposed.
Principle 37. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.	FI	DCMs and DCOs closely monitor open positions in commodity futures and options markets. This is complemented by CFTC monitoring. Action can be taken, if a clearing member is not able to meet its obligations or post required margin. Individual clearing agencies monitor member exposures in securities markets. Cross-market post-trade monitoring is facilitated through the DTCC Limit Monitoring system. Default procedures are in place in both clearing agencies and DCOs and disclosed through their rules. Short selling is subject to disclosure and locate requirements. Both the SEC and SROs monitor compliance with the regulatory requirements on short selling.
Principle 38. Securities settlement systems and central counterparties should be subject to regulatory and supervisory requirements that are designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.		Not assessed.

Fully Implemented (FI), Broadly Implemented (BI), Partly Implemented (PI), Not Implemented (NI), Not Applicable (NA)

Recommended Action Plan and Authorities’ Response

Table 9.

Recommended Action Plan to Improve Implementation of the IOSCO Principles

Table 9.

Recommended Action Plan to Improve Implementation of the IOSCO Principles

Principle	Recommended Action
Principle 1	The SEC and CFTC should continue their efforts to coordinate via joint regulations, unified reporting and/or use of substituted compliance as appropriate. All regulatory authorities with mandates impacting securities and derivatives markets should continue to enhance coordination. The CFTC is encouraged to review whether legal changes should be pursued in order to subject CPOs and CTAs to a similar standard of care as IAs and to a more comprehensive framework to address conflicts of interest.
Principle 2	Consideration should be given to mechanisms to make both the SEC and CFTC’s funding more stable, for example by the agencies’ becoming self-funded and/or providing for multiyear budgeting.
Principle 3	Additional resources should be provided for the SEC and CFTC commensurate to their expanded mandates.
Principle 6	The SEC should continue to work on improving data availability and automated tools to identify risks, in particular in connection with asset managers. The SEC should consider enhancing mechanisms to ensure a holistic view of emerging and systemic risk, for example by making more formal arrangements for discussions on risk, ensuring participation of the Commission as a whole, and establishing a more formal accountability framework. The CFTC should continue to work on improving the quality of swaps data and expanding current mechanisms to monitor the swaps markets.
Principle 8	The SEC is encouraged to review conflicts of interest arising from the participation of BD affiliates in an ATS managed by the BD. The SEC is encouraged to review the impact of order types, order routing, and related fee structures in equity markets on conflicts of interest. The SEC is encouraged to continue its review of the BD and IA models to determine whether harmonization of the standards of care is needed, and whether additional actions are needed in connection with conflicts of interest, including those arising from compensation arrangements for different types of accounts, products or services.
Principles 12, 24 and 31	The SEC should increase the intensity of its examination coverage of IAs.
Principle 16	Consideration should be given to making amendments to the federal securities laws to grant the SEC direct authority to impose disclosure requirements on issuers of municipal securities and to remove the exemption available to non-municipal conduit borrowers. Consideration should be given to reviewing the thresholds that trigger a suspension in reporting obligations, in particular for banks and bank holding companies.
Principle 17	The SEC is encouraged to consider reducing the deadline for beneficial ownership disclosure as well as for the first report that insiders need to file.
Principle 19	The PCAOB should take forward the implementation of actions to ensure the timeliness of its enforcement proceedings. The SEC and PCAOB are encouraged to further analyze whether PCAOB proceedings should be made public.
Principle 21	The PCAOB should work on ensuring timely advancement of its standard setting agenda.
Principle 23	FINRA is encouraged to finalize its rules for research analysis in debt securities, as well as rules for research analysis in equity securities to eliminate, where appropriate, potential asymmetries between the regime applicable to the firms covered by the Global Settlement and the regime applicable to the rest of the industry.
Principle 24	The authorities should consider to explicitly require IAs to MFs and CPOs to implement internal controls and risk management.
Principle 25	Consideration should be given to amending the CEA to enable the CFTC to require additional safeguards where a CPO or a related entity has possession of pool assets.
Principle 27	The CFTC or the NFA should adopt a rule providing for the way investors are to be treated, if adversely affected by errors in the pricing of interests in a CP.
Principle 28	As the authorities continue to analyze the risks posed by HFs, they are encouraged to review whether a comprehensive risk management framework is warranted.
Principle 29	The authorities are encouraged to consider whether to explicitly require internal controls and risk management for IAs and CTAs that conduct portfolio management.
Principle 30	The SEC is encouraged to continue its review of the capital and liquidity framework for ANC firms. More broadly, the SEC is encouraged to continue reviewing the adequacy of liquidity requirements for the larger BDs.
Principle 33	The SEC should continue to follow the development of bilateral trading systems and, if needed, adjust the regulatory framework as appropriate. The SEC should require the ATSs to disclose their order execution rules and procedures. The SEC should ensure that the regulatory framework enhances the requirement for fair access to ATS, including by removing or at least lowering the current five percent threshold. The SEC and FINRA are encouraged to further ensure that their respective processes provide a sufficiently in-depth analysis of the order execution procedures of a new ATS, in particular for fairness, and provide specific evidence of a BD’s operational and other competence to operate an ATS. The SEC is encouraged to consider whether additional requirements could be applied to exchanges themselves to further enhance their ability to manage the risks arising from direct electronic access.
Principle 35	The SEC is encouraged to continue to deepen its analysis of the pre-trade transparency impact of various order types and the reference prices dark order types are permitted to use to ensure that current derogations do not adversely impact the price discovery process. The CFTC should promptly finalize its block trade rules to provide a regulatory basis for assessing pre-trade transparency waivers for block trades.
Principle 37	The authorities are encouraged to review whether the current mechanisms are sufficient to provide them with a comprehensive view of the total exposures of market participants that are active across various markets (equity, fixed income, commodity futures and options).

View Table

Table 9.

Recommended Action Plan to Improve Implementation of the IOSCO Principles

Principle	Recommended Action
Principle 1	The SEC and CFTC should continue their efforts to coordinate via joint regulations, unified reporting and/or use of substituted compliance as appropriate. All regulatory authorities with mandates impacting securities and derivatives markets should continue to enhance coordination. The CFTC is encouraged to review whether legal changes should be pursued in order to subject CPOs and CTAs to a similar standard of care as IAs and to a more comprehensive framework to address conflicts of interest.
Principle 2	Consideration should be given to mechanisms to make both the SEC and CFTC’s funding more stable, for example by the agencies’ becoming self-funded and/or providing for multiyear budgeting.
Principle 3	Additional resources should be provided for the SEC and CFTC commensurate to their expanded mandates.
Principle 6	The SEC should continue to work on improving data availability and automated tools to identify risks, in particular in connection with asset managers. The SEC should consider enhancing mechanisms to ensure a holistic view of emerging and systemic risk, for example by making more formal arrangements for discussions on risk, ensuring participation of the Commission as a whole, and establishing a more formal accountability framework. The CFTC should continue to work on improving the quality of swaps data and expanding current mechanisms to monitor the swaps markets.
Principle 8	The SEC is encouraged to review conflicts of interest arising from the participation of BD affiliates in an ATS managed by the BD. The SEC is encouraged to review the impact of order types, order routing, and related fee structures in equity markets on conflicts of interest. The SEC is encouraged to continue its review of the BD and IA models to determine whether harmonization of the standards of care is needed, and whether additional actions are needed in connection with conflicts of interest, including those arising from compensation arrangements for different types of accounts, products or services.
Principles 12, 24 and 31	The SEC should increase the intensity of its examination coverage of IAs.
Principle 16	Consideration should be given to making amendments to the federal securities laws to grant the SEC direct authority to impose disclosure requirements on issuers of municipal securities and to remove the exemption available to non-municipal conduit borrowers. Consideration should be given to reviewing the thresholds that trigger a suspension in reporting obligations, in particular for banks and bank holding companies.
Principle 17	The SEC is encouraged to consider reducing the deadline for beneficial ownership disclosure as well as for the first report that insiders need to file.
Principle 19	The PCAOB should take forward the implementation of actions to ensure the timeliness of its enforcement proceedings. The SEC and PCAOB are encouraged to further analyze whether PCAOB proceedings should be made public.
Principle 21	The PCAOB should work on ensuring timely advancement of its standard setting agenda.
Principle 23	FINRA is encouraged to finalize its rules for research analysis in debt securities, as well as rules for research analysis in equity securities to eliminate, where appropriate, potential asymmetries between the regime applicable to the firms covered by the Global Settlement and the regime applicable to the rest of the industry.
Principle 24	The authorities should consider to explicitly require IAs to MFs and CPOs to implement internal controls and risk management.
Principle 25	Consideration should be given to amending the CEA to enable the CFTC to require additional safeguards where a CPO or a related entity has possession of pool assets.
Principle 27	The CFTC or the NFA should adopt a rule providing for the way investors are to be treated, if adversely affected by errors in the pricing of interests in a CP.
Principle 28	As the authorities continue to analyze the risks posed by HFs, they are encouraged to review whether a comprehensive risk management framework is warranted.
Principle 29	The authorities are encouraged to consider whether to explicitly require internal controls and risk management for IAs and CTAs that conduct portfolio management.
Principle 30	The SEC is encouraged to continue its review of the capital and liquidity framework for ANC firms. More broadly, the SEC is encouraged to continue reviewing the adequacy of liquidity requirements for the larger BDs.
Principle 33	The SEC should continue to follow the development of bilateral trading systems and, if needed, adjust the regulatory framework as appropriate. The SEC should require the ATSs to disclose their order execution rules and procedures. The SEC should ensure that the regulatory framework enhances the requirement for fair access to ATS, including by removing or at least lowering the current five percent threshold. The SEC and FINRA are encouraged to further ensure that their respective processes provide a sufficiently in-depth analysis of the order execution procedures of a new ATS, in particular for fairness, and provide specific evidence of a BD’s operational and other competence to operate an ATS. The SEC is encouraged to consider whether additional requirements could be applied to exchanges themselves to further enhance their ability to manage the risks arising from direct electronic access.
Principle 35	The SEC is encouraged to continue to deepen its analysis of the pre-trade transparency impact of various order types and the reference prices dark order types are permitted to use to ensure that current derogations do not adversely impact the price discovery process. The CFTC should promptly finalize its block trade rules to provide a regulatory basis for assessing pre-trade transparency waivers for block trades.
Principle 37	The authorities are encouraged to review whether the current mechanisms are sufficient to provide them with a comprehensive view of the total exposures of market participants that are active across various markets (equity, fixed income, commodity futures and options).

Detailed Assessment

41. The purpose of the assessment is primarily to ascertain whether the legal and regulatory securities markets requirements of the country and the operations of the securities regulatory authorities in implementing and enforcing these requirements in practice meet the standards set out in the IOSCO Principles. The assessment is to be a means of identifying potential gaps, inconsistencies, weaknesses and areas where further powers and/or better implementation of the existing framework may be necessary and used as a basis for establishing priorities for improvements to the current regulatory scheme.

42. The assessment of the country’s observance of each individual Principle is made by assigning to it one of the following assessment categories: fully implemented, broadly implemented, partly implemented, not implemented and not applicable. The IOSCO assessment methodology provides a set of assessment criteria to be met in respect of each Principle to achieve the designated benchmarks. The methodology recognizes that the means of implementation may vary depending on the domestic context, structure, and stage of development of the country’s capital market and acknowledges that regulatory authorities may implement the Principles in many different ways.

• A Principle is considered fully implemented when all assessment criteria specified for that Principle are generally met without any significant deficiencies.

• A Principle is considered broadly implemented when the exceptions to meeting the assessment criteria specified for that Principle are limited to those specified under the broadly implemented benchmark for that Principle and do not substantially affect the overall adequacy of the regulation that the Principle is intended to address.

• A Principle is considered partly implemented when the assessment criteria specified under the partly implemented benchmark for that Principle are generally met without any significant deficiencies.

• A Principle is considered not implemented when major shortcomings (as specified in the not implemented benchmark for that Principle) are found in adhering to the assessment criteria specified for that Principle.

• A Principle is considered not applicable when it does not apply because of the nature of the country’s securities market and relevant structural, legal and institutional considerations.

Table 10.

Detailed Assessment of Implementation of the IOSCO Principles

Table 10.

Detailed Assessment of Implementation of the IOSCO Principles

Principles for the Regulator
Principle 1.	The responsibilities of the regulator should be clear and objectively stated.
Description	Regulatory structure Federal regulation At the federal level, regulation of securities and derivatives markets is divided between the SEC and the CFTC. In broad terms, the SEC is responsible for the securities markets and related derivatives markets (such as options on securities), and the CFTC for futures and other derivatives markets. The Dodd-Frank Act expanded the coverage of the federal legislation, notably by: Bringing swaps within the federal legislation, and allocating responsibility for swaps markets between the CFTC and the SEC; Requiring the registration of municipal advisors with the SEC and providing for their regulation. The offering of municipal securities continues to be exempted from the registration and reporting requirements of the federal securities laws; Requiring the registration with the SEC of previously exempt advisers to HFs and private equity funds; Expanding the authority of the CFTC over off-exchange transactions in foreign currency with members of the retail public; and Removing exemptions from regulation provided for under the Commodity Futures Modernization Act of 2000 (CFMA) for foreign and other exempt boards of trade State-based securities regulation State authorities continue to play some role in the regulation of the securities markets. For example, smaller IAs (those with less than US$100 million in assets under management) are generally not required to register with the SEC as IAs, but are subject to state regulation. Some offerings of securities must be registered under both the Securities Act and applicable state securities laws, unless an exemption from registration is available. The National Securities Markets Improvement Act of 1996 (NSMIA) provided that the offer and sale of certain “covered securities” (such as securities listed on NYSE or NASDAQ) are no longer subject to state securities law registration requirements. NSMIA preserves the right of the states to investigate and prosecute fraud. Certain other securities offerings (such as those made solely within a single state) are not required to be registered under the Securities Act, but are subject to state regulation. Securities market intermediaries are typically required to register at the state as well as the federal level. SROs The U.S. regulatory system makes extensive use of SROs, including exchanges that have SRO roles and specialist SROs such as FINRA and the NFA. These SROs are subject to the authorization and oversight of the relevant regulator (see further under Principle 9). CFTC Responsibilities, powers and authority The CFTC is an operationally independent federal agency established under the CEA. Its responsibilities, powers and authority are set out in the CEA and related CFTC Regulations. (For example, see Section 2(a) of the CEA for the CFTC’s jurisdiction and Section 8a for its powers). The CFTC’s mission is to protect market users and the public from fraud, manipulation, other abusive practices, and systemic risk related to derivatives that are subject to the CEA and to foster open, transparent, competitive and financially sound markets (Section 3(b) CEA). Discretion to interpret authority The CFTC can interpret the authority granted to it by the CEA. It largely interprets the CEA based on the plain meaning of the statute and available legislative history. Interpretation is done mainly via guidance as well as more informal means such as frequently ask questions. In addition, the CEA gives the CFTC broad exemptive authority (Section 4(c)) and broad rulemaking authority (Section 8a(5)). Exemptive authority has been used to exempt classes of participants from particular provisions of a regulation, but also to allow a particular firm or product (or type of firm or product) not to comply with a specific provision in a law or regulation. The latter is usually done via no action letters. The rulemaking process is governed by Section 553 of the Administrative Procedure Act (APA) and other statutes that prescribe the manner in which the CFTC may adopt rules and regulations (see Principle 4). In general, rules are subject to consultation and cost-benefit analysis. This process is fully transparent with CFTC rule proposals, adoptions, and concept releases published in the Federal Register and on the CFTC’s website. Concerns have been expressed about the degree to which the CFTC has relied on guidance and no action letter relief to implement some provisions of the Dodd-Frank Act. The former because guidance is not subject to the formal consultation and cost-benefit analysis that is required for the adoption of rules under the APA. The latter mainly because it has added uncertainty to the regulatory framework, in particular since many no action letters have been time limited and some of them have been extended only shortly before their original expiry date. SEC Responsibilities, powers and authority The SEC is an operationally independent federal agency established under the Exchange Act. Its responsibilities, powers and authority are set out in the legislation it administers, including the Securities Act, the Exchange Act, the Trust Indenture Act, the ICA, the Advisers Act, the Sarbanes-Oxley Act (SOX), the Dodd-Frank Act and the Jumpstart Our Business Startups Act (JOBS Act). The SEC’s mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. Discretion to interpret authority The SEC can interpret its authority and the process for interpretation is clear and transparent. The SEC provides guidance by issuing interpretive releases, interpretive letters, legal or accounting bulletins, or less formal guidance such as frequently asked questions. These interpretations are posted on the SEC website and published in the Federal Register. Similar to the CFTC, the SEC has broad exemptive authority and rulemaking authority pursuant to the federal securities laws. As in the case of the CFTC, the SEC’s rulemaking is governed by the APA and by other statutes that prescribe the manner in which the SEC may undertake to consider or adopt rules of general applicability (see Principle 4). In general, rules are subject to consultation and cost-benefit analysis. This process is also fully transparent with SEC rule proposals, adoptions and concept releases published in the Federal Register and on the SEC’s website. Multi-authority issues (gaps and overlaps) As a general rule, the SEC and the CFTC have exclusive jurisdiction for the regulation of activities and products within the scope of their statutory mandates. There are, however, a number of exceptions. In addition to the authority state authorities have in relation to certain securities market activities (see above), there are some areas of the market where the CFTC’s and SEC’s authority overlaps, or is shared with one another or with other authorities. Swaps Title VII of the Dodd-Frank Act provides for a comprehensive new regulatory framework for the OTC derivatives market (referred to as swaps in the U.S.). Under this framework, the CFTC regulates “swaps”; the SEC regulates security-based swaps (SBS); and the SEC and CFTC jointly regulate “mixed swaps.” The new framework covers the registration and regulation of dealers and major participants, as well as requirements related to clearing, trade execution, regulatory reporting, and public dissemination of trade data. While the CFTC has primary regulatory responsibility for certain security based swap agreements (e.g., a swap over a broad based index such as the S&P 500), the SEC has authority in relation to the anti-fraud provisions of federal securities legislation. The prudential authorities also play a part in aspects of the regulation of the swaps market, especially in relation to clearing. Municipal brokers, dealers and advisors Banks transacting business in municipal securities are not required to register as BDs, but they are included in the definition of municipal securities dealer and must register with the SEC and the Municipal Securities Rulemaking Board (MSRB) in that capacity. In the municipal market, responsibility for ensuring compliance with MSRB rules is divided between the SEC, FINRA and federal bank regulators. The SEC has broad inspection and enforcement authority over broker-dealers and non-bank municipal securities dealers with respect to MSRB rules, SEC rules, and the federal securities laws. FINRA has inspection and enforcement responsibility over its BD members. Federal bank regulators have inspection and enforcement authority for municipal securities dealers that are banks. In addition to the SEC and FINRA, the FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency (OCC) all play a role in the enforcement of MSRB rules. Banks’ broker activity Some activities conducted by banks that would be regulated by the SEC if conducted by another type of market participant are either excluded or exempt from SEC regulation and subject only to regulation by the banking regulators. The Gramm-Leach-Bliley Act of 1999 (GLBA) provided certain exceptions from SEC oversight for specified securities activities. The Exchange Act provides conditional exceptions from the definition of “broker” for banks that engage in specified securities activities in connection with: third-party brokerage arrangements; trust and fiduciary activities; permissible securities transactions; certain stock purchase plans; sweep accounts; affiliate transactions; private securities offerings; safekeeping and custody activities; identified banking products; municipal securities; and a de minimis number of other securities transactions. The federal banking statutes generally do not limit the SEC’s authority over affiliates of banks such as their securities subsidiaries. Commodity pools The solicitation of funds for investment in a CP constitutes the offer of a security and is subject to obligations under the Securities Act and the Exchange Act. As a practical matter, public offers for CPs are generally made by one prospectus that complies with both the securities laws and the CFTC’s CP regulations. The majority of CPs are private placements, and therefore subject primarily to CFTC substantive regulation, but exchange traded products traded on national securities exchanges are subject to dual regulation by both the CFTC and SEC consisting of CP registration and regulation and disclosure requirements under both the CEA and federal securities laws. The SEC’s anti-fraud authority applies. Broker margin rules The Federal Reserve has legislative responsibility for setting margin requirements for both securities and futures intermediaries. It delegated this power to the CFTC in 1993, subject to annual reporting requirements, in relation to the futures industry but the Federal Reserve’s Regulation T applies directly to securities market intermediaries. Clearing houses and systemically important financial institutions Title VIII of the Dodd-Frank Act created a new framework for assessing the systemic risk associated with financial institutions and financial market utilities involved in clearing financial transactions. The Title grants authority to the Federal Reserve, the CFTC, the SEC, and the FDIC to work together to promulgate rules and standards of operation, enforce those rules, and generally manage the systemic risk of clearing houses and other financial market utilities. FSOC is responsible for designating financial institutions that are, or are likely to become, systemically important. Dual registration BDs registered with the SEC may also dually register with the CFTC, and many of the largest FCMs are also registered with the SEC as BDs. The SEC and CFTC have harmonized regulations where possible, for example in relation to uniform capital and financial reporting requirements. Because swaps are now included in the definition of commodity, HF managers that use them may be required to register as CPOs under the CEA as well as IAs under the Advisers Act. Consistent regulation of like services and products Insurance products Insurance products whose performance is based on underlying investments that are securities (such as unit linked products) are regulated as securities and issuers must comply with securities legislation disclosure obligations. Other activities CIS are regulated either as MFs under the securities laws or CPs under the CEA. There are some differences in the obligations that apply to their operators depending on the applicable regime (whether securities or derivatives). For example, IAs are subject to a strict fiduciary obligation, but such a duty does not apply to CPOs under the CEA—although this type of duty may stem from state law. Similarly, BDs that provide advice to clients incidental to their broker-dealer business are not bound by the same fiduciary standard as IAs. Coordination and cooperation between regulators The chairs of both the CFTC and SEC are members of FSOC, which is responsible for facilitating coordination among financial regulators to monitor systemic risk and promote financial stability across the U.S. financial system. For further details on the composition and operation of FSOC, see Principle 6. Both organizations also participate in a variety of cross government forums, such as the Financial Fraud Enforcement Taskforce, and in regular meetings between the SEC, the CFTC, the Federal Reserve, the FDIC and the OCC to discuss implementation of the Volcker rule. Because of the intersections between the securities regime and the regime in the CEA, the SEC and the CFTC have worked together over many years on matters of joint interest. The chairs of the SEC and CFTC are in regular contact. In some cases, coordination between the SEC and CFTC (and in some cases with other agencies) is required by statutes such as the Dodd-Frank Act. There are a number of MOUs in place to support these collaborative efforts, including MOUs dealing with: Ongoing regulatory liaison between the two agencies, including information sharing and key principles for dealing with novel derivatives products that may reflect elements of both securities and commodity futures and options; The oversight of and sharing of information about securities futures products, including provisions for example that the agencies will notify each other of planned examinations and share examination information; and A framework for consultation and information sharing on issues related to CDS central counterparties (the Federal Reserve is also a party to this MOU). According to market participants, the level of communication between the two agencies has increased over time. However, participants expressed concern that this enhanced communication has had a more limited impact on ensuring consistency of regulations, and reducing duplicative reporting and inspections. Other MOUs are in place with other government agencies, such as an MOU between the SEC and the Federal Reserve which deals with information sharing and cooperation including on AML, bank brokerage activities under the GLBA, clearing and settlement in the banking and securities industries, and the regulation of transfer agents. Both agencies have a close working relationship with federal law enforcement authorities.
Assessment	Broadly Implemented
Comments	The SEC and CFTC have clear mandates set out in the legislation they administer. Both have considerable discretion to interpret the legislation, especially in their rulemaking functions. The process for making formal rules is governed by legislation and is fully transparent and well understood by market participants and others. In less formal areas, especially guidance, there are concerns that in some cases the processes used are less rigorous. This is particularly the case in areas subject to recent rulemaking, such as the new swaps jurisdiction, where there has been extensive use of no action letters. While they have often been necessary to address unanticipated effects of the rules, some market participants considered that in some cases they should have been issued at an earlier stage. The sweeping changes made by the Dodd-Frank Act have eliminated many gaps in coverage in the regulatory system, notably in relation to swaps activity, municipal advisors, advisers to HFs and private equity funds, and retail foreign exchange activity. The legislation also removed exemptions previously applying to futures trading on exempt markets. Virtually all market activity is now covered by the regulatory regime. One exception is that offerings of municipal securities remain exempt from the registration and reporting requirements of the Securities Act and Exchange Act, although the anti-fraud provisions of both Acts apply to such offerings and the SEC has taken enforcement action against municipal issuers and other municipal market participants by using those provisions. This potential gap in the regime has not affected the grade under the Principle and is dealt with under Principle 16. Two issues contribute to the grade for this Principle: Consistent treatment of like conduct and products (Key Question 2(b) of the IOSCO Assessment Methodology); Arrangements for cooperation between responsible regulators (Key Question 2(d)). Consistent treatment of like conduct and products For the most part, like regulation is applied to like products and services. In some areas, however, there are differences between the regulatory regimes for what is, in essence, the same activity, especially from the perspective of retail investors. For example, in the securities area, IAs are subject to a fiduciary obligation to their customers and, at least in the case of IAs to mutual funds, conflicts of interest regulation contains an extensive list of prohibitions. In the derivatives area, CPOs and CTAs do not have fiduciary obligations stemming from the CEA, and the relationship between them and CP participants and CTA customers is governed largely by disclosure obligations and by some specified rules of conduct. The assessors recognize that in some cases an obligation akin to a fiduciary duty may arise under state law. They also acknowledge that there are differences between securities and derivatives products (including futures) that can justify differences in the way these products are regulated. Nonetheless, conduct in the form of the provision of advice to retail investors is substantially the same type of conduct, regardless of whether the products that are the subject of the advice are securities or derivatives. Yet, current differences in the areas identified could have a significant impact on the degree of protection afforded to retail investors in CPs and customers of CTAs. The CFTC may wish to look more closely to determine whether legal changes should be pursued to subject CPOs and CTAs to a similar standard of care as IAs and to a more comprehensive framework to address conflicts of interest. Cooperation between regulators In a system as large and complex as the U.S. one, with multiple authorities having sometimes overlapping jurisdiction, effective coordination between authorities is critical. This applies to coordination in both the rulemaking and the supervision processes and in the latter case also applies to coordination between the statutory regulators (the SEC and the CFTC) and the SROs (notably FINRA and NFA). The authorities, in particular the SEC and the CFTC, have made efforts to ensure effective communication and where possible coordination on rulemaking and supervision. For example, there has been extensive communication and coordination between the CFTC and the SEC in rulemaking under the Dodd-Frank Act and in the development of common standards for data collection from CPOs and private funds. The Chairs of the SEC and CFTC have regular discussions. Nonetheless, market participants pointed to examples where in both rulemaking and supervision there appears on occasion to be less coordination than may be optimal. Many market participants are subject to supervision by both the SEC and the CFTC, by the SROs, and also in some cases by the banking regulators. For example, many of the largest FCMs are also BDs, and potentially subject to examinations by the CFTC, SEC, FINRA and NFA. Market participants recognized the different mandates and areas of focus of the regulators, but expressed a need for increased coordination, cooperation and mutual reliance between the regulators and SROs in relation to reporting, examinations and other supervisory activities. Effective coordination of supervision efforts on the part of all regulators is especially important where, as is increasingly the case, supervision and examinations are focusing more on areas that are common across regulatory regimes, such as the adequacy of governance arrangements, internal control and risk management. These are areas where market participants suggest the need for enhanced communication and coordination between the regulators, especially in the planning and carrying out of examinations, and in the sharing of information both ex ante and post. The assessors agree there would seem to be opportunities for further coordination in the planning, implementation and sharing of information about these areas of activity.
Principle 2.	The regulator should be operationally independent and accountable in the exercise of its functions and powers.
Description	CFTC Independence The CFTC is an independent regulatory commission of the U.S. government and does not operate as a division of any Executive Branch department or other agency. It is accountable directly to Congress rather than to the Executive Branch of government. Governance The CFTC is governed by a Commission consisting of five Commissioners appointed by the President with the advice and consent of the Senate. Each Commissioner holds office for five years, with appointments staggered so that one Commissioner’s term expires each year. No more than three Commissioners may be members of the same political party. The President appoints, with the advice and consent of the Senate, a member of the CFTC as Chairman. The Chairman serves at the pleasure of the President and the President may at any time appoint a different Chairman subject to the advice and consent of the Senate. The CFTC Chairman replaced through this process may complete his or her term as a Commissioner. There are no statutory criteria for the removal from office of a Commissioner, but case law has established that the President can exercise the power to remove a Commissioner only for cause such as neglect of duty or malfeasance in office. The CEA prohibits CFTC Commissioners from accepting employment or compensation from any entity regulated by the CFTC and from participating, directly or indirectly, in any transactions subject to CFTC regulation. Interaction with government and other agencies In general, the CFTC can discharge its functions without the need for approval from or consultation with any other governmental authority. Various pieces of legislation require the CFTC to consult with and coordinate with other regulatory authorities in specific cases. For example, Section 712(a)(1) of the Dodd-Frank Act requires the CFTC to consult and coordinate with the SEC and the prudential regulators on rule making relating to the swaps market. The CFTC must also consult on a number of other matters with other authorities such as the Treasury Department and Federal Reserve before the registration of a DCM planning to trade futures based on any security issued or guaranteed by the U.S. government or any U.S. agency. The CFTC also has obligations to coordinate with other federal regulators (such as the Federal Trade Commission (FTC) and the Federal Energy Regulatory Commission (FERC)) on matters relating to the cash markets underlying derivatives products. The Congressional Review of Agency Rulemaking Act (CRARA) requires agencies to submit proposed rules to Congress with specified details about the rules. A non-major rule becomes effective as proposed by an agency, if Congress receives the required report. A major rule generally becomes effective 60 days after Congressional receipt of an agency’s report. This process is an information channel rather than an approval channel (and there may be a constitutional question as to Congress’s power to overturn a rule without legislative action). In practice, Congress has not sought to exercise a power of disapproval. Interaction with commercial and other sectoral interests There are explicit conflict of interest provisions that seek to address potential conflicts of interest of Commissioners and CFTC staff arising from previous relationships as well as from their holdings of financial products. These provisions are further described in Principle 4. The CFTC interacts with industry in particular in connection with the rulemaking process. Such interactions are conducted under an open process prescribed by the APA. In addition, the CFTC has adopted the practice of making a public record of a summary of any ex parte communications made to Commission members or staff in the course of rulemaking, and written submissions on proposed rules are placed on the public record. Funding stability The CFTC is funded through an annual appropriations process. It submits a budget request to the President or the Office of Management and Budget (OMB), which provides advice to the President on budget matters. The request must also be copied to relevant Congressional Committees. Authorization of the CFTC’s budget is through the adoption by the Congress of a specific bill authorizing and funding the CFTC’s operations (as part of the President’s budget). The appropriate House and Senate committees may hold hearings, request additional testimony by CFTC Commissioners or staff, or request additional documentation. On many occasions, the budget approved by Congress has been lower than the one requested by the CFTC. For example, for fiscal year 2015 the President recommended $280 million for the CFTC (an increase of $65 million and 253 staff persons over the 2014 levels), but the 2015 Agriculture Appropriations Bill provides the CFTC with a budget of $218 million. This budget represents an increase of $3 million over the 2014 enacted level, but is $62 million below the President’s request. The Bill allocates over $52 million for the purchase of information technology until September 30, 2016. The budget of the CFTC has been subject to sequestration three times during the last five years. However, CFTC staff indicated that in practice it has not had material consequences for the budget of the agency, although the furlough had to be applied on one occasion. Reauthorization process In common with a number of other federal agencies, the CFTC is subject to periodic reauthorization, typically at five year intervals. But even if a reauthorization decision is not made within the specified period (as is currently the case), as long as Congress continues to make budget appropriations to the agency, it is taken to have continuing authorization. For this reason CFTC senior officials did not consider that the requirement for reauthorization hinders the agency’s ability to discharge its functions effectively; rather they consider that it provides a point of accountability. Legal protection Principles of sovereign immunity apply to the CFTC as an agency of the federal government. The Federal Employees Liability Reform and Tort Compensation Act of 1988 (FTCA) provides federal employees with immunity from individual liability for torts committed in the scope of their employment. The CFTC has also adopted indemnification rules, covering Commissioners and staff, to provide protection for individual liability for possible violation of constitutional or statutory duties that are not covered by the FTCA. Accountability The CFTC is accountable to Congress. The House Committee on Agriculture and its Subcommittee on Risk Management and Specialty Crops, and the Senate Agriculture, Nutrition and Forestry Committee and its Subcommittee on Research, Nutrition and General Legislation have the principal responsibility for oversight of the CFTC. These Committees handle, in the first instance, the reauthorization, budget and funding decisions for the CFTC, as well as bills affecting the CEA. Transparency Section 8(h) of the CEA requires the CFTC to submit to Congress a written report within 120 days after the end of each fiscal year detailing the operations of the CFTC during that fiscal year. The CFTC is required to include in this annual report any information, data and legislative recommendations it deems advisable with respect to the administration of the CEA and its powers and functions under the CEA. Section 18(b) of the CEA requires that the annual report contain plans and findings regarding implementation of Section 18(a) of the CEA, which mandates certain research and information programs. The APA governs CFTC rulemaking and requires interested persons be given an opportunity to comment on proposed rulemaking. The Sunshine Act generally provides that meetings of the Commission must be open to the public and requires the CFTC to provide advance notice of such meetings (see Principle 4). Use of funds Section 8(i) of the CEA requires the Comptroller General (Government Accountability Office, GAO) to conduct reviews and audits of the CFTC and make reports on them. The CFTC must make available to the GAO any required information about its powers, duties, organization, transactions, operations and activities, as well as access to any books and records (subject to confidentiality requirements). In addition, the operations of the CFTC are subject to ongoing review by the CFTC’s independent Office of the Inspector General (OIG). OIG conducts and supervises audits and investigations of CFTC programs and operations and reviews existing and proposed legislation and regulations. OIG recommends policies to promote economy, efficiency and effectiveness in CFTC programs and operations, and to prevent and detect fraud and abuse. OIG keeps the Chairman of the CFTC and Congress informed about any problems, deficiencies, and progress of corrective action in programs and operations. OIG reports may be made public. Review of decisions Under the APA, a person aggrieved by a decision or action of the CFTC can challenge that decision in a U.S. Federal District Court. This applies to decisions to adopt rules, and decisions such as the denial of applications for registration or sanctions decisions. Confidentiality Section 8(a)(1) of the CEA provides that, except as otherwise specified in the CEA, the CFTC must not publish data and information that would separately disclose market positions, business transactions, trade secrets or names of customers, and the CFTC must not make public any data or information concerning or obtained in connection with any pending investigation of any person. Confidentiality of information is preserved through the accountability process by the code of ethics that applies to members of Congress and their staff, and by negotiation between the CFTC and Congress and its members. SEC Independence The SEC is an independent federal agency of the U.S. government and operates independently of the Executive Branch of government. It is accountable directly to Congress rather than to the Executive Branch of government. Governance The SEC is governed by a Commission consisting of five Commissioners appointed by the President with the advice and consent of the Senate. Their terms last five years and are staggered so that one Commissioner’s term ends on June 5 of each year. No more than three Commissioners may belong to the same political party. The President also designates one of the Commissioners as Chairman. Some chairs of the SEC have not been affiliated with a political party. The laws governing the SEC do not provide express criteria for removal of Commissioners, but as noted above, judicial precedent establishes that they can only be removed for cause. Commissioners must be full time and not engage in any other form of employment other than as Commissioner. The SEC’s Supplemental Standards of Ethical Conduct include prohibitions for Commissioners and staff on transactions involving an issuer directly regulated by the SEC or under investigation by it. These Standards also require Commissioners and staff to clear in advance any securities transactions or holdings. Interaction with government and other authorities As a general matter, the SEC is not required to consult with or obtain approval from a government minister or other authority with respect to the discharge of its statutory responsibilities under the federal securities laws. Various provisions of the securities laws require consultation or cooperation with other agencies in specific cases. For example, under the Exchange Act, the SEC consults and cooperates with the OCC, the Federal Reserve and the FDIC on bank transfer agents and clearing agencies; Title VII of the Dodd-Frank Act requires the SEC to engage in joint rulemaking with the CFTC on aspects of the swaps market; and Title VIII of the Dodd-Frank Act authorizes the SEC, in consultation with the Federal Reserve and the FSOC, to prescribe new risk management standards for example for clearing agencies. The situations in which consultation or cooperation is required are set out in legislation and transparent. The SEC is also subject to general administrative statutes that require it to undertake consultations with respect to its rulemaking or other operations (see Principle 4). As with the CFTC, all final SEC rules must be submitted to Congress before they can take effect. Interaction with commercial and other sectoral interests Similar to the CFTC, there are explicit conflict of interest provisions that seek to address potential conflicts of interest of Commissioners and SEC staff arising from previous relationships as well as from their holdings of financial products. These provisions are further described in Principle 5. As with the CFTC, the SEC interacts with industry particularly in connection with its rulemaking function. It does so through a transparent process further described in Principle 4. It also has adopted the practice of making a public record of a summary of any ex parte communications made to Commission members or staff in the course of rulemaking Funding stability The SEC’s budget is part of the federal budget that is prepared by the President and submitted to Congress. Each year, the SEC prepares a budget estimate, which it forwards to OMB. This budget request outlines the major program areas of the SEC and estimates the resources (including staff and expenses such as salary, facilities and supplies) needed to operate them. Funding for the SEC is made through an annual appropriation from Congress. This appropriation is deficit-neutral, because it is offset by securities transaction fees assessed on SROs in accordance with Section 31 of the Exchange Act. The current fee rate is approximately $0.02 per every $1,000 transacted. The SEC also has a reserve fund, which can, under certain circumstances, be used for the agency’s expenses, and the SEC has dedicated this to technology. The SEC can use up to $100 million from this fund each year. The funding is provided by deposits of $50 million per year in securities registration fees (with the remainder of registration fees being remitted to Treasury). The level of funding approved by Congress has been significantly lower than that requested by the SEC. Similar to the CFTC, SEC budget has been affected by the sequestration process in three occasions during the last five years. SEC staff indicated that in one occasion the sequestration process had a material effect in the final budget of the agency. Legal protection Similar to the CFTC, the principle of sovereign immunity provides protection to the SEC as a whole and to individuals (the Chair, Commissioners, and staff). While there are exceptions to the principle of sovereign immunity, the SEC and its members and staff are generally protected from frivolous or unwarranted litigation or claims. Staff acting in a prosecutorial fashion are entitled to absolute immunity from constitutional torts (civil rights actions), so long as the actions are taken within the scope of their authority. The FTCA provides immunity for torts committed by employees of the federal government within the scope of their employment. Accountability The SEC is subject to Congressional oversight. The two Congressional committees with primary authorizing and oversight responsibilities over the SEC are the Senate Committee on Banking, Housing and Urban Affairs (Senate Banking Committee) and the House of Representatives Committee on Financial Services (House Financial Services Committee). Each of those committees contains a subcommittee with jurisdiction specific to securities issues. Various other Congressional committees also have oversight or other responsibilities related to the SEC. Section 961 of the Dodd-Frank Act requires the SEC to report to Congress on the supervisory controls over the conduct of the SEC over its examinations of registered entities, enforcement investigations, and review of corporate financial securities filings. The Act also mandates a number of other periodic reports from the GAO on aspects of the SEC’s performance. The SEC is also accountable to Congress through its relationship with the GAO. The GAO’s work is done at the request of congressional committees or subcommittees, or is mandated by public laws or committee reports. The GAO supports congressional oversight by: Auditing agency operations to determine whether federal funds are being spent efficiently and effectively; Investigating allegations of illegal and improper activities; Reporting on how government programs and policies are meeting their objectives; Performing policy analyses and outlining options for congressional consideration; and Issuing legal decisions and opinions. During the last 5 years GAO has delivered reports to Congress on topics such as municipal securities, credit rating agencies, the definition of accredited investors and regulation of research analysts. Transparency The SEC’s operations and use of resources are transparent. For example, the SEC publishes annually an Agency Financial Report, which describes the SEC’s activities and financial operations for a given fiscal year. The SEC also makes publicly available a copy of its current Rules of Practice and Rules on Fair Fund and Disgorgement Plans; and the Staff’s Enforcement Manual. The SEC is required to report to the Senate Banking Committee and the House Financial Services Committee not later than 90 days after the end of each fiscal year on the supervisory controls over the conduct by the SEC of examinations of registered entities, enforcement investigations, and review of corporate financial securities filings. The APA governs SEC rulemaking and generally requires that interested persons are given an opportunity to comment on proposed rulemaking. The SEC posts its rulemaking releases, public comment letters filed with the SEC, as well as other data or information that is important to the SEC’s consideration of the rulemaking on the SEC’s website. The Sunshine Act generally provides that meetings of the Commission must be open to the public and requires the SEC to provide advance notice of such meetings. The SEC videocasts all open SEC meetings on the Internet. Use of funds The SEC’s receipt and use of funds are subject to regular audit by the GAO and the SEC’s Office of Inspector General (OIG). The GAO conducts annual audit of the SEC’s financial statements and internal controls over financial reporting. The GAO and OIG also conduct regular audits of SEC programs and operations. The results of these audits are reported to agency management, made available to Congress and OMB, and are generally made public on the Internet. Review of decisions A person aggrieved by a final order of the Commission may seek judicial review in a federal court. Judicial review can be sought by those adversely affected by agency rulemaking, by registration decisions and sanctions decisions. The APA requires the SEC to prepare a written decision setting out the SEC’s findings of fact and conclusions of law and the underlying reasons. The federal securities laws also require the SEC to issue orders in its administrative proceedings. The SEC has extensive published rules of procedure aimed at ensuring fairness in the conduct of hearings and other administrative activities. Confidentiality The Exchange Act and Advisers Act contain statutory provisions designed to safeguard the confidentiality of information obtained in the course of examinations or investigations. Rule 24c-1 under the Exchange Act provides that the SEC may provide nonpublic information in its possession to certain entities, including other domestic and foreign governmental entities, but only if it receives appropriate assurances of confidentiality. The Freedom of Information Act (FOIA) governs public access to certain types of documents. FOIA requires that the SEC make certain information available to the public, but also provides certain exceptions for, among other things, commercially sensitive material. The confidentiality of information provided through the accountability process is preserved, as with the CFTC, through a combination of the ethical obligations of members of Congress and their staff, and by negotiation between the SEC and Congress.
Assessment	Broadly Implemented
Comments	Both the SEC and the CFTC are operationally independent on a day-to-day basis and fully accountable to the legislature. The reason for the grade in this Principle is that the annual budget process to which both agencies are subject makes planning for medium and long term priorities subject to considerable uncertainties. In addition, in recent years there have been significant gaps between both agencies’ budget requests (which have been supported by the President) and the funding they have received. This means that new responsibilities, especially those resulting from the Dodd-Frank Act, have largely been met by reallocating resources internally, including away from other regulatory and supervision areas. This has, notably, impacted the frequency of examinations. The sequestration process has added uncertainty about budgets. Congress, through legislation, creates mandates that affect both aspects of supervisory activity and the structure of the agencies, for example by mandating that the SEC conduct annual examinations of CRAs (see Principle 22), and create a separate Office of Credit Ratings. While some types of legislative mandate given to the SEC and the CFTC can potentially limit their ability to manage resources effectively to meet emerging needs as market circumstances change, the assessors consider that the current legislative mandates have been fairly well aligned with the SEC’s and CFTC’s own priorities. In the same vein, while in the case of the SEC certain structures have been mandated, the impact of those on the agencies’ organizational structure has so far been relatively limited. The assessors recognize that there is a delicate balance between independence and accountability, and that the funding process does not appear to have had any impact on the independence of the SEC’s and CFTC’s regulatory and supervisory decision making processes. Nonetheless, in recent years the Congressional budget process, on which funding decisions for the CFTC and the SEC depends, has been politically complex and subject to considerable uncertainties; there have been significant delays in the approval of proposed budgets; and, as noted above, there are major gaps between budget requests and final allocations. This adds to the uncertainties inherent in an annual budget process, and potentially limits the ability of the agencies to make forward plans for multi-year investments (such as in technology) and supervisory activities spanning more than the current budget cycle. The assessors believe that, within the existing accountability framework, consideration should be given to mechanisms that would allow the agencies to make longer term plans for the use of resources than is possible under an annual budget process. Examples of such mechanisms include multi-year budgets, or a move toward some or all of the agencies’ budgets being self-funded. Composition of both Commissions is subject to a requirement as to the political affiliation of Commissioners, and legislation requires that no more than three commissioners may belong to the same political party. This is an unusual requirement by international standards and reflects particular U.S. traditions. In practice it protects the agencies from a perception that agency thinking is dominated by the views of one political party; but it also risks creating a perception that decision making at Commission level is in some sense a political process. This potentially may lead to a further perception that the agency is not fully independent from political influence. The Sunshine Act provisions, which mandate an unusually high level of transparency in Commission decision making, are intended to mitigate this risk.
Principle 3.	The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.
Description	CFTC The CFTC has four Divisions (Clearing and Risk (DCR); Enforcement (DOE); Market Oversight (DMO) and Swap Dealer and Intermediary Oversight (DSIO)) and eight Offices (including an Office of the Chief Economist, an Office of Data and Technology, an Office of international Affairs) and an Office of the Inspector General). It also has 3 regional offices. Power and authorities The CEA gives the CFTC extensive powers to supervise the markets, financial institutions, market participants and SROs within its jurisdiction. These powers include the power to seek information from regulated persons and others, to conduct surveillance of markets, to monitor compliance by regulated entities, to investigate suspected breaches of the legislation it administers, to impose sanctions and to refer matters to the criminal authorities. See further under Principles 10 and 11. The Dodd-Frank Act significantly enhanced the CFTC’s regulatory authority including by: Giving it new authorities over SDs, major swap participants (MSPs), DCMs, DCOs, SEFs and SDRs; Significantly enhancing the CFTC’s enforcement anti-manipulation authority (see DEA Section 753); Expanding the CFTC’s authority to bring new types of enforcement actions alleging false statements to the CFTC (see CEA Section 6(c)(2)); Expressly prohibiting certain trading practices that are disruptive of fair and equitable trading (see Section 747 of the Dodd-Frank Act and Section 4c(a) of the CEA); Removing a number of previous exemptions from regulation; and Including detailed Core Principles for DCOs to enhance the CEA regulatory regime for central counterparties. The CFTC has undertaken extensive rulemaking to implement the requirements of the Dodd-Frank Act. Most mandated rulemaking is now complete. Allocation of resources and sufficiency of funding The CFTC’s ability to affect the operational allocation of resources is impacted by the way the budget is approved. The budget submitted to Congress must include an allocation request that contains a specific breakdown of the proposed resource allocation within the CFTC. This allocation may be revised as part of discussions between the Congress and the CFTC. The final allocation is established when the Congress adopts the bill funding the CFTC’s operations. Significant changes in allocation of funds once appropriated require a reprogramming request to the relevant Committee of Congress. Senior officials from the CFTC acknowledge that the current level of funding poses challenges particularly in light of the expansion of the CFTC mandate brought by the Dodd-Frank Act, but that they will continue to use resources as effectively as possible. However, market participants expressed concerns about the impact that Congress’ approved budget has on the CFTC’s ability to deliver timely high quality regulations as well as effective supervision of the new population under the CFTC’s jurisdiction. Staff resources As of May 31, 2014, the CFTC had 646 employees that comprised 435 regulatory and supervision staff (attorneys, economists, auditors, risk and trade analysts, and other financial specialists); 163 management and support staff; and 48 executives. Section 2(a)(7) of the CEA permits the CFTC to maintain comparative compensation and benefits in relation to other federal financial regulators for the purpose of retaining and attracting employees. Current salaries are comparable to those paid by other federal financial regulators –although some of them can offer better benefits given their self-funded nature. Staff turnover has ranged from 8 to 12 percent, and has remained in this range for the last five years. Training The CFTC’s Human Resources Branch provides a series of educational/training seminars keyed to the primary mission of the CFTC through its Talent Management and Leadership Development Section. The Section employs a full-time Chief Learning Officer to ensure that the training needs of all employees are met. Training seminars are focused on the financial and legal aspects of the futures, options and swaps markets. The Commission recently announced that it has entered into a multi-year contract to allow all CFTC employees to take technical training related to financial management, financial marketplaces and business skill enhancement. Technological resources CFTC senior staff highlighted the investments that the agency has made to develop robust automated mechanisms for market surveillance. Current efforts focus on extending such tools to the swaps market as described in Principle 6. Investor education The CFTC has an Office of Consumer Outreach which creates and distributes financial education messages to help consumers avoid fraud and deception in the commodities markets. It has a section on its website devoted to consumer protection. The consumer protection section of the website educates consumers about the U.S. futures markets; notifies the public about the types of fraud in the marketplace; offers guidance on how to file complaints or send in tips regarding suspicious activities; and provides updates on disciplinary actions. SEC The SEC has five Divisions (Corporation Finance (CF); Enforcement, Investment Management (IM); Trading and Markets (TM); and Economic and Risk Analysis (DERA)); and 22 Offices, including the Office of Compliance Inspections and Examinations (OCIE), the Office of the Chief Accountant (OCA), the Office of Credit Ratings (OCR), the Office of Municipal Securities, and the Office of the Inspector General (OIG). It also has 11 regional offices. Power and authorities The legislation administered by the SEC (outlined under Principle 1) gives it extensive powers to supervise the markets, financial institutions, market participants and SROs within its jurisdiction. These powers include the power to seek information from regulated persons and others, to conduct surveillance of markets, to monitor compliance by regulated entities, to investigate suspected breaches of the legislation it administers, to impose sanctions and to refer matters to the criminal authorities. See further under Principles 10 and 11. The Dodd-Frank Act expanded the authority of the SEC in a number of areas, giving it new authority over: Previously exempt IAs to HFs and private equity funds with over US$100 million assets under management; Municipal advisors; and Security based swaps. Allocation of resources and sufficiency of funding As is the case for the CFTC, the SEC’s ability to make operational changes to the budget approved by Congress is affected by the way the budget is approved. When the agency submits its budget proposal to Congress, the proposal must be accompanied by an allocation request which establishes the way resources will be spent. In this regard the budget allocates the funds for categories of spending called “object classes”. The SEC’s largest budget object class, for instance, is for personnel compensation and benefits, which was approximately $927 million for fiscal year 2014. The budget approval bill usually includes provisions that authorize the SEC to transfer funds among object classes or programs within certain limits (in recent years, for instance, the SEC has been allowed to reallocate the lesser of $5 million or 10 percent of a category). Outside these limits, the SEC needs to seek the permission of the House and Senate Appropriations Committees to reallocate funds from one category to another by submitting a formal reprogramming request. The SEC budget has not increased in line with the expansion of its mandate as a result of the Dodd-Frank Act. According to SEC senior staff, this has among other challenges affected the SEC’s ability to implement a robust examination program for IAs. Staff resources The SEC has a staff of more than 4,000 people. While the majority of the SEC staff is composed of lawyers and accountants, the agency has increased the number of economists and quantitative analysts as part of its effort to enhance its risk-based supervisory approach. Like the CFTC, the SEC is exempted from the general salary scale applicable to government employees. Current salaries are comparable to those paid by other financial regulators – although some of them can offer better benefits given their self-funded nature. The SEC continues to implement enhanced employee benefits, market-based pay structure, multiple day telework, flexible work schedules, and pay-for-performance, all of which are designed to encourage skilled staff members to remain. The SEC aims to keep its turnover rate relatively low, below 8 percent per year. During fiscal years 2010 through 2013, the SEC experienced a turnover rate that averaged less than 6 percent, which was consistent with the overall federal sector turnover rate. Training The SEC has created SEC University to provide training and development opportunities to all staff. The mission of SEC University is to develop SEC employees and managers to ensure high performance and productivity and a collaborative, effective, and engaged workplace. SEC University plans and delivers internally held in-person courses, assists employees who need to take a class offered by an outside organization, and provides a variety of web based training. Every new employee and Commissioner receives ethics education and training. Regulatory requirements regarding ethics training are set forth in the Government-wide ethics regulations. OEC has an internal website on the SEC’s intranet that provides additional guidance on all of these topics and links to the Office of Government Ethics (OGE) regulations and disclosure forms. Technological resources The SEC is increasingly making more use of quantitative data to support both its rulemaking as well as its supervisory activities. Technology is a key component of this effort and sophisticated tools have been developed by the agency as described in Principle 6. Investor education The SEC’s Office of Investor Education and Advocacy leads the SEC’s investor education initiatives by communicating with investors, responding to complaints and inquiries, and providing educational programs and materials. It does so by: Handling investment-related complaints; Providing responses to investor requests for information and assistance; Raising awareness about the SEC’s online educational resources, including the SEC’s investor.gov website; Implementing investor education programs; and Participating in in-person events for investors.
Assessment	Partly Implemented
Comments	Both the CFTC and the SEC have stated in testimonies on their budgets that their levels of funding need to be increased to enable them to effectively fulfill their mandates. The SEC in particular has stated that its supervision of IAs, including the new population of advisers to HFs and private equity funds, is affected by budget constraints. For the CFTC, rulemaking for swaps has meant more limited resources are available for areas within its established jurisdiction. The CFTC has stated that this has affected its ability to carry out examinations of intermediaries; to make full use of swaps data; to conduct effective daily surveillance of market activity; and to investigate and prosecute violations. This resource constraint will likely become increasingly important with the implementation of new rules. The CFTC has also been subject to specific requirements to allocate part of its budget to IT investments and activities, which, while important, face implementation challenges due to lack of sufficient funding for staff resources. In practice, in recent years the budget appropriations of both agencies have not kept pace with the expanded mandates and increasingly complex markets. CFTC and SEC appropriations Fiscal years 2010-2014 ($ million) FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 CFTC 169 203 205 205 215 SEC 1,111 1,185 1,346 1,302 1,372 Source: CFTC and SEC.
Principle 4.	The regulator should adopt clear and consistent regulatory processes.
Description	Clear and equitable procedures Procedural rules and regulations Both the CFTC and the SEC operate in a highly transparent way. Registration requirements are transparent and published on the CFTC and SEC’s websites, and so are interpretations, guidance and (subject to requests for confidentiality for a specified time) no action letters. In particular in the enforcement area, manuals and guidance available on the agencies’ websites set out the agencies’ approach to investigations and the imposition of sanctions. For critical processes the agencies require staff to work under the four eye principle, which helps to ensure consistency of decisions. As a general matter, the U.S. Constitution requires administrative agencies to conduct their proceedings with due process. Legislation that applies to most federal agencies applies to the CFTC and the SEC. The most important of these statutes are: The APA: there are detailed provisions in the APA dealing with processes for agency decision making, including rulemaking (for example requirements for notice and an opportunity to participate in rulemaking through submission of written data, views or argument) and other decisions such as registration and sanctions decisions. It generally requires that affected parties be given notice of reasons for decisions and an opportunity to be heard before final decisions are made. The APA also provides for judicial review of final agency decisions. The Sunshine Act: this Act requires transparent procedures in the discharge of agency business. Among other things, it provides that meetings of the Commissions must be open to the public unless an exemption applies, and requires advance notice of meetings. The Paperwork Reduction Act (PRA): this Act requires review and analysis of reporting and record-keeping issues and burdens in agency rulemaking; The Regulatory Flexibility Act (RFA): this Act requires the agencies to consider the needs of small entities in evaluating proposed rules and rule changes; The Freedom of Information Act (FOIA): this Act requires agencies to make publicly available information that is not subject to specified restrictions on disclosure; The Privacy Act: this Act sets out procedures for agencies when they obtain, maintain and disseminate information about members of the public; and The Right to Financial Privacy Act (RFPA): this Act requires agencies to follow specified procedures when they seek to subpoena certain financial records from financial institutions or transfer these records to other government agencies. Both the CFTC and the SEC are also bound by procedural rules in the legislation they administer. For example, Section 23(a)(2) of the Exchange Act requires the SEC to consider the impact proposed rules would have on competition; and Section 15(a) of the CEA requires the CFTC to consider the costs and benefits of its actions before issuing a new regulation. The CFTC and the SEC have also promulgated extensive rules and regulations that establish procedural and transparency standards for agency actions. For example, both agencies have specific regulations setting out rules of procedure for specific aspects of their operations, such as adjudicatory proceedings and investigatory proceedings. Consultation and transparency Both agencies’ rulemaking processes are governed by the APA. The APA generally requires the agencies to publish a notice of proposed and final rulemaking in the Federal Register and to provide interested persons an opportunity to participate in the rulemaking through submission of written data, views or arguments with or without an opportunity for oral presentations. The SEC and the CFTC also from time to time use public forums to enable discussion of proposed rules. The SEC has created a number of advisory committees pursuant to the Federal Advisory Committee Act (FACA), which regulates the formation and operation of advisory committees by federal agencies. These consultative committees include an Investor Advisory Committee (which has been made permanent by the Dodd-Frank Act) and an Advisory Committee on Small and Emerging Companies. The CFTC also has a number of advisory committees, including an Agricultural Advisory Committee, a Global Markets Advisory Committee, a Technology Advisory Committee and an Energy and Environmental Markets Advisory Committee. The SEC and CFTC websites provide access to all rules, regulations and policies adopted by the agencies, as well as other material such as staff interpretive letters and no action letters. Cost of compliance The consultation processes used by the CFTC and the SEC in their rulemaking enable them to consider the costs and benefits of proposed rules. Specific legislation, such as the PRA and RFA, also require consideration of regulatory burdens imposed by proposed rules. Section 15(a) of the CEA requires the CFTC to consider the costs and benefits of its action from five perspectives: protection of market participants and the public; efficiency, competitiveness and financial integrity of futures markets; price discovery; sound risk management practices; and other public interest considerations. Procedural fairness As described above, the SEC and the CFTC are bound by statutory provisions and their own rules to provide procedural fairness. As a general rule, these provisions require the agency to provide a statement of reasons for decisions, and an opportunity for an affected party to be heard before a final decision is made. Section 557 of the APA requires that the agency decisions (including initial, recommended, and tentative decisions) must include a statement of findings and conclusions, and the reasons or basis for such, on all material issues of fact, law, or discretion that are presented on the record. Such decisions must all include a statement of the appropriate rule, order, sanction, relief or denial. In this context decisions include decisions to deny or revoke a license. Review of decisions Chapter 7 of the APA creates the right of judicial review over agency actions. Under Section 702, a person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action is entitled to judicial review. Decisions of an Administrative Law Judge can be appealed to each Commission, and the Commissions’ decisions can be appealed to a court. Confidentiality Section 8(a)(1) of the CEA provides that, except as otherwise specified in the CEA, the CFTC may not publish data and information that would separately disclose market positions, business transactions, trade secrets or names of customers, and the CFTC may withhold from public disclosure any data or information concerning or obtained in connection with any pending investigation of any person. The Exchange Act and Advisers Act both contain statutory provisions that are designed to safeguard the confidentiality of information obtained in the course of examinations or investigations. The SEC also has adopted rules under the Exchange Act to permit confidential treatment of requests for certain information. Rule 24c-1 under the Exchange Act provides that the SEC may provide nonpublic information in its possession to certain entities, including other domestic and foreign governmental entities, but only if it receives appropriate assurances of confidentiality. Both agencies have a policy of not commenting publicly on ongoing investigations.
Assessment	Fully Implemented
Comments	Both the CFTC and the SEC are subject to transparent and comprehensive procedural rules and regulations, imposed by government-wide legislation and by their own rules. The issue of the use of guidance and no action letters, rather than rulemaking, to adjust the parameters of the regulatory regime is dealt with in the comments under Principle 1.
Principle 5.	The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.
Description	The Commissioners and staff of the CFTC and SEC are subject to codes of ethics and professional conduct standards that cover integrity, procedural fairness, prevention of conflict and confidentiality. Regulations issued by the U.S. Office of Government Ethics (OGE) apply to the SEC and the CFTC and cover: basic obligations of public trust; gifts from outside sources; gifts between employees; conflicting financial interests; impartiality in performing official duties; seeking other employment; misuse of position; and outside activities. In addition both agencies have supplemented these government-wide rules by adopting detailed rules and regulations governing the conduct of Commissioners and staff. CFTC Conflicts of interest Subpart C of Part 140 of the CFTC Regulations establishes general ethical standards of conduct for CFTC employees and CFTC Commissioners. CFTC Regulations restrict business and financial transactions and interests; non-governmental employment and outside activities; and the receipt and disposition of foreign gifts and decorations. Other Regulations prohibit the disclosure of non-public commercial, economic or official information to any unauthorized person; and require reporting by and an ethics review of all former employees who intend to practice or otherwise represent a party before the CFTC for two years after terminating employment with the CFTC. Trading CFTC Regulations prohibit, subject to some narrow exceptions, CFTC Commissioners and staff from trading in products regulated by the CFTC. Use of information Section 9(d) of the CEA makes it a punishable felony for a CFTC employee or CFTC Commissioner to share or otherwise benefit from information the employee or Commissioner receives in the course of employment which may affect or tend to affect the price of commodities. Section 9(c) of the CEA makes it a felony for a CFTC employee or CFTC Commissioner to trade commodity futures and options or to participate directly or indirectly in any investment transaction in an actual commodity, if nonpublic information is used in the transaction or if prohibited by CFTC regulations. Confidentiality and secrecy Except as otherwise provided in the CEA, Section 8(a) of the CEA prohibits the CFTC from disclosing publicly data and information that would separately disclose the business transactions, or market positions of any person and trade secrets or names of customers. Section 9(a)(5) makes it a felony punishable by a fine of up to $500,000 and/or imprisonment up to five years if any person willfully violates any other provision of the CEA. Procedural fairness CFTC Commissioners and staff are bound by the procedural fairness rules described under Principle 4. Monitoring compliance Most CFTC staff are required to complete annual financial declarations, with more comprehensive information mandated for senior staff. Approximately 170 staff members must also report financial transactions. Compliance is monitored by the Office of General Counsel, which reviews disclosures. If non-compliance is detected, the OIG is asked if it wishes to investigate. If not, the matter is handled through management. Serious violations potentially involving criminal breaches are referred to the Office of Public Integrity within the DOJ, which makes a decision on whether to commence a criminal action. SEC Conflicts of interest SEC Commissioners and staff are bound by the government wide rules described above that prohibit them from participating personally in particular matters that would have a direct and predictable effect on their own or imputed financial interests. These standards also regulate non-financial conflicts that could create the appearance that the individual would lack impartiality. Commissioners and staff cannot participate in a matter involving a person with whom they have a “covered relationship” or if the circumstances would cause a reasonable person with knowledge of the relevant facts to question their impartiality in the matter unless an SEC ethics official issues an authorization to participate. The SEC has adopted Supplemental Standards of Ethical Conduct for its Commissioners and employees. Among other things, these standards include comprehensive rules in connection with securities holdings and transactions in securities. They also include more strict provisions in connection with post-employment restrictions. As per the general framework (supplemented by SEC standards) positions at certain salary levels are subject to a one year cooling off period. Securities trading and financial interests The SEC’s Conduct Regulation includes comprehensive rules regarding the securities holdings and transactions of all staff, including Commissioners, as well as any employee’s spouse, minor children, or any person the employee serves as legal guardian. The SEC’s regulations require the reporting of securities transactions, with certain exceptions, within five days of the receipt of confirmation. The SEC’s Supplemental Standards of Ethical Conduct include prohibitions for Commissioners and staff on transactions involving an issuer directly regulated by the SEC or under investigation by it. These Standards also require SEC staff to clear in advance any securities transactions or holdings. Commissioners and some senior officers must file a public financial disclosure report when they assume office, on an annual basis thereafter, and upon termination. Employees who have the greatest risk of creating harm by misusing information or having conflicts of interest must file confidential financial disclosure forms. Use of information The OGE Standards of Conduct prohibit the misuse of one’s official position, including the use of (or allowing others to use) confidential or nonpublic information. The SEC’s own regulation also prohibits the misuse of confidential and nonpublic information. Confidentiality and secrecy SEC Commissioners and staff are bound by confidentiality provisions imposed by the statutes they administer (see for example Section 24(b) of the Exchange Act). Procedural fairness SEC Commissioners and staff are bound by the procedural fairness rules described under Principle 4. Statutory provisions are supplemented by detailed procedural rules such as those governing administrative hearings and enforcement and rulemaking activities. Monitoring compliance The SEC’s OEC was established in 2011 as an independent office reporting directly to the SEC’s Chair. The OEC is responsible for administering the Commission’s ethics program and for interpreting the SEC’s supplemental ethics rules as well as federal government-wide ethics laws, rules, and regulations. The OEC does not have investigative or disciplinary powers. If it finds a potential breach, it refers it to management. If the conduct were criminal, it would be referred to OIG. OIG has investigative powers. It is responsible for notification to the DOJ and OGE for referrals of potential violations of the federal government-wide criminal conflict of interest statutes. If the OIG finds evidence of non-criminal misconduct under either government-wide or SEC regulations, it forwards a report of investigation to the appropriate management officials for consideration of disciplinary or remedial action. According to the SEC staff, one staff member has been criminally prosecuted for false disclosure. Sanctions Violations of the federal government-wide conflict of interest statutes may be enforced either civilly or criminally. Violations of the SEC’s administrative rules can result in disciplinary action. Willful disclosure of nonpublic information under the Exchange Act is also a criminal offense. Depending on the circumstances and the legal authority at issue, an SEC employee may be imprisoned, fined, demoted, or terminated for violating an ethics provision.
Assessment	Fully Implemented
Comments
Principle 6.	The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate.
Descriptions	SEC Process to identify risks The statutory mandate of the SEC does not explicitly refer to financial stability or systemic risk. Nevertheless, SEC staff commented that contributing to the identification of emerging and systemic risk is seen by the agency as an important function which is inextricably linked to its statutory objectives of protecting investors, maintaining fair markets and facilitating capital formation. Current supervisory programs developed to fulfill its core mandate are the main channels through which the agency identifies emerging and systemic risks in the U.S. securities markets. Those supervisory programs are developed by the divisions in charge of monitoring the corresponding entities/sector. Senior staff indicated that in setting up their priorities each division has interaction with other relevant parts of the organization including, as appropriate, with the Commission to ensure that such priorities take into consideration relevant information. The supervisory program for monitoring of issuers is described in detail in Principle 16; for mutual funds it appears mainly in Principle 24; for securities intermediaries mainly in Principles 30 and 31; and for market supervision and surveillance mainly in Principles 34 and 37. In recent years such programs have been strengthened to more effectively contribute to risk identification, in three different ways: Data availability As part of its ongoing supervision of issuers, mutual funds, and intermediaries, the SEC already receives periodic reports (as described in the respective principles) that allow it to identify issues of concern in specific firms as well as potential areas of concern across an industry. This information is received electronically, and in the case of domestic corporate issuers already in a mark-up language that facilitates its use. Mark-up language is also being implemented for certain data that securitization issuers and NRSROs will have to provide. Through legal and regulatory reforms implemented in recent years the information available to the SEC has been expanded. Key examples of data that the SEC already receives and uses as a result of these reforms are (i) MMFs’ holdings; and (ii) private funds (including HFs). Addition of staff with different skill profiles and corresponding organizational changes In recent years the SEC has increased staff with different skill profiles (economists, quantitative analysts) and made organizational changes to strengthen its ability to identify risks, including for policy-making purposes. For example, organizational changes include: The creation of several offices in OCIE, such as the (i) Office of Risk Analysis and Surveillance (ORAS) to enhance OCIE’s ability to perform more sophisticated data analytics, (ii) the Risk Analysis Examination (RAE) team to develop a more consistent, risk-based approach to the selection of firms for examination; and (iii) the Quantitative Analytics Unit (QAU) which provides support in the field to the SEC’s examination teams by creating and deploying customized data analytic tools. The creation of the Risk and Examinations Office (REO) in the Investment Management Division to coordinate with OCIE and contribute to the SEC’s efforts to monitor risk in the asset management industry including through ongoing monitoring of a select number of the largest asset managers selected for monitoring based on certain risk characteristics. The creation of the Office of Risk Supervision in TM, which participates in a variety of ongoing monitoring reviews focused on clearing agency risk frameworks and processes. Development of sophisticated tools to allow for increased use of data In tandem, the SEC has developed more sophisticated tools that allow different divisions to have more robust processes of risk identification. For example: In connection with issuers’ monitoring: ENF has developed a tool for corporate issuer risk assessment that creates a consistent methodology for quantifying earnings management and other abnormal behaviors through the use of regression models and statistical analysis. In connection with BDs and IAs: ORAS has constructed risk models that attempt to identify potential areas of risk at all of these intermediaries based on information contained in regulatory filings. In connection with private funds: DERA has developed HF performance models (Aberrational Performance Inquiry or API models). In connection with markets: the SEC launched a new analytical tool called MIDAS that enables the SEC to analyze, almost instantaneously, large amounts of trading data across markets. Currently MIDAS comprises only data of exchanges. Through another initiative (CAT described in Principle 36) the SEC would have available a consolidated audit trail. In addition, a risk analytics committee was created in 2013 to facilitate cross departmental discussions on risk analytics tools used by different divisions, to avoid duplication and ensure cross-fertilization. The committee is coordinated by DERA. Internal coordination SEC staff indicated that discussions between departments where issues of concern, including emerging risks, are discussed take place on a regular basis. Feedback from these discussions feeds into SEC’s broader risk assessment process. In addition, the directors hold weekly meetings with the SEC Chair. These meetings can deal with a variety of issues, including discussions on emerging risk brought by the directors. The meetings do not have a predefined agenda. Staff from the Chair’s office attends these meetings and helps to ensure follow up. The SEC Chair in turn has weekly (one on one) meetings with each Commissioner, discussing a variety of issues, including emerging risks and potential follow up actions, and receiving feedback from Commissioners. In addition, staff from the divisions meets with Commissioners, both on an ad-hoc and on a routine basis, to discuss topics of interest including emerging risks. More informally Commissioners may ask staff for further briefings and responses to their questions regarding risks. Based on all this input, the Chair directs staff to undertake specific actions to address identified risks; i.e. whether by rule-making, study or change in supervisory approach. For each identified risk, particular staff is selected, who remains accountable to formulate, if necessary, a recommendation for an agency response to address the risk consistent with the Chair’s direction. In the case of rulemaking, counsels to each Commissioner are briefed on an ad-hoc and routine basis by the staff and the Chair’s office on rulemaking. Finally OCIE coordinates an inter-disciplinary and cross divisional task force called the Market Event Response Team, a mechanism through which OCIE, Enforcement, Trading and Markets, other SEC divisions and offices, and self-regulatory organizations work collaboratively to respond real-time to rapidly evolving market events. CFTC Process to identify risks The CEA includes CFTC objectives “to deter and prevent price manipulation or any other disruptions to market integrity; to ensure the financial integrity of all transactions … and the avoidance of systemic risk; to protect all market participants from fraudulent or other abusive sales practices and misuses of customer assets; and to promote responsible innovation and fair competition among boards of trade, other markets and market participants.” Similar to the SEC, the supervisory processes developed by the CFTC to fulfill its core mandate are the main channels through which the agency identifies emerging and systemic risks in commodities markets. Those supervisory processes include (i) market surveillance (described mainly in Principles 34, 36 and 37); and (ii) monitoring of financial risk posed by regulated entities (described mainly in Principles 30 and 37). CFTC staff indicated that such processes are well developed and rely on robust access to data based on reporting obligations (such as the large traders report submitted by the FCMs and information on margins submitted by the DCOs) and automated tools for market surveillance. Each day, for all active futures and options contract markets, the CFTC’s market surveillance staff monitors the activities of large traders, and examines all price spikes, scheduled news release periods of market-sensitive data, all daily settlements in the major commodities and all option and final settlements in all major futures and options contracts. Staff also tracks key price relationships, and relevant supply and demand factors in a review for potential market problems. With the addition of swaps, staff now monitors credit events for effects on credit default indices and evaluates if the CDS settlement, after a credit event, was potentially manipulated. The CFTC risk surveillance staff monitors the financial risk posed to and by DCOs, clearing members, and market participants, including market risk, liquidity risk, credit risk, and concentration risk. Relevant margin and financial resources are included within this monitoring program. CFTC staff regularly conducts back-testing to review margin coverage at the product level and follows up with the relevant clearing house regarding exceptional results. Independent stress testing of portfolios is conducted regularly. The independent stress tests may lead to individual trader reviews and/or FCM risk reviews. Traders and FCMs that have a higher risk profile are then reviewed during the CFTC’s on-site review of a clearing house’s risk management procedures. In addition, examinations of DCOs involve an analysis of a broad range of topics including, but not limited to, the adequacy of a DCO’s financial, operational and managerial resources; the DCO’s ability to manage all risks associated with clearing and settlement, including whether the DCO uses appropriate tools and procedures to monitor such risks; whether the DCO’s risk analysis and oversight program is able to accurately identify and minimize sources of operational risk; and a DCO’s ability to resist, and to minimize, any potential damage from cyber security threats. CFTC staff indicated that the current focus lies in expanding these processes to monitor swaps markets. This requires enhancing the expertise of the agency, the technology available to it, and a significant effort to improve the quality of swaps data. On the latter, CFTC staff indicated that since the passage of the Dodd-Frank Act it has actively engaged its new authority, and has registered four SDRs, implemented regulations requiring real time public reporting of swaps transaction data by the SDRs on their websites and began publishing a weekly swaps report on the CFTC website. CFTC staff continues to evaluate and engage in dialogue regarding the policies and procedures employed by registered SDRs to ensure accuracy of swap data received. In addition, the Division of Market Oversight recently created a new Data and Reporting Branch. The CFTC is also pursuing data quality metrics. Additionally in January 2014 the CFTC constituted an interdivisional staff working group to complement ongoing efforts to improve swap transaction data quality and the CFTC ability to use the data for analysis and regulatory purposes. Finally the CFTC signed an MOU with the OFR in 2014 which establishes a framework for assessing the quality of the data. This framework will form the basis of the subsequent development of a project plan for understanding swaps and OTC derivatives transactions and their impact on financial stability Internal coordination CFTC staff indicated that a significant amount of coordination among the different divisions takes place on a regular basis, under informal mechanisms. In addition, there are meetings of staff with the Chair on a weekly basis where concerns on potential risks can be raised. There are also informal meetings between staff and individual Commissioners on issues of their interest. Through meetings with market participants, the staff and individual Commissioners also maintain direct contact with the market which allows them to have a better understanding of risks. Finally closed door surveillance meetings are held at Commission level every Friday, which are permitted under an exception in the Sunshine Act. The meetings have three parts: surveillance, examination and enforcement. An agenda is set up seven days in advance of a meeting. Briefs are prepared and presented by staff as necessary. In general, the surveillance part of the meeting is used by staff to discuss with the Commission emerging issues, take decisions on how to tackle them, as well as decide on the need for any follow up. Meetings are recorded: the record includes a list of participants, a brief outline of the topics discussed and a statement that the General Counsel certified that the meeting was properly closed. In addition, staff indicated that the CFTC has formed a Market Risk Advisory Committee (MRAC) with a mandate to conduct public meetings and submit reports and recommendations to the CFTC regarding systemic risk issues that could potentially threaten the stability of the derivatives and other financial markets. The membership of MRAC will consist of 20-25 members from a variety of different type of industry members and its charter will indicate that the MRAC “will make recommendations to the Commission’s mission of ensuring integrity of the derivatives markets and monitoring and managing system risk”. Coordination among the agencies SEC and CFTC staff meet on a frequent basis, in regard to specific firms or issues of common interest. The Chairs also meet on a regular basis to discuss issues of common interest. Participation of SEC and CFTC in the FSOC The FSOC is a key channel by which the SEC and CFTC contribute to a process of emerging and systemic risk identification across the financial sector. As per the Dodd-Frank Act, the FSOC is in charge of the identification of risks to the financial stability of the U.S. that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; and responding to threats to financial stability. Pursuant to the Dodd-Frank Act, the FSOC consists of ten voting members and five non-voting members. The Chairs of the SEC and CFTC are voting members of the FSOC. Under the current framework there is no requirement that the Commission vote ahead of the Chair expressing opinions in the FSOC. This enables more expeditious contribution and voting. However, at the same time it means that the positions the heads take in the FSOC meetings do not have to reflect the views of the Commission as a whole. The FSOC works under a committee structure. The FSOC’s systemic risk committee is the key structure for FSOC’s analysis of emerging threats to financial stability. The systemic risk committee includes senior staff of all the relevant agencies comprising the FSOC and reports to a Deputies Committee. The Deputies Committee coordinates and oversees the work of the interagency staff committees. The members of the Deputies Committee include a senior official from each member agency. The Deputies Committee convenes approximately every two weeks to discuss the Council’s agenda and to direct the work of the Systemic Risk Committee and the five other functional committees. The systemic risk committee plays a key role in prioritizing the review of sources of systemic risk and guiding the work of staff and the systemic risk subcommittees. If there is agreement at the systemic risk committee that an issue warrants further examination, the issue is usually assigned for its further development to the agency with the most expertise in the area, whereby such agency would further explore risks and vulnerabilities and potential responses/actions to address vulnerabilities identified and present them to the committee. When the committee determines that the issue is sufficiently developed, it presents the issue to the Deputies Committee. Examples of issues discussed by FSOC under the jurisdictions of the SEC or the CFTC include MMFs and asset managers. In both cases the SEC has taken a lead role in the analysis of risks as well as in developing a regulatory response, as appropriate. The FSOC has also used its designation powers and designated eight financial market utilities and three nonbank financial companies as systemically important. Staff of both the SEC and CFTC concurred that the creation of the FSOC has strengthened coordination between all the agencies and provided a structured forum for discussions on risks. They agreed that FSOC structure and tools are still evolving. Pursuant to the Dodd-Frank Act the GAO has made a number of recommendations to the FSOC, including on the development of a more robust framework for identification of emerging and systemic risks. Senior officials from the agencies highlighted also the importance that the FSOC develops robust frameworks for designation of non-bank SIFIs. Market participants highlighted that there would be benefits in increased transparency vis-à-vis the industry. International cooperation and coordination In addition, SEC and CFTC staff also participate in supervisory arrangements for certain complex global financial institutions These arrangements create a framework for ongoing dialogue and cooperation among multiple financial authorities with a view to enhancing the risk assessment of internationally active entities and to supporting effective supervision of such entities. For example, the SEC participates in colleges for CRAs and the CFTC in arrangements of CCPs. The SEC and CFTC also cooperate with counterparts on supervisory matters on an ad hoc basis and engage in bilateral and multilateral consultations with counterpart regulators to discuss issues of general regulatory concern that exist at a higher, more market-wide level.
Assessment	Broadly Implemented
Comments	The main reason for the grade relates to the robustness of current processes to identify emerging and systemic risks in connection with Key Question 1 of the Assessment Methodology. The first assessments of Principle 6 conducted by the IMF after the introduction of the new Assessment Methodology focused on three high level issues in assessing the existence of a process to identify systemic risk, which is required pursuant to Key Question 1: (i) whether the arrangements in place allow for a holistic (across products, entities, and markets) view of risk; (ii) whether they allow for a periodic reassessment of risk; and (iii) whether they allow for proper follow-up actions. The experience gained has enabled an enhancement of the assessment criteria for Key Question 1, to include the following two additional criteria: (iv) a review of the type of data and analysis that the authorities use as part of the process to identify such risks; and (v) the degree to which the process implemented allows for proper accountability. This is in line with the recommendations included in the recent report of the Assessment Committee of IOSCO. These enhanced assessment criteria have been applied since the assessments conducted from summer 2013 onwards. The assessors note the increased attention that both the SEC and CFTC are giving to proper risk identification and its impact on the identification of systemic risk. As described above, the SEC has been working on improving data availability, tools to leverage such data and, ensuring that the agency has staff with the right set of skills. While these improvements are still work in progress, they have already led to significant enhancements in the risk identification processes of the different divisions through which the SEC discharges its functions. However, in the assessors’ opinion there is room to enhance mechanisms that allow the agency to ensure a holistic view of risks (across markets/products/entities), such as via more formal/structured and regular discussions/meetings on emerging and systemic risks. The assessors acknowledge that there are avenues that are currently being used for risk discussions. However, they seem to require enhancements to ensure that discussions on emerging and systemic risks are conducted in a systematic way, under a framework that formalizes accountability. Further, a stronger involvement of the Commission as a whole appears necessary. The SEC cited the Sunshine Act as inhibiting the ability of the Commission (as a whole) to hold periodic meetings on risk. Instead the Chair does hold regular meetings with individual Commissioners. However, this limitation has the potential of detracting from the quality of discussions, and may also have an impact on the accountability of the Commission as a whole. In addition, efforts to enhance data availability should continue, in particular in connection with the asset management industry. As the SEC Chair has stated, “while funds and advisers currently report significant information about their portfolios and operations to the Commission, these reporting obligations have not adequately kept pace with emerging products and strategies being used in the asset management industry”. For example, SEC rules do not require standardized reporting for many types of derivatives used by funds today. Similarly, the SEC does not currently receive complete information about securities lending by funds. Collecting more data on separately managed accounts is also needed. In this regard, the assessors note that the SEC staff is currently developing recommendations for the Commission to modernize and enhance data reporting for both funds and advisers. In the case of the CFTC, the assessors agree that the processes for risk identification in the futures markets are at a mature stage, and on an ongoing basis the CFTC has made necessary enhancements, such as in the case of the large traders report. The challenges it now faces relate to ensuring that it can develop similarly robust mechanisms to monitor the swaps markets. Work on the latter is at an early stage. The assessors acknowledge that this is a global challenge, given that in most markets swaps have just recently become regulated. They also acknowledge initiatives in place that seek to improve the quality of data reporting for swaps. Finally, the assessors take note of the fact that the agency has developed mechanisms for the Commission as a whole to hold periodic discussions on emerging and systemic risks via its closed door surveillance meetings. Given the more focused mandate of the CFTC and the size of the organization, current mechanisms can be an effective channel for the agency to have broad discussions on risk. Finally, the creation of the FSOC and the participation of the chairs of the SEC and CFTC in the FSOC have contributed to enhancing the agencies’ role in systemic risk identification. However, the positions the heads take in the FSOC meetings do not have to reflect the views of the Commission as a whole (i.e., there is no requirement that the Commission vote ahead of the Chair expressing opinions in the FSOC). The operation of the FSOC itself is outside of the scope of this assessment (as the requirement of the methodology is to assess the agencies’ own process to identify risk and/or contribute to a process to identify systemic risk of other agencies).
Principle 7.	The Regulator should have or contribute to a process to review the perimeter of regulation regularly.
Description	Different processes lead to reviews of the perimeter of regulation by both agencies. Such reviews in turn can prompt changes in (i) regulations which the agencies themselves can undertake as they both have rulemaking authority; (ii) proposals for legislative changes; or (iii) the adoption of other types of measures to address risks identified in products, entities or markets –whether regulated or unregulated. Supervisory processes of both agencies The supervisory processes established by both agencies to fulfill their mandates (as described in Principle 6) are key channels that allow the agencies to identify risks posed by products, entities and markets–whether regulated or unregulated. In turn, the identification of areas of risks is a key factor that shapes the examination programs of both agencies. For example, The SEC has instituted a “presence examination program”, for new categories of registrants brought under its jurisdiction by the Dodd-Frank Act, such as IAs of private and HFs, whereby staff holds meetings with senior staff of the firms to better understand the business model and risk associated to these new categories of registrants. The CFTC has increased its presence in the FCM community and pays particular attention to liquidity risks via horizontal examinations. The identification of risks also impacts regulatory proposals and may lead to changes in regulations or the issuance of guidance. In both agencies their economic analysis units (DERA and OCE) play an important role in rule-making by conducting research as well as cost/benefit analysis in connection with rule proposals. For example, the findings from the examination program of BDs have led the SEC to issue guidance in connection with liquidity management. Further, its program for large BDs has resulted in proposals to review the capital and liquidity framework for ANC firms. The agencies have also made requests to Congress for reviews of their legal authority as a result of risks identified through their supervisory programs. For example, in the 2000s the CFTC requested Congress expand the CFTC’s authority over retail foreign exchange products. This issue was largely addressed in the reauthorization of the CFTC in 2008, and its authority further expanded in the Dodd-Frank Act. During the summer of 2009, the Director of IM testified on behalf of the SEC that the incomplete information that the SEC had regarding advisers to private funds was a “significant regulatory gap in need of closing.” Also that summer, the SEC Chair sent Congress a list of other suggested ideas identified by the SEC staff as possible provisions for securities law improvements to help the SEC better protect investors, and many of these proposals became part of the Dodd-Frank Act. Other types of measures adopted by both agencies to address risks identified through their supervisory processes include investor education and the use of alerts, such as alerts on fraud and risks stemming from unregulated products. In fiscal year 2013, the SEC OIEA published 26 investor alerts and bulletins. OIEA’s alerts and bulletins have covered a range of topics including Bitcoin and Other Virtual Currency-Related Investments and Advertising for Unregistered Securities Offerings. Staff also works with other regulators to issue joint alerts and bulletins. Recent examples include: an SEC-CFTC investor alert on binary options, an SEC-FINRA alert on pump-and-dump stock schemes, and an SEC-FINRA bulletin on pension and settlement income streams. FSOC Reviews of the perimeter of regulation can also be prompted by discussions at FSOC level. For example, internal concerns, as well as discussions at FSOC led the SEC to make significant reforms to the MMF regulatory framework, including the removal of an exemptive relief for a subset of such funds that will after a transitional period be required to value their portfolios at fair value. The SEC is currently conducting a review of specific aspects of the asset management industry also as a result of internal concerns as well as discussions at FSOC in connection with asset managers and systemic risk. Review of past events Both agencies have made changes to the perimeter of regulation as a result of lessons from market events, and have sought legislative changes as necessary. For example, The SEC implemented a series of reforms to its regulatory framework to strengthen the reliability of the equity markets, following the 2010 flash crash. Such measures (along with others that are currently at a proposal stage) were part of the recommendations of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues established on May 11, 2010 to analyze the flash crash. The CFTC significantly strengthened the financial responsibility rules for FCMs as a result of the failures of Peregrine and MF Global in 2011 and 2012. Specific reviews required by law or decree The Dodd-Frank Act required the GAO to conduct a review of the municipal securities markets. This review coincided with a series of recommendations by the SEC to enhance disclosure and transparency in the municipal markets, as further described in Principle 16. Those disclosure recommendations include legislative changes (to provide the SEC with additional authority to impose requirements in connection with the disclosure that municipal issuers must make to investors) as well as actions within the authority of the SEC (including issuing updated interpretative guidance regarding disclosure obligations of municipal securities issuers or amending Exchange Act Rule 15c2-12 to further improve disclosure); The JOBS Act mandated the SEC staff to undertake a review of Regulation S-K to determine how SEC requirements could be updated and modernized to simplify the securities registration process. The SEC staff completed this mandated review and is currently developing specific recommendations for updating disclosure requirements. Executive Order 13563, Improving Regulation and Regulatory Review (issued January 18, 2011), included calls on agencies to undertake an annual retrospective review of agency regulations. This Order does not apply to independent agencies; however the CFTC has voluntarily abided by it. In determining the extent to which these existing regulations needed to be modified to conform to the Dodd-Frank Act’s new requirements, the CFTC has subjected many of its rules to scrutiny in accordance with the Executive Order. The CFTC staff intends to begin the process of the periodic, retrospective examination of the remainder of its regulations after completion of rules required by Dodd Frank. A Regulatory Review Group consisting of senior agency staff will be formed to implement this review. Advisory committees Both agencies have also made use of advisory committees to identify areas of risk where a regulatory response might be needed. The SEC’s Investor Advisory Committee (IAC) was established by the Dodd-Frank Act as a permanent committee to advise the SEC on regulatory priorities, regulation of securities products, trading strategies, fee structures, effectiveness of disclosure, and initiatives that protect investor interests and promote investor confidence and the integrity of the securities marketplace. The Dodd-Frank Act authorizes the committee to submit findings and recommendations for review and consideration by the SEC. In fiscal year 2013, the IAC submitted its initial recommendations for review and consideration by the SEC. Among the emerging issues the IAC addressed were recommendations for the SEC to review universal proxy ballots, data tagging, target date mutual funds, and implementation of the JOBS Act rulemaking mandate to remove the ban on general solicitation in private offerings. The SEC also utilizes an Advisory Committee on Small and Emerging Companies; and more recently, it formed a new Equity Market Structure Advisory Committee. The CFTC’s Advisory Committees provide input and make recommendations on a variety of regulatory and market issues that affect the integrity and competitiveness of U.S. markets. The committees, governed by the provisions of the FACA, currently include: Agricultural Advisory Committee, Global Markets Advisory Committee, Energy and Environmental Markets Advisory Committee, and Technology Advisory Committee. These committees provide recommendations as well as guidance to regulated entities in the specific issues under their jurisdictions, thus contributing to ensuring that the regulatory perimeter and framework remains up-to-date (see for example the recommendations of the Technology Committee on pre-trade practices issued in 2011). Internal reviews as part of the Strategic Plans Both agencies develop strategic plans, which identify the strategic priorities for the agencies as well as specific regulatory and supervisory actions to meet such priorities. Such identification is supported by formal structured discussions within the organizations. The approved Strategic Plan forms the basis for each fiscal year’s operating plan and associated activities. At the end of each fiscal year or the conclusion of individual activities, staff evaluates performance and resource utilization against performance measures that have been identified in the Strategic Plan and in the SEC and CFTC’s budget submissions to Congress. For example the SEC Strategic Plan for 2014-2018 identifies the review of the structure of the equity markets as an area for review. As part of the implementation of this priority the current Chair has announced the creation of a committee, with both internal and external membership, that will assess the current market structure and come up with recommendations. In the case of the CFTC, the Strategic Plan 2011-2015 identified the review and update of the content requirements of the large traders report as a key priority for the agency as it would enable it to better monitor the markets. These improvements were implemented this year. International SEC and CFTC staff also participates in a number of international and multilateral processes to review various types of risks associated with market products and participants. For example, SEC DERA staff participates in IOSCO’s Committee on Emerging Risks (CER). A key objective of the CER is to develop and maintain a detailed research methodology for the identification, monitoring and mitigation of systemic risk that can be used by securities regulators around the globe. DERA staff is also engaged in the Financial Innovation Network of the Financial Stability Board’s Analytical Group on Vulnerabilities, which examines new financial products and services with a view towards spotting emerging risks and regulatory gaps.
Assessment	Fully Implemented
Comments	Several different processes contribute to the review of perimeter of regulation by the SEC and CFTC both on a sectoral/issue specific basis as well as on a more holistic basis. Examples of the former are reviews as a result of the supervisory programs for each type of entities, specific events, recommendations from advisory committees, or reviews required by Congress on specific provisions of a law. An example of the latter is the strategic planning process, which requires the agencies to set priorities and to define areas where changes to regulations (or supervisory practices) are needed. In the case of the CFTC, voluntary adherence to the Executive Order on Improving Regulation is another example of a broader process, as it requires the agency to conduct retrospective reviews of its rules on an annual basis to ensure that they remain relevant. The assessors note however that the robustness of the reviews of the perimeter of regulation is dependent of the agencies’ processes for risk identification. In this regard, the assessors refer to the comments made on Principle 6.
Principle 8.	The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed or otherwise managed.
Description	Regulation of conflict of interest The SEC and CFTC administer a regulatory framework that is designed to address conflicts of interest and misalignment of incentives through requirements that prohibit conflicts, mandate disclosure, or require appropriate steps to manage or mitigate conflicts of interest and misalignment of incentives. Issuers The framework for issuers mainly relies on disclosure of conflicts of interest in the prospectus and subsequent filings (as further explained in Principle 16). This obligation is complemented by fiduciary duties owed by company directors to the company and its shareholders (see Principle 17). In particular, the SEC recently adopted rules that will increase the transparency of ABS (Regulation AB II). Among others, these rules will require disclosure of asset-level data (ALD) that will need to be provided for several types of securitizations at the time of the offering and on an ongoing basis; enhanced disclosure about transaction parties and loss mitigation practices; and for shelf offerings of ABS, certification by the CEO of the depositor about the disclosure contained in the prospectus and the structure of the securitization. Compliance with the new rules is required by November 23, 2015 except for compliance with new ALD requirements which is, required by November 23, 2016. In addition, the final rule recently jointly adopted by six federal agencies, including the SEC, implemented risk retention requirements included in the Dodd-Frank Act. The rule requires sponsors of ABS to retain no less than five percent of the credit risk of the assets collateralizing the ABS issuance. The rule prohibits hedging or transferring of the credit risk that the sponsor is required to retain. As required by the Dodd-Frank Act the final rule defines qualified residential mortgages (QRM) and exempt securitizations of QRMs from the retention requirements. In defining QRM, the agencies refer to the definition of qualified mortgage developed by the Consumer Financial Protection Bureau the key features of which exclude interest-only loans, negative amortization loans, loans beyond 30 years, balloon loans, and loans with excessive up front points and fees, and require limits on debt to income ratio (not higher than 43 percent). The final rule requires the agencies to review the QRM definition not later than 4 years after the effective date of the rule (and every five years after that date). The rule also exempts from the retention requirements commercial loans, commercial mortgages or automobile loans if they meet specific standards of high quality underwriting. The rule is effective one year after publication in the Federal Register for RMBS and 2 years after publication for all other securitizations. Finally the Dodd-Frank Act requires the SEC to implement rules to address potential conflicts of interest in the SBS markets. Two sets of rules are currently under consultation, one would limit certain concentrations in the ownership of, and exercise of voting rights with respect to SBS clearing agencies, security-based SEFs and national securities exchanges that post or make available for trading SBS. The other would require SBSDs and MSBSPs to disclose to the relevant counterparty material information about the SBS, including material incentives and conflicts of interest. Securities Intermediaries Intermediaries registered with the SEC and CFTC are also subject to conflict of interest provisions. Depending on the type of registrant the specific regime applicable to conflicts relies on disclosures, prohibitions and/or information barriers. These frameworks are described in more detail in other Principles: CIS operators (Principle 24); and other securities intermediaries (Principle 31). In general, the U.S. regime relies heavily on disclosure to the party affected by the conflict via a document made available to that party as a key mechanism to deal with conflict of interest. This reliance on disclosure (as opposed to management or prohibition) is much more predominant in the commodities side. Other entities Frameworks for addressing conflicts of interest exist also for SROs (Principle 9), auditors (Principle 20) and NRSRO (Principle 22). Monitoring of conflicts of interest The SEC monitors issuers’ compliance of disclosure obligations through the CF program of file review described in Principle 16. Review of registrants’ compliance with their obligations in relation to conflicts of interest is a key component of the examination program instituted by both the SEC and CFTC as well as by FINRA and the NFA. These programs are described in more detail in other Principles: SROs (Principle 9), NRSRO (Principle 22); CIS operators (Principle 24); and securities intermediaries (Principle 31). Monitoring compliance by auditors with their independence obligations is a key component of the inspection program developed by the PCAOB. When breaches are found, both agencies (and the SROs) require remediation actions and, when appropriate, take enforcement actions. For example, in a recent action the SEC instituted proceedings against an IA, its chief executive officer, chief compliance officer (CCO), and another employee for allegedly misleading investors and breaching their fiduciary duties to clients. More specifically, Enforcement alleged, among other things, that the firm and its CEO entered into revenue sharing arrangements in which they paid themselves kickbacks and failed to disclose the conflicts of interest created by these agreements as they recommended investments to clients. The CCO and an IA representative are also alleged to have breached their fiduciary duties and defrauded clients by failing to disclose conflicts of interest and concealing the kickbacks they received from the investments that they recommended.
Assessment	Fully Implemented
Comments	Overall, discussions with market participants led to conclude that conflicts of interest have been an important component of the examination programs of the agencies and SROs. However, there are a few important areas where participants expressed concerns about the existence of conflicts of interest that require further action by the SEC. Those include: (i) the participation of affiliates of brokers that operate ATS in their platforms; (ii) the impact of order types, order routing and related fee structures in equity markets; and (iii) the degree of flexibility in the choice of registration either as a BD or IA, and in that context, the different standard of care that legally applies to each type of intermediary, different compensation arrangements for the sale of products, and how they impact customer protection, including in connection with the types of accounts, products and/or transactions that are recommended to customers. The recently announced recommendation to establish an advisory committee to analyze the current equity market structure is an important step. Short term changes are intended to be considered, together with a more holistic review of the market. In addition, the SEC has put out a request for data to allow the agency to gain deeper understanding on the different regimes applicable to BDs and IAs.
Principles for Self-Regulation
Principle 9.	Where the regulatory system makes use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.
Description	The U.S. system makes extensive use of SROs in both securities and derivatives markets. The overall regulatory effectiveness depends on effective supervision by SROs, and on effective supervision by the CFTC and the SEC of SROs within their jurisdiction. SROs have two broad areas of responsibility: supervision of markets and supervision of market intermediaries. SRO functions are recognized by the CEA and CFTC regulations, and by the Exchange Act and related SEC rules. CEA SROs Several categories of organizations authorized by the CEA have self-regulatory responsibilities: futures exchanges (DCMs), SEFs, DCOs, and RFAs. CFTC Regulations define the term SRO as a contract market, SEF or RFA. DCOs are not formally recognized as SROs in the CFTC Regulations but they do have some self-regulatory obligations. There are currently 16 registered DCMs of which 15 are active; 24 SEFs temporarily registered or with pending temporary registration; 14 DCOs; and one RFA (NFA). Since many FCMs are members of more than one DCM, the CFTC has allowed the SROs to agree among themselves which of the SROs will be the designated self-regulatory organization (DSRO) for the purpose of maintaining ongoing financial and sales practice surveillance over member FCMs. The SROs have entered into agreements among themselves and have established the Joint Advisory Committee (JAC) to coordinate their oversight activities. All current DCM SROs and the NFA participate in these arrangements. In practice, there are two DSROs: CME is the DSRO for all FCMs that are clearing firms; and NFA is the DSRO for a number of non-clearing FCMs, for swap dealers, independent IBs, CTAs and CPOs. In addition, some smaller DCMs have contracted with NFA to conduct market surveillance and trade practice surveillance on their behalf, and most SEFs have contracted with NFA to conduct market surveillance on their behalf. SROs that participate in these arrangements remain responsible for their SRO obligations under the CEA. NFA The NFA is the only RFA. All firms and individuals that wish to act as futures market intermediaries must apply for NFA membership or associate status. NFA has incorporated into its rules, by reference, the CFTC’s segregation, recordkeeping, and related reporting requirements for SDs, MSPs, FCMs, IBs, CPOs, and CTAs. The CFTC has delegated to NFA registration processing functions and the authority to take adverse action, such as to revoke or to deny registration, against registrants and applicants for registration based upon disqualifying conduct set out in Sections 8a(2) and (3) of the CEA. The CFTC retains authority to take actions of this kind. The CFTC has also delegated other functions to NFA, including the responsibility to review CPO and CTA disclosure documents. The CFTC has general oversight responsibility for all NFA functions and has full access to the information NFA obtains in the course of its regulatory activities. The CFTC also monitors NFA for enforcement of NFA’s own rules and by-laws. Market operators and clearing organizations The CEA contains sets of “core principles” for DCMs (23 Core Principles), SEFs (15) and DCOs (18). These core principles recognize the SRO functions performed, and set out requirements to be met in carrying out these functions. CFTC Regulations elaborate on these requirements. Admission of participants Core Principle 2 requires a DCM to establish, monitor and enforce compliance with access requirement rules. CFTC regulations require access criteria that are impartial, transparent and applied in a non-discriminatory way. Rules to the same effect apply to SEFs (SEF Core Principle 2 and related CFTC Regulations). DCO Core Principle C requires a DCO to have objective, publicly disclosed, fair and open access requirements. Section 17(b)(2) of the CEA requires an RFA’s rules to provide that any person or entity registered under the CEA, a registered entity, or any other person designated under CFTC Regulations as eligible for membership may become a member of the RFA. Rules of conduct DCM Core Principle 12 requires DCMs to establish and enforce rules to: Protect market participants from abusive practices committed by any party, including abusive practices committed by a party acting as an agent for a participant; and Promote fair and equitable trading on the contract market. Section 17(p) of the CEA requires an RFA to establish rules that require the RFA, among other things, to establish training standards and proficiency testing for persons involved in futures industry, and to establish minimum standards governing sales practices of its members and Associated Persons (APs). Disciplinary rules and proceedings The CEA and CFTC Regulations require SROs to monitor and enforce compliance with rules and standards. In addition, NFA and DCMs must monitor and enforce compliance with CFTC Regulations establishing standards for intermediaries, such as CFTC minimum financial and reporting requirements, requirements for the protection of customer funds and communications with customers. Division of responsibilities between the CFTC and SROs Although much of the day-to-day supervision of markets and industry participants is carried out by the SROs, the CFTC retains authority to inquire into any matters covered by SRO supervision. Where an SRO does not have the ability to obtain necessary information (for example, where the investigation requires subpoenaing third party records) or impose sanctions (for example, in the case of a recidivist), CFTC enforcement staff can support the SRO responsibilities. Authorization Capacity To become registered, each DCM, SEF and DCO applicant must show compliance with the Core Principles and maintain compliance with them to retain registration. An applicant for RFA status must show that it complies with the requirements for an RFA to be registered under Section 17 of the CEA. Rules Section 5c(c) of the CEA requires DCMs, SEFs, and DCOs to file with the CFTC new products, new rules, and rule amendments. These entities can choose either to self-certify that the rule complies with the CEA or request the CFTC’s approval of the rule. A rule subject to self-certification can be implemented 10 days after it has been filed. In practice, almost all rules and rule amendments come through the self-certification process. The CFTC can make a decision to stay the certification of a rule for up to 90 days if the rule raises novel or complex issues, inadequate explanation was provided, or the rule is potentially inconsistent with the CEA. For rules where the CFTC’s approval is sought, the CFTC has 45 days to consider the rule (this may be extended if the rule raises novel or complex issues). Special provisions apply to new products (see Principle 33). Section 8a(7) of the CEA authorizes the CFTC to alter or supplement the rules of a registered entity (such as a DCM, SEF or DCO) under certain circumstances and provided it follows specified procedural steps. Section 17 of the CEA requires an applicant for RFA status to provide the CFTC with copies of its constitution, charter or articles of incorporation or association, and all bylaws. An RFA must file with the CFTC copies of any changes or additions to its rules. The RFA may make any proposed change or addition effective 10 days after the receipt of a filing by the CFTC, unless it requests that the CFTC review and approve the submission or the CFTC informs the RFA of its intention to do so. The CFTC has power to abrogate, alter or supplement the rules of an RFA if it appears necessary or appropriate to assure fair dealing by the members of the association, to assure a fair representation of its members in the administration of its affairs, or to effectuate the purposes of the CEA. To deny certification of a rule made by an SRO, the CFTC must make a determination that the rule would be inconsistent with the CEA or regulations made under it. Co-operation with the CFTC The CEA and CFTC Regulations directly oblige SROs to cooperate with the CFTC and with other SROs to investigate and enforce applicable laws and regulations. In view of the statutory obligations, MOUs between the CFTC and SROs are not used. Governance Acceptable Practices under DCM rules state that a board be composed of least 35 percent public (independent) directors, and executive committees must also have 35 percent public membership. In addition, the Acceptable Practices state that DCM boards must have a Regulatory Oversight Committee, consisting of only public directors, which monitors and oversees the DCM’s regulatory program and a DCM’s disciplinary panel be composed to minimize conflicts of interest. Section 17 of the CEA requires that an RFA’s rules assure a fair representation of its members in the adoption of any rule of the association, the selection of its officers and directors, and in all other phases of the administration of its affairs. An RFA must provide for meaningful representation on the governing board of a diversity of membership interests and that no less than 20 percent of the regular voting members of the board are comprised of qualified non-members who are not regulated by the RFA. An RFA must provide on all major disciplinary committees for a diversity of membership sufficient to ensure fairness and to prevent special treatment or preference for any person in the conduct of disciplinary proceedings and the assessment of penalties. Avoiding anti-competitive situations and misuse of oversight role Section 15 of the CEA requires the CFTC to take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the objectives of the CEA in issuing any order or in approving any rule of a DCM or an RFA. CFTC Regulation 170.9 requires that an applicant to become an RFA must demonstrate that it will promote fair and open competition among its members and will conduct its affairs consistent with the public interest to be protected by the antitrust laws. DCM Core Principle 19 provides that, unless necessary or appropriate to achieve the purposes of the CEA, the DCM must not adopt any rule or take any action that results in any unreasonable restraint of trade, or impose any material anticompetitive burden on trading on the contract market. SEFs (Core Principle 11) and DCOs (Core Principle N) must not adopt any rule or take any action that results in any unreasonable restraint of trade, or impose any material anticompetitive burden. Supervision All current SROs (DCMs and NFA) participate in a joint audit program under the auspices of the JAC, which must meet the requirements of CFTC Regulation 1.52. This audit program focuses on the SROs’ supervision of FCMs’ financial and reporting requirements. Recent amendments require that the program be separately evaluated by an “examination expert” at least once every three years, and that a report containing the content and any related responses to the findings of the examination be provided to the CFTC. The first evaluation has not yet taken place. The CFTC requires that DSROs to ensure that each FCM is subject to an on-site examination within nine to 18 months of the date of the previous examination by the DSRO. DCMs The CFTC’s rule enforcement program for DCMs covers review of market surveillance, audit trail, trade practice surveillance, disciplinary and dispute resolution programs. DMO’s Compliance Branch conducts rule enforcement reviews (RERs) of each DCM’s ongoing compliance with the Core Principles through their self-regulatory programs. For the largest DCMs, the CFTC aims to conduct an RER each year focusing on at least one of the above topics, and generally cover market surveillance and trade practice surveillance at least every two years. For smaller DCMs, RERs are carried out less frequently (in practice every 3 to 4 years) and often look at a number of these topics. Typically, the DMO’s Compliance Branch selects a 12 month target period and examines a DCM’s audit trail reviews, trade practice and market surveillance investigations, investigation logs, hedge exemptions, surveillance systems, compliance manuals, summary fine schedules, disciplinary files, settlement agreements, and arbitration files. CFTC staff also conduct on-the-record interviews with a DCM’s compliance officials. The Compliance Branch’s findings, any deficiencies identified, or recommendations for improvement are included in a report presented to the Commission, which votes on whether to accept the report. The report is published on the CFTC’s website. Other periodic RERs usually examine a DCM’s market surveillance program for compliance with DCM Core Principle 4 (Prevention of Market Disruption), and DCM Core Principle 5 (Position Limitations or Accountability). The Compliance Branch also from time to time conducts horizontal RERs of the compliance of multiple exchanges in regard to particular Core Principles. DMO also carries out systems safeguards examinations of DCMs, reviewing one or more of seven topics, including enterprise risk management and governance, systems operations, business continuity planning and disaster recovery. For the critical exchanges such as CME and ICE, these are carried out every 12 to 18 months; for others, these reviews take place every 3 to 4 years. The CFTC also has a market surveillance program designed to prevent market manipulation in futures and options markets and monitor compliance with the CFTC rules and regulations (see Principle 34). SEFs It is anticipated that the DMO’s Compliance Branch will conduct RERs for a SEF after it obtains permanent registration. NFA In addition to the FCMs for which it is responsible under the joint audit program, NFA is responsible for regulatory compliance matters with respect to its member IBs, except for IBs guaranteed by an FCM that does not have NFA as its DSRO. NFA is also responsible for sales practice surveillance over all member CPOs and CTAs. NFA’s oversight of CPOs and CTAs includes review of annual reports and disclosure documents, and the conduct of examinations of these firms on a periodic basis. The CFTC monitors compliance by NFA with its self-regulatory obligations by conducting periodic reviews of NFA’s compliance programs. NFA oversight reviews focus on the NFA responsibilities, including review of the financial and sales practice compliance programs for registered intermediaries, as well as review of NFA’s programs for arbitration, registration and fitness, and disciplinary actions. CFTC staff members meet with NFA and review program materials and databases, evaluate procedures, and perform reviews of samples of NFA’s files to determine whether its procedures are consistent with its regulatory obligations, whether it has properly executed its program, and that the files contain sufficient documentation. The results of these reviews are presented to the CFTC and reported back to NFA. Consecutive reviews of the same program may focus on a particular aspect of the program in question, including following up on recommendations made in prior reviews. The CFTC conducted a review of NFA’s registration program in 2010, and within the past ten years has conducted reviews of NFA’s programs for CPO and CTA compliance, telemarketing supervision, FCM and IB financial reports, disciplinary actions, and arbitration. In the past year, the CFTC has conducted 3 different reviews, with a focus on disclosure document processes, the financial disclosure process, and NFA examinations of registrants. Professional standards The CEA and CFTC Regulations impose conduct standards on SROs and their employees. These include: Obligations to keep confidential material non-public information (CFTC Regulation 1.59(d)(ii)) and information supplied to an SRO by the CFTC); and Prohibitions on the misuse of information acquired as a result of carrying out SRO duties (Section 9(e)(1) CEA and CFTC Regulation 1.59(d)(ii)). Conflicts of interest As well as the governance arrangements described above, Core Principles applying to DCMs, SEFs and DCOs all contain provisions (elaborated on in the CFTC rules) expressly requiring them to minimize and resolve conflicts of interest. The Core Principles are supplemented by more detailed rules such as CFTC Regulation 1.69, which requires that a member of an SRO’s governing board, disciplinary committee or oversight panel must abstain from voting on any matter and from deliberating on the same where that member is a named party or otherwise has an interest. Exchange Act SROs Background Two main SRO functions are performed by registered exchanges and FINRA: supervision of market activity (market surveillance) and supervision of market intermediaries. All exchanges have SRO responsibilities under the Exchange Act but they can “outsource” some or all of their market surveillance responsibilities by contracting with another SRO through a regulatory service agreement (RSA). The outsourcing exchange remains liable for its market surveillance obligations under the legislation. In practice, many exchanges have entered into market surveillance RSAs with FINRA (see Principle 34 for further details). BDs generally must register with the SEC and become members of at least one SRO, such as a national securities exchange or a registered securities association. To deal with the situation where BDs are members of more than one SRO, the Exchange Act (Section 17(d)) and SEC Rules) permit SROs to enter into a plan (which must be approved by the SEC) for one SRO to become the designated examining authority (DEA) for common members. SEC approval of a plan filed pursuant to Rule 17d-2 relieves an SRO of the regulatory responsibilities allocated by the plan to another SRO. FINRA FINRA is currently the only SRO that is a registered securities association. BDs that have a public customer business must be members of a registered securities association and therefore FINRA unless they limit their transactions to securities traded on an exchange of which they are a member. BDs that limit their activity to government securities or municipal securities are subject to special registration. Natural persons “associated with” a registered BD do not have to register themselves as BDs, but, unless their activities are strictly clerical and ministerial, they must register with the appropriate SRO (generally, FINRA), and take the appropriate qualifying examinations. There are about 630,000 individuals registered in this way. All BD staff with client facing responsibilities must be registered. Exchanges To trade directly on a particular exchange, a BD must become a member of that exchange. MSRB Firms that engage in transactions in municipal securities must also comply with the rules of the MSRB, an SRO that, subject to SEC review, makes rules governing transactions in municipal securities. Unlike other SROs, the MSRB generally does not enforce compliance with its rules. Compliance with MSRB rules is monitored and enforced by FINRA and/or the SEC (in the case of BDs and municipal advisors), and the federal bank regulators and the SEC (in the case of banks). Admission of participants Under the Exchange Act, a national securities exchange, registered securities association, or clearing agency must have rules that permit any registered BD or natural person associated with a BD to become a member of the exchange or association. Under the Exchange Act, the rules of an SRO must not be designed to permit unfair discrimination between customers, issuers, brokers or dealers regulated by virtue of the Exchange Act on the basis of matters not related to the purposes of the Exchange Act or the administration of the SRO. If an exchange or FINRA denies membership or participation to an applicant, it must notify the SEC. A denial of membership or participation by an exchange or FINRA is reviewable by the SEC. Rules of conduct Exchange and FINRA members are required to comply with trading and business conduct rules. The Exchange Act provides that an exchange and FINRA must be able to enforce members’ compliance with their rules. The Exchange Act sets out the requirements for rules, which include rules designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest. Disciplinary rules and proceedings The exchanges and FINRA must have rules that provide that their members will be appropriately disciplined for violation of the provisions of the Exchange Act and SEC rules and regulations, and their own rules. Sanctions must include expulsion, suspension, limitation of activities, functions and operations, fines, censure, and being suspended or barred from being associated with a member of any other fitting sanction. Parallel provisions apply to clearing agencies. Once an SRO has imposed a final disciplinary sanction against a member or person associated with a member, it must promptly file notice with the SEC of its action. A final disciplinary sanction imposed by a SRO is reviewable by the SEC. Division of responsibilities between the SEC and SROs Under Sections 21(d) and (e) of the Exchange Act, the SEC has the authority to enforce an SRO’s rules and to compel an SRO to enforce its rules with regard to its members by filing an action in federal court; relief available includes, among other things, monetary penalties, injunctive action, and any form of equitable relief. Section 21(f) of the Exchange Act allows the SEC to bring such actions when it appears that an SRO is unable or unwilling to take appropriate action against a person in the public interest and for the protection of investors, or when such action is otherwise necessary or appropriate in the public interest for the protection of investors. The SEC has authority to take disciplinary actions directly against a BD and associated persons. Registration Capacity Sections 6(b)(1) and 15A(b)(2) of the Exchange Act provide that an exchange or association shall not be registered unless it is so organized and has the capacity to carry out the purposes of the Exchange Act. The exchange or association must also be able to enforce compliance by its members and persons associated with its members with the Exchange Act, the rules and regulations thereunder, and its own rules. Further details on exchange registration are included in Principle 33. Rules As part of the registration process for SROs, the SEC reviews their proposed rules to ensure they comply with the standards required by the Exchange Act. Under Section 19(b)(1) of the Exchange Act, an SRO must file any proposed change in, addition to, or deletion from its rules. Once filed, the SEC must publish a notice of the filing in the Federal Register, which must include specified details and give the public an opportunity to submit comments. Thereafter, within 45 days after the publication date, the SEC must approve, disapprove, or institute proceedings to determine whether to approve or disapprove the rule change, subject to an extension of time from the SRO or on the SEC’s own motion up to a maximum of 90 days from the publication date. The SEC must approve a proposed rule change, if it finds it consistent with the requirements of the Exchange Act and the rules and regulations thereunder. Otherwise it must disapprove it. In making this determination, the SEC must consider whether the proposed rule change will promote efficiency, competition and capital formation. The SEC has disapproved exchanges’ rule changes in the past. Rules generally do not take effect until approved by the SEC, but some proposed rule changes filed under Section 19(b)(3)(A) of the Exchange Act take effect upon filing, without need for SEC approval. The proposed rule changes that may take effect upon filing include rules that: constitute a stated, policy, practice or interpretation with respect to the enforcement of an existing rule; establish or change a due, fee, or other charge imposed by the exchange; or are concerned solely with the administration of the exchange. The SEC has by rule extended the categories of rules that become effective on filing to include rules that do not significantly affect the protection of investors or the public interest or rules that do not impose a significant burden on competition (see SEC Rule 19b-4(f)). Section 19(c) of the Exchange Act gives the SEC authority to abrogate, add to, and delete from the rules of an SRO (other than a registered clearing agency). Co-operation with the SEC and other SROs All SROs are defined as SROs under the Exchange Act and have obligations imposed directly on them by the legislation and are subject to oversight by the SEC. MOUs are therefore not used. Some SROs have entered into agreements under Exchange Act Section 17(d) and SEC Rule 17d-2 to coordinate among themselves the allocation of regulatory responsibility regarding the receipt of regulatory reports from participants, the examination of participants for compliance, and the enforcement of compliance. All agreements must be filed with the SEC and, after public notice and comment, may be declared effective by the SEC. Governance The Exchange Act requires that the rules of an SRO must assure a fair representation of its members in the selection of its directors and the administration of the affairs of the SRO. Sections 6(b)(3) and 15A(b)(4) also require that the rules of an exchange provide that one or more directors be representative of issuers and investors and not associated with a member of the exchange, broker or dealer. The SEC has generally approved for SROs other than clearing agencies up to 20 percent member representation on SRO boards of directors and on SRO committees dealing with trading rules and member discipline. For clearing agencies, the SEC evaluates the procedures of each clearing agency for meeting the fair representation requirement on a case-by-case basis. Section 15B(b)(2)(B) of the Exchange Act was amended by the Dodd-Frank Act to require that the number of public representatives on the MSRB at all times exceed the number of regulated representatives. Avoiding anti-competitive situations and misuse of oversight role The Exchange Act requires that the rules of SROs (including MSRB) must not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. When reviewing an SRO’s proposed rule, the SEC analyzes, among other things, the rule’s burden on competition. Oversight Supervision programs The SEC has an examination and enforcement program to oversee the activities of the SROs, including exchanges, FINRA, and clearing agencies. Section 19(g)(1) mandates that every SRO comply with and enforce compliance with the provisions of the Exchange Act and the SEC rules and regulations and the SRO’s own rules, “absent reasonable justification or excuse.” The SEC assesses an SRO’s continuing compliance with these obligations by carrying out examinations of SROs as part of OCIE’s examination and inspection program. During these inspections, OCIE can review, among other things, the SROs’ examination and surveillance programs for member financial responsibility and operational compliance, regulatory programs for monitoring trading activity, disciplinary and enforcement programs, exchange listing programs, membership programs and arbitration programs. In the past three fiscal years, OCIE has conducted a total of 140 examinations of SROs. SEC examinations of the national securities exchanges and FINRA are not done on a fixed cycle, and generally a risk based approach is used. In 2012 and 2013, the SEC did an assessment of all national securities exchanges and FINRA to establish a baseline for governance, internal controls, and enterprise risk management programs at each SRO. Other inputs into the risk assessment process include TCRs and information from DERA and Trading and Markets. Among recent risk areas identified for examination of exchange SROs are: the internal controls and governance around their rule making process; their supervision of RSAs; order types used by the options exchanges and the related governance; systems outages, errors and integrity; and, exchanges’ business continuity planning. In the past year, OCIE conducted examinations across most of the national securities exchanges (and FINRA, SIPC, MSRB and 2 clearing organizations) focusing on, among other areas, the listings processes, order types and governance and the collection of securities transaction fees. The SEC also has a program for review of the SROs’ information technology systems to evaluate whether the systems have sufficient capacity and resiliency to accommodate conditions of increased volume and disruptions to normal operations. This program is now carried out by OCIE and is staffed by information technology experts who regularly confer and meet with members of the SROs’ information technology staff (for exchanges, see also Principle 34). FINRA Dodd-Frank Act Section 964 requires that, on a regular basis, the GAO submit a report to Congress on the SEC’s oversight of FINRA with respect to ten specified areas. The areas include governance (including management of conflicts of interest), examinations, arbitration services, and funding of FINRA’s operations. In 2013, OCIE completed an inspection of FINRA focusing on these ten areas to assist in its risk scoping efforts. For future risk scoping purposes, OCIE has developed a process to evaluate risks and prioritize areas of focus in inspections of FINRA. FINRA is subject to periodic reviews and at any time a number of reviews may be taking place. A technology review (see above) is generally done annually. Reviews of FINRA’s supervision of the sales practices of its BD members are also carried out annually. These involve a review of the sales practice supervision programs conducted by three district offices of FINRA. In 2013, the SEC reviewed FINRA’s enforcement program. Other reviews include examination of the market surveillance activities carried out by FINRA under RSAs. Professional standards SROs generally have internal policies or rules regarding ethical conduct on the part of their staff, including the preservation of the confidentiality of material accessible by them and not publicly available, and prohibit the use thereof for personal benefit. In addition, SROs are required to comply with Section 10(b) of the Exchange Act and the rules thereunder, particularly Rules 10b-5 and 10b5-1, which prohibit any person that receives material, nonpublic information in a duty of trust or confidence from breaching that duty, causing the trading of securities on the basis on nonpublic information (insider trading). Sections 6(b)(7), 15A(b)(8), and 17A(b)(3)(H) of the Exchange Act require that the rules of an exchange, association, and clearing agency must provide for a fair procedure for disciplining members and persons associated with members, denying membership, and prohibiting or limiting access to services, and for exchange and associations barring persons from being associated with members. SROs are required, for example, to notify members of the specific charge against them, give them an opportunity to defend themselves and to keep a record of the proceeding. Conflicts of interest The SEC reviews SRO proposals and examines SRO operations to evaluate any potential impact conflicts of interest may have on the effective oversight of the securities markets. In particular, the SEC reviews proposed changes to an SRO’s ownership and regulatory structure, and has a focus in that review of addressing conflicts of interest at the SRO.
Assessment	Fully Implemented
Comments	In the U.S. regulatory system, SROs, including FINRA, NFA, and the exchanges and clearing organizations, play a critical role as front line supervisors of markets and intermediaries. SRO responsibilities are set out in the legislation. This results in a complex set of arrangements, but the legislation gives the regulators full authority to oversee the conduct of SROs, for example though the rule approval process, the power to intervene and require changes to rules or supervision practices, and by their powers to conduct examinations that test whether SROs are complying with their regulatory and supervision obligations. Both the CFTC and the SEC have robust programs to monitor compliance by SROs, and carry out regular examinations. In addition, there are regular interactions with the SROs, often on a daily basis. For the SROs’ market surveillance obligations, these examinations cover, among other things, the exchanges’ governance, compliance with record keeping and audit trail obligations, and the functioning of trade practice and market surveillance processes including the investigation of suspected misconduct. For member supervision, examinations cover the membership application processes used by the SROs, and their ongoing supervision of issues such as sales practices, discipline and arbitration. The timeframe for the regulators’ review of SRO rule amendments is limited, especially for the CFTC. The self-certification process allows the CFTC limited time to review rules, especially for new products, and relies on the accuracy of the certification of the SROs. In this regard, however, the assessors note: The practice of SROs to consult informally with the CFTC prior to formal lodgment of rules, including rules relating to new products, where the rule is potentially controversial. This gives the CFTC opportunity to influence the final content of the rule prior to formal registration; The fact that the regulators can extend the time to enable more scrutiny, including public consultation. The fact that, although most rules use the self- certification process, the CFTC has used the stay procedure on a number of occasions in the past year, in rules relating to SEFs; The fact that the CFTC (and the SEC) have the power to mandate or impose changes to SRO rules. Taking into account these factors, the assessors conclude that the requirements of Key Question 2(d) are met.
Principles for the Enforcement of Securities Regulation
Principle 10.	The regulator should have comprehensive inspection, investigation and surveillance powers.
Description	CFTC Information gathering and inspection powers General powers The CFTC’s power to examine documents and inspect regulated entities and individuals is based on the entities’ record-keeping obligations and the requirement that all books and records be retained for five years and be “readily accessible” to the CFTC and the DOJ during the first two years of that period (Regulation 1.31(a)). The CFTC can require records of regulated persons to be produced without judicial process or notice. Surveillance powers DCMs and SEFs have responsibility for the conduct of surveillance for trading activity. In addition, CFTC staff conducts front line surveillance on a broader base of information than individual DCMs and SEFs possess. CFTC has direct access to participant information. In addition to information submitted to the CFTC regularly, CFTC staff has authority to request data directly from market participants and from DCMs and other regulated entities.(see Principle 34). CFTC staff carry out periodic routine inspections and audits of DCMs to ensure that they are carrying out their obligations. Staff will conduct these routine audits and inspections on SEFs once they have obtained permanent registration status. Record keeping requirements Customer identity FCMs, IBs and members of a contract market (such as floor brokers) must keep a record which shows for each commodity futures or options account the identity of the person for whom such account is carried or introduced and their principal occupation or business. They also must keep a record showing the identity of any other person guaranteeing such an account or exercising any trading control over the account (CFTC Regulation 1.37(a)). Know-your-client and AML record keeping requirements also apply (see under Principle 31). SDs and MSPs are subject to similar requirements with respect to counterparties whose identity is known to the SD or MSP prior to the execution of a swap transaction. A Customer Identification Program (CIP) Regulation issued jointly by the CFTC and FinCEN pursuant to the Bank Secrecy Act (BSA) requires that certain registrants obtain identification and verification information on their customers. An FCM’s or IB’s CIP procedures must enable it to form a reasonable belief that it knows the true identity of each customer. Bank and brokerage accounts CFTC Regulations require that there be a complete record, or audit trail, of the entry and execution of all orders for transactions in commodity interest and related cash or forward transactions. Comprehensive record creation, retention and reporting requirements ensure that all transactions in futures and options can be documented and reconstructed. These obligations are supplemented by BSA requirements, under which the CFTC has authority to obtain the identification and verification information collected under the CIP Regulation. Record retention CFTC Regulation 1.31 requires all books and records required by the CEA and CFTC regulations to be kept for a period of five years and to be readily accessible during the first 2 years of the 5-year period. All books and records must be open to inspection by any representative of the CFTC or DOJ. Outsourcing to SROs and third parties As described under Principle 9, the U.S. system makes extensive use of SROs (notably DCMs and the NFA) to supervise the conduct of SRO members. SROs performing these roles have member inspection programs. SROs’ compliance with their supervision obligations is supervised by the CFTC through RERs for DCMs and through its program for the supervision of the NFA. The CFTC has access to information about the SRO and can cause improvements to be made in SRO processes. SROs themselves may only delegate supervision functions to the NFA or another SRO. CFTC Regulation 38.154(a) permits a DCM to use a NFA or another registered entity to provide services to assist in complying with the Core Principles. A DCM that uses a regulatory service provider must ensure that its regulatory service provider has the capacity and resources necessary to provide timely and effective regulatory services, including adequate staff and automated surveillance systems. A DCM remains responsible for the performance of any regulatory services received from a third party, and for the regulatory service provider’s performance on its behalf. A DCM must also conduct periodic reviews of the adequacy and effectiveness of the services provided. Under Commission Regulation 37.204(a), analogous provisions apply to SEFs that delegate supervision responsibilities to the NFA, another registered entity, or FINRA. SEC Information gathering and inspection powers General powers The SEC has the power under the Exchange Act, the Advisers Act, and the ICA to inspect all regulated entities’ business operations, including books and records, at any time without giving notice and without judicial action, even in the absence of suspected misconduct. The SEC has the power to supervise registered exchanges and ATS pursuant to its authority to conduct SRO inspections and broker-dealer examinations. It has access to all books and records of registered exchanges and other trading venues. Trading activity Subject to the SEC’s oversight, SROs have legislatively mandated market surveillance responsibilities and have the frontline responsibility for overseeing daily trading activities and regulatory compliance on the exchanges. Record-keeping requirements Statutory record-keeping and record retention requirements applying to entities regulated by the SEC are contained in the Exchange Act, the ICA and the Advisers Act. Exchange Act Rules set out record-keeping rules for securities exchanges, registered securities associations (i.e., FINRA), clearing agencies and the MSRB, and for brokers and dealers. Rule 17a-4 governs the retention of these records, which vary by record type, as well as other records such as information supporting a firm’s financial reports and communications sent or received by the firm that relate to the firm’s business. ICA Rules set out record keeping and retention rules for investment companies. The required retention periods vary according to the record type. Advisers Act Rules set out record keeping and retention rules for advisers and, in general, records must be maintained and preserved in an easily accessible place for at least five years (the first two years in an appropriate office of the investment adviser). The SEC is in the process of developing record keeping and retention rules for regulated entities in the swap industry for which it has jurisdiction. Customer identity Registrants are required to maintain specified records concerning client identity under regulations promulgated under the Exchange Act, the Advisers Act, the BSA, and the PATRIOT Act. Mutual funds are treated as “financial institutions” for certain purposes and thus specific BSA rules apply to mutual funds, including client identification obligations. Under this legislative scheme, broker-dealers and mutual funds must maintain a CIP appropriate to their size and type of business. Through use of its powers to require access to books and records and to compel information, the SEC has access to the identity of all customers of registrants, including those of brokerdealers, investment companies and IAs. IAs cannot be compelled to disclose the identity of clients (Section 210(c) of the Advisers Act) except when disclosure may be necessary or appropriate in an enforcement investigation or proceeding. In practice, this provision has not posed difficulties for the SEC in obtaining information about clients of IAs. Bank and brokerage accounts Under Exchange Act Rule 17a-3, brokers and dealers are required to keep and maintain records showing cash positions and securities purchased, sold, received or transferred to or from customer accounts. Additionally, BSA rules require BDs, mutual funds and IAs to obtain and keep certain records relating to the transfer of funds to or from the entity. Outsourcing to SROs and third parties The SEC does not outsource any of its own inspection or other regulatory enforcement authority to SROs or third parties. But as noted under Principle 9 and above, the system administered by the SEC makes extensive use of SROs, notably national securities exchanges and FINRA. An SRO may enter into a regulatory service agreement (RSA) with a registered third-party SRO under which the third-party SRO agrees to perform certain regulatory obligations of the procuring SRO. The procuring SRO remains responsible for meeting its regulatory obligations under the Exchange Act. Under Exchange Act Rule 17d-2, any two or more SROs may file with the SEC a plan to allocate regulatory responsibilities among themselves. If the SEC declares the plan effective, any SRO that is a party to the plan is relieved of its regulatory responsibility to the extent that its responsibility is allocated under the plan to another SRO. The SEC has full access to information maintained or obtained by SROs. It can bring an enforcement action against an SRO for failure to act or adequately perform required functions. It can also cause changes and improvements to be made to an SRO’s processes, for example by requiring changes to its rules (including by directly imposing rule changes); or taking administrative or court action to impose remedies that result in changes or improvements.
Assessment	Fully Implemented
Comments
Principle 11.	The regulator should have comprehensive enforcement powers.
Description	CFTC Powers of investigation Section 8(a)(1) of the CEA gives the CFTC comprehensive power to conduct investigations to ensure compliance with laws and regulations. Section 6(c) gives the CFTC power to administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence, and require the production of any books, papers, correspondence, memoranda, or other records that the CFTC deems material to the inquiry. These powers can be used to seek information from any person, whether regulated or not. If an individual or firm named in a subpoena refuses to comply with its terms, the CFTC may apply to a federal district court to enforce the subpoena. Enforcement powers The CFTC has the authority under the CEA to file a civil enforcement action in federal district court or an administrative enforcement proceeding in an administrative tribunal to ensure compliance with the CEA. It has extensive rules relating to enforcement activity such as Part 11 of its rules (Investigations). The Dodd-Frank Act strengthened the CFTC’s enforcement powers by adding or amending certain provisions, including: Section 6(c) (and CFTC Regulation 180.1) to prohibit any manipulative device, scheme or artifice in the swaps, futures and cash markets and explicitly prohibit false or misleading statements; Section 4c(a) to prohibit disruptive trading practices, including violations of bids and offers, intentional or reckless disregard for the orderly execution of transactions during the close, and spoofing; Section 4s (and CFTC Regulations 23.400-451), setting out business conduct standards for SDs and MSPs; Sections 2(c)(2)(B) and 2(c)(2)(D), strengthening the CFTC’s enforcement authority over retail Forex and retail commodity transactions (e.g., precious metals); and Section 23 (and Regulation 165), creating whistleblower incentives and protection; and Section 4c(a)(4), prohibiting trading on confidential information emanating from government departments or agencies that may affect or tend to affect the price of any commodity in interstate commerce or swap. Civil proceedings Remedies available in a federal district court include injunctions, ex parte orders to preserve records and freeze assets, civil monetary penalties, disgorgement, restitution, and contract rescission, and any other equitable relief needed. Civil monetary penalties of up to the greater of $140,000 or triple the monetary gain to the person can be imposed for each violation other than manipulation (plus post-judgment interest). In the case of manipulation or attempted manipulation, a civil monetary penalty of up to the greater of $1 million or triple the monetary gain to the person can be imposed for each violation (plus post-judgment interest). Administrative proceedings Complaints initiating an administrative action under Sections 6(c) and 6(d) of the CEA are conducted under the CFTC’s Rules of Practice in Part 10 of the CFTC Regulations. Sanctions that can be imposed by administrative action include orders: Prohibiting a respondent from trading on or subject to the rules of any contract market and requiring all contract markets to refuse such person all trading privileges for any period specified in the order; Suspending (for a period of not more than six months), revoking or restricting a respondent’s registration with the CFTC; Assessing civil monetary penalties against a respondent, up to $140,000 or triple the monetary gain to the person for each violation; not more than the greater of $1 million or triple the monetary gain to the person for each violation for manipulation; plus post-judgment interest; Directing that a respondent make restitution to customers of damages proximately caused by the respondent’s violations; and Directing a respondent to cease and desist from violating the CEA or CFTC Regulations in an administrative action brought pursuant to Section 6(d). Criminal prosecutions The CFTC has the power to refer matters for criminal prosecution to DOJ and state criminal authorities, but it cannot independently initiate criminal actions. The CFTC routinely works in parallel with criminal law enforcement authorities to investigate potential violations of the CEA. Alleged criminal violations of the CEA pursuant to Section 9 of the CEA or violations of other federal laws that involve commodity futures trading are referred to DOJ for prosecution. Likewise, conduct that may violate state laws is referred to the appropriate state authority. A criminal prosecution does not preclude the CFTC from taking civil action for the same conduct, and similarly, CFTC action does not preclude a subsequent criminal prosecution. Power to require information Power to compel a person to provide information The CFTC has broad subpoena powers and may obtain information from any individual or entity, whether registered or not, in connection with possible violations of the CEA and Commission regulations. Section 6(c) of the CEA authorizes the CFTC to subpoena the production of documentary and testimonial evidence from any place in the United States, any State, or any foreign country or jurisdiction. Telecommunications data The CFTC has power to access electronic communications from regulated entities, but a judicial decision based on internet privacy legislation has ruled that it cannot require access to the content of communications from an internet service provider without seeking judicial approval. Bank records The RFPA creates a procedure that must be followed in an investigation before the CFTC can access bank records relating to individuals or partnerships of less than six people. The Act generally requires prior notice to be given to the account holder, but it also permits delayed notice in specified circumstances, such as where there is a risk of the destruction of evidence, or where notice would seriously jeopardize an investigation. These provisions do not apply to civil proceedings, where discovery rules apply. In practice, the CFTC has not had difficulty in using the delayed notice provisions where circumstances warrant. (See also Principle 13). Private rights of action Section 22 of the CEA permits private rights of action under certain circumstances. Section 22(a) permits private damage actions against anyone other than a SRO who violates, or willfully aids and abets a violation, of the CEA. Section 22(b) establishes a private damage remedy against SROs and their officials, which in bad faith refuse to enforce their own rules, or enforce their own rules in violation of the CEA, and cause monetary loss to the plaintiff. The CFTC’s enforcement powers do not compromise a private person’s right of action to seek remedies under the CEA. Section 14 of the CEA permits anyone complaining of a violation of the CEA or the CFTC’s rules to apply to the CFTC for an order awarding damages caused by the violation. These reparations procedures provide a variety of methods to resolve claims, including a voluntary procedure based on the submission of written documents, a summary procedure for claims of less than $30,000 and a formal procedure before an Administrative Law Judge. Information sharing If information is available from another federal or state agency, such as a state securities regulator or the SEC, the CFTC can obtain this information by seeking access to the public and non-public information in that agency’s files. The CFTC cooperates with other domestic enforcement authorities through explicit statutory authorization, formal MOUs and informal arrangements. SEC Powers of investigation General investigation power The Securities Act, the Exchange Act, the Advisers Act, and the ICA give the SEC broad authority to investigate actual or potential violations of the federal securities laws, including the SEC’s rules and regulations and the rules of SROs, and give it broad powers to gather evidence from any person, whether regulated or not.. For example, Section 21(b) of the Exchange Act gives the SEC authority to subpoena witnesses to compel their testimony, and require the production of books and records. It also permits the SEC to administer oaths and affirmations, which require witnesses to be truthful in their testimony. Enforcement powers Civil proceedings The SEC can bring civil proceedings in a federal district court seeking remedies that include injunctions, temporary restraining orders to halt ongoing fraud and freeze assets, disgorgement, civil money penalties and any other equitable relief deemed necessary. The range of civil money penalties varies in accordance with the application of the facts of the case to the structure for penalties available under the federal securities laws. Statutory amounts are adjusted periodically for inflation. Under the Exchange Act for example, the current maximum amount of civil penalty per violation in a civil action for fraud is the greater of $160,000 for a natural person, $775,000 for an entity or, as to a natural person or entity, the gross amount of pecuniary gain (Section 21(d)(3) of the Exchange Act). In insider trading cases, for example, the Exchange Act provides that a person who committed the violation may be subject to a penalty amount as much as three times the amount of profit gained or losses avoided by the unlawful trading or communication of information (Section 21A of the Exchange Act). Administrative proceedings The SEC has the authority to institute administrative actions against a person or an entity alleged to have violated the law. Administrative actions are instituted by the SEC and litigated by Enforcement before an SEC ALJ. The ALJ’s decision is subject to review by the SEC, and the SEC’s decision is in turn subject to appeal before a U.S. Court of Appeals. Sanctions and remedies available through administrative proceedings include: Securities industry suspensions of up to twelve months; Bars as to regulated individuals; Limitations on activities; Civil penalties; Disgorgement; Revocation of the registration of an entity; and For professionals, such as attorneys and accountants, an order that the professional be suspended from or denied the privilege of practicing before the SEC. Criminal prosecutions The SEC has the authority to refer cases to federal and state criminal law enforcement authorities. It routinely works in parallel with criminal law enforcement authorities to investigate potential violations of the securities laws. A criminal prosecution does not preclude the SEC from taking civil action for the same conduct, and similarly, SEC action does not preclude a subsequent criminal prosecution. Suspension of trading The SEC can summarily suspend trading in a security for up to ten business days under Exchange Act Section 12(k), if it determines that the public interest and protection of investors require such a suspension. Also, pursuant to Section 8(d) of the Securities Act, the SEC can issue a stop order suspending the effectiveness of a registration statement that contains incomplete, inaccurate, false or misleading information. Under Section 12(j) of the Exchange Act, the SEC can also deny, suspend for up to twelve months, or revoke the registration of a security if the issuer is found to have failed to comply with the Exchange Act and rules made under it. Dodd-Frank Act The Dodd-Frank Act gave the SEC additional enforcement powers in a number of areas, including by, for example: Authorizing the SEC to impose civil money penalties in cease-and-desist proceedings; Authorizing the SEC to impose industry wide collateral bars on individuals found to have violated the securities laws; Providing authority for charging aiding and abetting liability under the Securities Act and the ICA (this liability already existed under the Exchange Act and the Advisers Act); Authorizing the SEC to obtain penalties against aiders and abettors in civil actions under the Advisers Act; and Specifying that manipulative short sales are unlawful. Power to require information The SEC can use the supervisory powers described under Principle 10 to access information and records held by regulated entities. In addition, under its subpoena authority, the SEC can compel the production of documents or testimony from any person or entity (whether regulated or not) anywhere within the U.S., including from banking entities. Electronics data As is the case with the CFTC, U.S. federal law imposes restrictions on the SEC’s ability to obtain certain information regarding electronic communications. Bank records The SEC must follow the procedures set out in the RFPA when it seeks financial records of an individual customer or small partnership from a financial institution. The process is the same as that applied to the CFTC (see also Principle 13). Private rights of action Private persons can seek their own remedies for misconduct relating to the securities laws. The SEC’s enforcement powers do not compromise private rights of action seeking remedies under the federal securities laws. In addition, the federal securities laws provide for express remedies in favor of private parties who claim damages as a result of specific violations of the federal securities laws. For example, Section 11 of the Securities Act imposes liability for misstatements or omissions in registration statements; and Section 9 of the Exchange Act imposes liability for specified manipulations of exchange-traded securities. Federal courts have implied private rights of action under some statutory provisions, notably under Exchange Act Section 10(b) for securities fraud. Information sharing The SEC is authorized by law to share information with certain other authorities. Under Section 24(c) of the Exchange Act, the SEC can make nonpublic information and records in its possession available to persons the SEC deems appropriate, including domestic and foreign counterparts, if they have a need for the information and make appropriate assurances of confidentiality. Generally, the SEC is not reliant on other authorities to obtain evidence necessary for its investigations.
Assessment	Fully Implemented
Comments
Principle 12.	The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.
Description	CFTC Inspection, surveillance and compliance monitoring In 2014, the CFTC has 95 staff positions dedicated to examinations of registrants. DCM and DCO supervision The CFTC has a direct examination program for DCMs and DCOs, and will commence direct examinations of SEFs and SDRs in the near future. This work is undertaken by DMO and DCR, which in fiscal year 2014 have a total of 47 examination positions to carry out this function. The operational integrity of exchanges is addressed through the CFTC’s periodic RERs that broadly address audit trail, market surveillance, trade practice surveillance, and disciplinary programs. RERs are typically carried out every year for the larger exchanges and about every three to four years for the smaller exchanges. These reviews test each DCM’s ongoing compliance with the Core Principles through the self-regulatory programs operated by the exchange to enforce its rules, prevent market manipulation and customer and market abuses, and ensure the recording and safe storage of trade information. The Compliance Section of DMO also carries out horizontal RERs, testing across a number of exchanges compliance with particular Core Principles. See also Principles 9 and 34. Licensed intermediaries For intermediaries generally, the CFTC itself does not conduct routine on-site direct inspections of intermediaries. The CFTC’s regulatory scheme relies on the supervision activities of the SROs (DCMs and NFA) and continuing oversight by the CFTC of the exercise of those responsibilities. To test the work performed by DSROs, CFTC staff conduct risk-based reviews that focus on five areas of an SRO’s supervisory program: financial stability, customer protection, risk management, market moves and operational capabilities. The CFTC conducts examinations of intermediaries for cause or to test the quality of the DSROs’ work. In FY 2014, DSIO carried out 11 limited scope examinations of FCMs and one for cause examination of a swap dealer. For detail on the intermediary inspection programs carried out by the SROs, see further under Principle 24 (for CPOs) and Principle 31 (for other intermediaries). The CFTC requires DSROs to ensure that each FCM is subject to an on-site examination within nine to 18 months of the date of the previous examination by the DSRO. Unusual market transactions On a daily basis, DMO’s Surveillance staff reviews details of transactions at each exchange by using the CFTC’s surveillance system. Analysts identify potential abuses from data analysis conducted using tools developed by the staff. The CFTC is currently in the process of upgrading this system to enhance its ability to detect trade practice violations, including wash trading and trading ahead. DMO staff also periodically observe trading activity on the floor of each exchange for the exchanges that still have open outcry trading and discuss potential issues of concern with compliance staff at the exchange. Compliance systems The Core Principles applying to DCMs and SEFs oblige them to have in place arrangements to monitor and enforce compliance with the legislation and with their rules. CFTC Regulations require them to have adequate staff to fulfil their obligations as SROs. All categories of intermediaries, including FCM, IBs, CPOs and CTAs are required to develop and maintain compliance policies and procedures. CFTC Regulation 166.3 requires all CFTC registrants to diligently supervise the handling of all commodity interest accounts by partners, officers, employees and agents. Any violation of the CEA by a supervised person creates a liability on the supervisor for failure to supervise. Section 2(a)(1)(B) of the CEA imposes respondeat superior liability on the principal for the acts of its agents. Mechanisms to detect and investigate insider trading and other forms of market abuse DCM Core Principles require a DCM to monitor and enforce compliance with rules of the contract market, including rules relating to abusive trading practices. CFTC Regulation 38.156 requires DCMs to have an automated trade surveillance system capable of detecting potential trade practices violations. The automated system must, among other things, process daily orders and trades no later than 24 hours after the completion of the trading day; and be capable of detecting and flagging specific trade execution patterns and trade anomalies. Regulation 38.157 requires a DCM to conduct real-time market monitoring of all trading activity on its electronic trading platform(s) to identify disorderly trading and any market or system anomalies. SEFs are subject to analogous requirements. The CFTC conducts oversight of the exchanges’ programs to ensure effectiveness. In addition to the exchange surveillance program, the CFTC independently conducts an extensive market surveillance program, utilizing large trader reports and analysis of trading data, which it receives on a daily basis. Intelligence and investor complaints CFTC investigations often come from customer tips, complaints, or referrals (TCRs). Over 200 TCRs were received from whistleblowers in the fiscal year 2014. The Dodd-Frank Act amended the CEA by adding a new Section 23 (Commodity Whistleblower Incentives and Protection) under which the CFTC established a whistleblower program. The CFTC can pay awards, based on collected monetary sanctions, to eligible whistleblowers who voluntarily provide the CFTC with original information about violations of the CEA that lead either to a judicial or administrative action. The CFTC made its first payment to a whistleblower in May 2014. Other CFTC enforcement cases come from a variety of sources, including internal referrals from the supervisory areas of the CFTC and referrals from SROs, state and federal authorities or foreign regulators. CFTC enforcement staff also monitors press reports and websites the information from which may form the basis of enforcement cases. Reconstruction of execution and trading CFTC Regulation 38.551 requires a DCM to capture and retain all audit trail data necessary to detect, investigate, and prevent customer and market abuses. This data must be able to be used to reconstruct all transactions within a reasonable period of time. Regulation 37.205 makes analogous provisions in relation to SEFs. Enforcement The CFTC’s Division of Enforcement (DOE) has a total staff of just over 150 people, the majority of whom are attorneys, but also include over 20 investigators and 3 economists. At the time of the assessment mission, the CFTC had approximately 99 litigation matters pending in United States District Courts throughout the U.S., approximately 433 pending investigations, and 77 preliminary inquiries. These matters target specific program areas including: Allegations of manipulation, attempted manipulation, and false reporting; Trade practice violations; Fraud and other misconduct involving CPs, HFs, CPOs, and CTAs; and Financial, supervision, recordkeeping and other violations committed by registered entities and individuals. In addition, the DOE program focuses on pervasive fraud involving retail forex futures, forex options, and off-exchange precious metal and retail forex transactions. The CFTC has tended to bring cases in the federal courts rather than through administrative proceedings before an ALJ. There are no permanent ALJs attached to the CFTC and where used they are sourced from outside the agency. Some matters, such as revocation of registration or statutory disqualification, must be done administratively. DOE works actively with federal and state criminal and civil law enforcement authorities. Over 90 percent of the CFTC’s major fraud cases (those with customer losses over $1 million) filed during fiscal year 2013 involved a parallel criminal proceeding. During fiscal years 2010 to 2013, the CFTC referred an average of approximately 50 matters to domestic criminal and civil authorities annually, of which an average of 40 matters were referred to criminal authorities. As a result of these criminal referrals, an average of 45 indictments were filed annually alleging a range of criminal misconduct arising out of activity in the futures and swaps markets. Criminal sanctions in those cases included prison sentences, fines, and restitution. Defendants received prison sentences of up to 50 years, others received fines of over $100 million, and still others were ordered to pay restitution of more than $250 million. The CFTC has obtained the following monetary relief in its civil and administrative enforcement actions over the last 3 fiscal years: CFTC Enforcement Actions Type of Violation and Actions Filed (by Fiscal Year)1 Type of Violation FY 2011 FY 2012 FY 2013 FY 2014 Fraud 55 57 29 26 Illegal Offering of Off-Exchange Transactions 1 0 8 13 Trade Practice 6 15 72 6 Financial Integrity and Controls 3 12 23 7 Recordkeeping and Reporting 1 2 0 2 Manipulation, Attempted Manipulation and False Reporting of Market Information 3 2 4 6 Disclosure of Non-Public Material Information 0 0 1 0 Statutory Disqualification 1 9 5 4 False Statements and Omissions of Material Facts to the Commission/NFA/Exchanges 2 2 13 2 Violation of a Commission Order 0 0 1 1 Registration Violations 25 3 1 0 Audit Failures 2 0 2 0 Source: CFTC 1 Many of these cases involved multiple, significant charges including various combinations of fraud, illegal off-exchange transactions, registration violations, false statements to the CFTC/NFA/exchanges, recordkeeping violations, etc. Placement of a case with a particular category was where it was deemed the best fit. 2 In Fiscal Year 2013, the CFTC brought its first action using its anti-spoofing/disruptive trading authority enacted under the Dodd-Frank Act. 3 In Fiscal Year 2013, the CFTC brought its first case for false statements to the CFTC using its new Dodd-Frank Act authority. In fiscal year 2014, the CFTC brought two other actions for false statements. CFTC Monetary Relief Fiscal Year Civil Monetary Penalties Restitution and Disgorgement FY11 $316,682,679 $181,844,807 FY12 $475,360,925 $456,581,900 FY13 $1,570,700,568 $201,409,408 FY14 (to Apr 30) $961,072,836 $1,330,365,570 Total $4,831,648,447 $3,686,210,358 Source: CFTC SEC Inspection, surveillance and compliance monitoring Intermediaries supervision OCIE carries out the SEC’s examination authority through its National Examination Program (NEP). OCIE: Examines or inspects securities firms registered with the SEC, including BDs, municipal securities dealers, clearing agencies, transfer agents, IAs, investment companies, and municipal advisors; and: Examines and oversees the SROs, which monitor trading activity on the exchanges for which the SROs provide additional regulatory oversight. In carrying out these responsibilities, OCIE uses a risk-based approach for selecting which firms, areas, and issues to examine, and draws on a variety of resources, including its staff’s specialized knowledge, risk analytics, and advanced technology, to target its resources on the areas that pose the highest risk. As of early 2014, OCIE had approximately 805 examiners, many of whom are accountants, attorneys, and former industry professionals, devoted to examinations of registrants. A number of specialist units and programs within OCIE provide support to the examinations process, as discussed under Principle 6. In 2013, OCIE began publishing its annual examination priorities to educate and inform registrants of particular areas of examination focus and to provide entities an opportunity to evaluate their compliance systems and remediate any issues identified before they might be selected for examination. OCIE conducts inspections in all categories of securities intermediaries. However, FINRA is considered the front line supervisor for BDs. Details of the examination programs are included in Principle 24 for mutual funds and their operators and Principle 31 for securities intermediaries. In addition, the Risk and Examinations Office in IM has a risk monitoring program that includes targeted, risk-based examinations to obtain information and evaluate potential financial or operational risks in the asset management industry. See further under Principle 24. SRO supervision OCIE conducts comprehensive risk-based examinations of SROs’ regulatory programs, including reviews of SROs’ examination and surveillance programs and their disciplinary and enforcement programs. See further under Principle 9 and Principle 34. NRSROs Office of Credit Ratings (OCR) conducts examinations of NRSROs. The Office had 44 staff for fiscal year 2014. Pursuant to the Dodd-Frank Act examinations must be conducted on an annual basis. (See Principle 22). OCIE and OCR Examinations and Monitoring Type/firm FY 2011 FY 2012 FY 2013 Broker-dealers 390 443 438 Large firm monitoring 11 11 Investment advisers 1,004 974 964 Investment companies (including administrators) 112 104 99 Transfer agents 46 42 42 Clearing agencies 2 5 17 Municipal advisors 5 NRSROs 10 9 10 SROs 52 38 50 Technology control program 11 13 13 Source: SEC Compliance systems SEC and SRO rules specifically require regulated entities to have in place supervisory and compliance procedures reasonably designed to prevent securities laws violations. For example, Rule 206(4)-7 of the Advisers Act requires registered advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the legislation and rules made under it; similar provisions apply to investment companies (ICA Rule 38a-1); and FINRA rules, NASD Rules and NYSE rules require written compliance policies and supervisory procedures reasonably designed to achieve compliance with their rules and federal securities laws. FINRA Rules require annual CEO certification of BDs’ compliance and supervisory procedures. OCIE examination staff and the SROs conduct reviews of the adequacy of firms’ written supervisory procedures and test whether the procedures are being implemented, including whether employees are given the written supervisory procedures. As well as taking action against individual employees of regulated entities, the SEC can sanction broker-dealers and IAs and their associated persons for failure reasonably to supervise individuals subject to their supervision who commit violations of the federal securities laws. A BD or IA can be charged with failure to supervise when it fails to have or to implement supervisory and compliance policies reasonably designed to detect and prevent violations of the federal securities laws by subordinate personnel. Mechanisms to detect and investigate insider trading and other forms of market abuse The mechanisms to detect market abuse are described in Principles 34 and 36. When inspecting an SRO’s surveillance program, the SEC staff’s objectives are to determine whether: The parameters of SRO automated surveillance systems are appropriately designed to generate alerts that identify potential instances of noncompliance with SRO rules and federal securities laws; and The systems are effectively detecting such activity. Intelligence and investor complaints OCIE reviews and evaluates TCRs from a variety of external sources in accordance with the SEC-wide TCR system and related policies. Particular attention is given to TCRs alleging or indicating fraud. This process helps inform the selection of registrants for examination and the scope of examinations. The Office of the Whistleblower (OWB), established in response to the new whistleblower provisions in the Dodd-Frank Act, administers the SEC’s whistleblower program. It gathers intelligence from whistleblowers, and refers matter to other Enforcement staff for further investigation where appropriate. The SEC has made a number of payments under this program. The SEC also has direct electronic access to suspicious activity reports (SARs) and other reports financial institutions are required to file under the BSA. Reconstruction of execution and trading Section 19(g) of the Exchange Act requires each SRO to enforce compliance with the SRO’s rules by its members, including by having mechanisms for conducting surveillance of the markets and establishing an audit trail. FINRA has taken over the Order Audit Trail System (OATS) established by NASD and later expanded to include OTC equity securities. Several options exchanges use the Consolidated Options Audit Trail System (COATS). The SEC in 2012 adopted Rule 613 to require the national securities exchanges and FINRA to submit a national market system (NMS) plan to create, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of NMS securities. This plan was recently submitted to the SEC (see Principle 36). Enforcement Background The SEC has approximately 1,300 employees in Enforcement, including attorneys, accountants, and other professionals, who investigate and prosecute violations of the federal securities laws. Enforcement staff are located in each of the regional offices and in Washington D.C. The SEC has devoted increasing resources to its enforcement program and in fiscal year 2013, Enforcement had a budget of $449.35 million. The SEC in recent years has enhanced its enforcement activities, including by: Establishing a cooperation program to provide incentives for individuals and entities to cooperate and assist with SEC investigations and enforcement actions; Adopting a new settlement protocol to require admission of wrongdoing in cases where there is a need for public accountability, such as in cases involving egregious conduct, significant investor harm, significant market risk and obstruction of an SEC investigation (14 cases have so far been settled in this way); Establishing five new national specialized units to target Enforcement staff and other resources to areas of significant concern: an Asset Management Unit; a Municipal Securities and Public Pensions Unit; a Foreign Corrupt Practices Act Unit; a Complex Financial Instruments Unit; and a Market Abuse Unit. Each of these units have taken significant enforcement actions since their establishment in 2010; and Establishing a number of task forces to focus on high priority areas, including task forces on: financial reporting and audit; microcap fraud; broker-dealers; and the JOBS Act. Enforcement activities SEC enforcement cases come from a number of sources. These include: Referrals from the supervisory areas. Each Regional Office has a referral Committee which brings together Enforcement and supervisory staff to discuss possible enforcement cases. Around 10-15 percent of OCIE examinations result in referrals to Enforcement; Review by Enforcement’s Office of Market Intelligence of TCRs (around 16,000 TCRS are reviewed each year): Tips from whistleblowers to the Office of the Whistleblower (in fiscal year 2013, there were about 3,200 tips); and Referrals from the SROs and other external sources. Enforcement also commences investigations on its own initiative. For example, the specialized units and task forces carry out monitoring and surveillance of the market and either initiate their own cases or refer them to other parts of Enforcement. Administrative and civil cases Enforcement brings cases as administrative proceedings before an ALJ and/or as civil cases in a District Court. The decision as to which route to take depends on the facts and circumstances of each case. Some remedies, such as the freezing of assets, are available only through a court process; and some remedies such as barring individuals from securities industry activity are expressly provided for only in administrative proceedings. Enforcement has about 130 litigation lawyers who, along with staff attorneys, handle these cases. At the end of fiscal year 2013, Enforcement had over 1,444 ongoing investigations, excluding litigation and other post investigative activities. In that year, the SEC brought 676 enforcement actions, 15 percent of which were high impact cases or reflected a national priority. The SEC obtained some form of relief in 93 percent of actions brought in 2013. The majority of cases are settled, but an increase in the number of cases against individuals is one factor in the increase in cases that go through the full litigation process. Total SEC Enforcement Actions Fiscal Year Enforcement Actions 2014 755 2013 676 2012 734 2011 735 2010 681 2009 664 Source: SEC SEC Enforcement Cases—Selected Types Of Action Type of action FY 2010 FY 2011 FY 2012 FY 2013 Market manipulation 34 35 46 50 Insider trading 53 57 58 44 Securities offerings 144 123 89 103 Issuer reporting and disclosure 126 89 79 68 Source: SEC Sanctions Ordered in SEC Enforcement Actions Fiscal Year Disgorgement Ordered Penalties Ordered Officer and Director Bars Trading Suspensions 2013 $2.257 billion $1.167 billion 81 371 2012 $2.083 billion $1.021 billion 120 651 2011 $1.878 billion $928 million 82 276 2010 $1.82 billion $1.03 billion 71 254 2009 $2.09 billion $345 million 90 192 Source: SEC Criminal cases Criminal actions for violations of the securities laws and for fraud involving securities market activity are taken by the criminal authorities at federal, state and local level. At the federal level, the U.S. Attorney’s Office has 93 offices nationally and some 5,500 assistant U.S. attorneys. Economic crime is a significant priority. In addition, the Fraud Section of the Criminal Division of the U.S. Department of Justice in Washington, DC has a specialized group of prosecutors who bring criminal securities fraud cases throughout the United States. State and local prosecutor’s offices also investigate and prosecute securities market cases, especially in the large market centers. Large, high profile cases are undertaken at all levels but smaller cases tend to be undertaken at state and local level. The SEC works closely with criminal authorities, referring cases and providing assistance in investigations. Typically, the SEC refers cases to the U.S. Attorney’s Offices and to the Fraud Section of the Criminal Division of the U.S. Department of Justice, but it also makes referrals to the other authorities. Cases requiring the additional powers available to criminal authorities (such as wiretapping and search warrants) are referred at an early stage. Often, cases are investigated in parallel, with the SEC investigating at the same time as the criminal authorities. Frequently, these cases are filed simultaneously. Criminal action was taken in 126 cases in 2013 as a result of SEC referrals. The criminal authorities receive cases from other sources, such as complaints, referrals from SROs, or media reports. Some state authorities also proactively monitor data such as suspicious activity reports to identify possible actionable misconduct. This means that securities fraud cases, including smaller ones, are investigated and prosecuted. SEC Enforcement also works closely with other regulators on enforcement issues. In 2013, SEC staff provided assistance and access to files to domestic regulators in 504 investigations and to foreign regulators in 508 investigations. In addition, the U.S. Department of Justice (through both U.S. Attorney’s Offices and the Civil Division of the Department of Justice in Washington, DC) brings civil actions for securities fraud and other financial fraud; this includes circumstances when the higher standard of proof in criminal cases is not met. The U.S. Department of Justice has a Financial Fraud Enforcement Task Force based in Washington, DC, which coordinates certain criminal and civil actions in complex financial crimes cases.
Assessment	Broadly Implemented
Comments	The supervision and examination programs of the SROs, and of the SEC and the CFTC, for intermediaries and CIS are described in more detail under the relevant sectoral Principles (especially Principles 24 and 31). Overall, these programs provide for regular cycle examinations of most intermediaries so that even lower risk firms are examined on a regular basis. For cause examinations are also undertaken, in response to particular information such as tips or complaints. For intermediaries other than IAs, the NFA and FINRA carry out most of these examinations, and based on files reviewed by the assessors the examinations are well focused and thorough, with appropriate follow up actions taken where problems are identified. The SEC, and to a lesser extent the CFTC, also carry out direct risk-based examinations, which are also used to test the effectiveness of the supervision carried out by the SROs. For reasons described under Principles 24 and 31, the SEC’s supervision of IAs, including those that operate mutual funds, is less intensive and examinations cover a relatively small percentage of the population each year. This is the reason for the grade under this Principle. The SEC uses sophisticated systems to profile risk and to identify higher risk IAs for examination, but given the importance of the mutual fund and asset management sectors, more frequent examinations of IAs are warranted. Both the SEC and the CFTC make robust use of their enforcement powers, and devote considerable resources to their enforcement activities. Enforcement actions by the agencies cover all areas within their jurisdictions. In particular, the SEC has significantly enhanced many aspects of its enforcement program. These enhancements enable it to better detect and act on problematic behavior reported to it through tips and complaints. Its new specialized enforcement units and taskforces actively monitor priority areas where misconduct may have an impact on the markets or investors. The criminal authorities act on referrals from the regulators and from other sources, and on their own initiative. There are strong incentives for them to act on high profile cases, but attention is also given to smaller cases especially at the state and district level.
Principles for Cooperation in Regulation
Principle 13.	The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.
Description	Authority to share information Section 24(c) of the Exchange Act and Rule 24c-1 provide that the SEC may, in its discretion and upon showing that the information is needed, provide any records and information in its possession6 to a range of domestic and foreign regulators and other authorities,7 subject to appropriate assurances of confidentiality. Rule 24c-1 specifically includes foreign financial regulatory authorities8 among the persons to whom the SEC may provide information. The SEC staff generally relies on the information provided by the requestor as to the need for the information. Upon request, the CFTC may share information with any domestic9 or foreign10 regulator (or other authority) acting within the scope of its jurisdiction, provided that the requirements in Section 8(e) of the CEA are satisfied. The CFTC staff informed that it generally relies on the information provided by the requesting regulator or authority as to the matter falling within the scope of the requestor’s jurisdiction. The information sharing right of both the SEC and CFTC covers that required under Key Questions 13.1(a)-(g) and 13.3(a)-(g). It can also include information concerning the beneficial ownership or control of a bank or brokerage account as well as information necessary to reconstruct a transaction, including bank records. No external approval is needed for the SEC or CFTC to share information. The SEC and CFTC have procedures in place for sharing non-public information designed to ensure that the required assurances of confidentiality and use are obtained either through an MOU or less formal arrangements, such as access request letters. Specific information sharing powers under the Dodd-Frank Act Sections 112(d)(1)-(2) of the Dodd-Frank Act authorize the FSOC to request and receive, and member agencies to provide, any data or information as necessary to monitor the financial services marketplace to identify potential risks to the financial stability of the United States or to otherwise carry out any of the relevant Dodd-Frank Act provisions. Section 809(e) of the Dodd-Frank Act includes specific information sharing powers on designated financial market utilities (DFMUs) or financial institutions engaged in designated activities (DFMIs) with both domestic and foreign authorities. No requirement for the breach of U.S. law Section 21(a)(2) of the Exchange Act explicitly authorizes the SEC to provide assistance to a foreign securities authority without regard to whether the facts as stated in the foreign securities authority’s request would also constitute a violation under U.S. laws. Similarly, Section 12(f)(1) of the CEA expressly states that the CFTC may provide investigative assistance to a foreign futures authority, including collecting and sharing information, without regard to whether the facts stated in the request would also constitute a violation of the laws of the United States. Customer financial records If the SEC or CFTC is seeking financial records of a customer (defined in the Right to Financial Privacy Act (RFPA) as an individual or a partnership of five or fewer individuals) from a covered financial institution (including a bank), it must follow specific procedures. According to these procedures, a government authority may have access to or obtain copies of such customer’s financial records, if the customer has either authorized such disclosure or, after notice to the customer, the disclosure takes place in response to an investigative subpoena (Section 3402 RFPA). An SEC or CFTC subpoena has to indicate that it is from the respective agency, and that the records are relevant to a legitimate law enforcement inquiry. A copy of the subpoena must be served on the customer or mailed to the customer’s last known address. (Section 3405 RFPA). Requests from foreign authorities under the IOSCO MMOU for financial records covered by the RFPA require consulting the requesting authority before disclosing the request to the customer (Section 11.a of the MMOU). According to the SEC and CFTC, when the SEC or CFTC is making the request on behalf of a foreign authority, the subpoena would identify the SEC or CFTC as the requester and typically would not reveal the name of the requesting foreign authority, nor detailed information about the investigation. Access to records can be gained, if 10 days have expired from the date of service or 14 days have expired from the time of mailing and the customer has not challenged the inquiry. The customer can try to challenge the disclosure of his/her records only on the basis of very limited grounds, including that the records are not relevant for the law enforcement inquiry in question. The SEC and CFTC could also in certain circumstances obtain the financial records through a delayed notice provision without first notifying the customer. In the case of the SEC, this approach would involve seeking approval from an appropriate court to delay notice to the customer if (Section 21(h) Exchange Act): A delay in obtaining access to bank records or providing notice would result in a flight from prosecution, destruction of or tampering with evidence, transfer of assets or records outside the United States, improper conversion of investor assets, or impeding the ability to identify or trace the source or disposition of funds; A delay is necessary to identify or trace the record or beneficial ownership interest in any security; The acts or practices under investigation involve the dissemination of materially false or misleading information concerning any security, issuer or market or failure to make disclosures required under the securities laws, or a financial loss to investors or other persons which remains substantially uncompensated; or The acts or practices under investigation involve significant financial speculation in securities or endanger the stability of any financial or investment intermediary. The CFTC is subject to the general RFPA conditions for delaying notice to the customer that enable such delay by order of an appropriate court subject to certain conditions, including that there is reason to believe that a notice would result in endangering life or physical safety of any person; flight from prosecution; destruction of or tampering with evidence; intimidation of potential witnesses; or otherwise seriously jeopardizing an investigation or official proceeding or unduly delaying a trial or ongoing official proceeding. When the agencies receive requests from foreign authorities that require complying with the RFPA, staff explains the RFPA’s requirements and notice provisions, on the basis of which the foreign authority can decide on its preferred course of action. The CFTC has been subject to fewer information requests from foreign authorities than the SEC. In the most recent case, the foreign authority requested the use of the delayed notification procedure. Similarly, U.S. government agencies are subject to restrictions on obtaining certain information from internet service providers under the Electronic Communications Privacy Act (ECPA). Unsolicited information The SEC may share nonpublic information with appropriate authorities on the basis of Section 24(c) of the Exchange Act upon showing that it is needed and that the authority receiving the information provides assurances of confidentiality as the SEC deems appropriate. In some instances, both of these requirements can be satisfied without a request for assistance, as is the case under various MOUs. For example, Section 13 of the IOSCO MMOU authorizes a signatory to proactively share information without prior request under the conditions specified. Section 8(g) of the CEA provides that the CFTC may provide, on its own initiative, registration information to certain authorities. In other cases, the CFTC can share information subject to the conditions set forth in Section 8(e) of the CEA described above. In practice, if the CFTC knows that the information in its possession may be important to another regulator or authority, it encourages the other regulator or authority to make a request for information (if contemplated by the supervisory arrangements) to comply with the relevant Section 8(e) requirement.
Assessment	Fully Implemented
Comments	The RFPA requirements to give notice to customers on requests for records require consulting the requesting authority. This is consistent with the IOSCO MMOU. The customer is provided with very limited information on the reasons for the request and the process is relatively streamlined.
Principle 14.	Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.
Description	Power to enter into information sharing arrangements Both the SEC and CFTC have the power to enter into information-sharing arrangements with other domestic and foreign authorities under Section 24(c) of the Exchange Act and Section 8(e) of the CEA, respectively. Both the SEC and CFTC MOUs are approved by the respective Commissions and signed by the Chair or his/her designee. Both agencies can also use less formal arrangements, such as ad hoc requests for information, to facilitate information sharing. This applies regardless of whether a foreign authority has signed the IOSCO MMOU or a bilateral MOU. No written, confidential information can be shared either with a domestic or foreign regulator or authority without an MOU or another type of arrangement, such as an access request letter which provides the necessary assurances of confidentiality and limitations on the use of the information. The Dodd-Frank Act includes two provisions that explicitly relate to information sharing arrangements with foreign regulatory authorities. Under Section 752(a) of the Dodd-Frank Act, the CFTC, SEC and prudential regulators may agree to any necessary or appropriate information sharing arrangements to promote effective and consistent global regulation of swaps and security-based swaps. Specific reference is also made to the right of the CFTC to agree on information sharing arrangements for the regulation of commodity futures and options on such futures (Section 752(b) Dodd-Frank Act). Existing arrangements Domestic The SEC and/or the CFTC have entered into MOUs to facilitate supervisory cooperation with other domestic regulators, including the following: The SEC and the Federal Reserve MOU (July 2008); The SEC, the Federal Reserve and the CFTC MOU on CDS CCPs (November 2008); and The SEC and CFTC MOU establishing a permanent regulatory liaison between the agencies and providing for enhanced information sharing, including an addendum relating to novel financial products that may reflect elements of both securities and commodity futures or options (March 2008). Foreign Both the CFTC and the SEC have been signatories to the IOSCO MMOU since 2002. The primary MOU used by the CFTC for enforcement purposes is the IOSCO MMOU. Before the establishment of the IOSCO MMOU, the SEC had signed bilateral information sharing MOUs for enforcement cooperation with the securities authorities of 20 different countries. In light of the IOSCO MMOU, the SEC staff now strongly recommends the negotiation of bilateral MOUs for enforcement cooperation only if a foreign securities authority is empowered to provide assistance beyond that required by the IOSCO MMOU. The SEC has also entered into supervisory MOUs regarding cross-border regulated entities with its counterparts in several jurisdictions. The scope of these MOUs varies depending on the level and type of cross-border activity. In addition, the SEC has entered into protocols that cover the sharing of nonpublic issuer specific information relating to the application of IFRS and U.S. GAAP by dually listed issuers. A list of the SEC’s MOUs, including MOUs for supervisory cooperation, is available on the SEC’s website. Where a foreign authority is not a signatory to the IOSCO MMOU, the CFTC may use bilateral cooperative arrangements entered into primarily for enforcement purposes or informal letter arrangements. Copies of MOUs and other information sharing arrangements are available on the CFTC website. The CFTC has also entered into a range of cooperative arrangements for supervisory, prudential and risk assessment purposes, financial information sharing, and supervision of CIS and the alternative investment fund industry. The CFTC is also a signatory to the Boca Declaration on Cooperation and Supervision of International Futures Exchanges and Clearing Organizations. The CFTC has also entered into supervisory MOUs with respect to regulated entities operating on a cross-border basis. Confidentiality The confidentiality requirements described in Principle 5 apply to the SEC and CFTC and their staff. In addition, there are specific requirements that relate to confidentiality of information exchanged with other authorities. SEC The SEC can generally maintain the confidentiality of a request for information received from a foreign regulator. This is ensured primarily through the following: Section 24(d) of the Exchange Act provides a basis for denying a third-party request made under the FOIA for records provided by a foreign securities authority that has informed the SEC that disclosure of such information would violate the domestic laws applicable it; Section 24(f) of the Exchange Act provides that the SEC cannot be compelled to disclose privileged information obtained from any foreign securities or law enforcement authority, if the latter has informed the SEC that the information is privileged. Section 24(g) of the Exchange Act provides that the SEC is not authorized to withhold information from the Congress or prevented from complying with a court order in an action commenced by the United States or the SEC. As a result, the Congress is entitled to obtain certain information from the SEC. However, it is the practice of the SEC to undertake to keep information provided by a foreign securities authority non-public with the understanding that disclosure could harm the SEC’s relationship with the foreign securities authority and adversely affect the SEC’s ability to obtain information from the foreign securities authority in the future. According to the SEC staff, requests for this type of information are infrequent and the Congress has been made aware of the need to preserve confidentiality of non-public information held by the SEC. CFTC Pursuant to CFTC Regulation 11.3, information and documents obtained by the CFTC in the course of any investigation (including investigations initiated to assist a foreign futures authority) are deemed non-public and confidential, unless made a matter of public record (e.g., as part of a civil or administrative proceeding). The CFTC has additional authority to protect from disclosure information regarding requests made by foreign futures authorities and information received from them: The CFTC can refuse to make public under the FOIA documents, where their disclosure could interfere with the CFTC’s or any other authority’s enforcement activities or disclose the identity of a confidential source, including a foreign agency or authority (CFTC Regulations 145.5(g)(1) and (4)); With the exception of legally enforceable demands, the CFTC cannot be compelled to disclose any information obtained from a foreign futures authority, if the latter has stated that public disclosure of the information would violate its laws and the CFTC has obtained the information pursuant to an MOU or other relevant procedure (Section 8(a)(1) CEA); and The CFTC’s DOE may withhold from producing in an administrative enforcement proceeding information obtained from a domestic or foreign governmental entity or from a foreign futures authority that either is not relevant to the resolution of the proceeding or was provided on condition that the information not be disclosed or that it only be disclosed as evidence in an enforcement or other proceeding (CFTC Regulation 10.42(b)(2)(v)). The CFTC follows a similar approach to that of the SEC with regards to information requests from Congress (Section 8(a)(1) CEA). Practice Domestic information sharing The SEC’s and CFTC’s practice in sharing information with other domestic authorities is described in Principles 1 (other federal authorities and state authorities), 11 (criminal authorities) and 13. Foreign information sharing At the SEC, requests for assistance from foreign authorities (or to foreign authorities) are handled centrally by the Office of International Affairs (OIA), in close coordination with Enforcement and the other Divisions and Offices, including OCIE and OCR. In fiscal years 2012, 2013 and 2014, the SEC responded to, respectively, 450,508, and 548 requests for enforcement assistance from foreign authorities. In addition, the SEC provided assistance and received assistance in cross-border examinations and other supervisory matters. Within the CFTC, the responsibility for foreign information sharing relating to the investigation and prosecution of derivatives laws lies within the DOE’s International unit. During fiscal year 2013, the CFTC received 69 requests for assistance from 23 foreign regulators and authorities and provided completed responses to 65 of them by the end of the fiscal year. Over the past three fiscal years, the CFTC responded to 173 requests, with an average response time of 39.6 days. In addition, the CFTC shared information in connection with cross-border examinations and other supervisory matters.
Assessment	Fully Implemented
Comments
Principle 15.	The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.
Description	Obtaining records, documents, statements and testimonies SEC Under Section 21(a)(2) of the Exchange Act, the SEC has the authority to open a formal investigation to provide assistance to a foreign securities authority to determine whether any person has violated, is violating or is about to violate any laws or rules relating to securities matters that the requesting authority administers or enforces. The SEC may provide such assistance without regard to whether the facts stated in the request would constitute a violation of U.S. laws. In exercising this authority, the SEC has to consider whether the requesting authority has agreed to provide reciprocal assistance to the SEC, and whether compliance with the request would prejudice the public interest of the U.S. While not a prerequisite for sharing information with a foreign counterpart, requests made pursuant to an MOU between the SEC and a foreign authority, including the IOSCO MMOU, generally would be deemed to satisfy the reciprocity requirement. As part of providing assistance to a foreign securities authority, the SEC may use its powers under Section 21(b) of the Exchange Act as it would in its own investigations. This includes requiring the production of documents held by regulated entities as well as the ability to use the SEC’s subpoena powers to compel the production of documents or testimony from any person or entity anywhere within the U.S. This power is very broad in scope, authorizing any member of the SEC or any officer designated by it to administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence, and require the production of any books, papers, correspondence, memoranda, or other records that the SEC deems relevant or material to the inquiry. Such attendance of witnesses and the production of any such records may be required from any place in the U.S. at any designated place of hearing. CFTC The CFTC’s ability to provide assistance to foreign authorities is practically identical to that of the SEC. Section 12(f)(1) of the CEA states that, upon request from a foreign futures authority, the CFTC may, in its discretion, provide assistance in conducting an investigation that the foreign futures authority deems necessary to determine whether any person has violated, is violating, or is about to violate any laws, rules or regulations relating to futures or options matters that the requesting authority administers or enforces. The CFTC may conduct such investigation as it deems necessary to collect information and evidence pertinent to the request for assistance. Section 12(f)(2) of the CEA requires the CFTC, in deciding whether to provide assistance, to consider whether the requesting authority has agreed to provide reciprocal assistance to the CFTC in futures and options matters and whether compliance with the request would prejudice the U.S. public interest.11 Assistance may be provided without regard to whether the facts stated in the request would also constitute a violation of the laws of the United States. As in the case of the SEC, the CFTC may compel on behalf of a foreign futures authority the production of documents and the taking of statements. Independent interest The SEC and CFTC are not restricted from sharing information or obtaining information even if they do not have an independent interest in a matter. Providing other assistance Both the SEC and CFTC are able to offer assistance to foreign regulators in securing compliance with the laws and regulations identified in Key Question 2. They can also provide information on the relevant regulatory processes in the U.S. They do not have the power to use their statutory authority to seek urgent injunctions and asset freezes on behalf of foreign regulators. However, they can assist in advising foreign regulators on how to initiate a proceeding in civil court or request the assistance of the DOJ. Foreign regulators may also pursue assistance in obtaining court orders through a mutual legal assistance treaty or a multilateral instrument such as the U.N. Convention against Transnational Organized Crime (UNTOC). DOJ has the ability to assist foreign regulators and foreign criminal authorities in obtaining court orders to issue search warrants, obtain asset freezes, summon witnesses, and compel the production of documents and other evidence. The ability to assist a foreign regulator depends on the specific language of the mutual legal assistance treaty between the U.S. and the foreign country or the terms of UNTOC; typically the remedies offered are only available to prosecutors for criminal violations. Providing information on financial conglomerates The SEC can provide supervisory assistance under Section 24(c) of the Exchange Act. Similarly, the CFTC can share supervisory information under Section 8(e) of the CEA and obtain information under Section 12(f)(1) of the CEA. Such supervisory information sharing is based on information that the SEC and CFTC already have in their possession or that they can receive from the books and records of supervised entities. This can include information covered by Key Question 7. Supervisory MOUs provide a mechanism by which the SEC, CFTC and their counterparts can consult, cooperate, and share information on a confidential basis about regulated entities that operate across borders. These supervisory MOUs facilitate the easier sharing of supervisory information, including on financial conglomerates.
Assessment	Fully Implemented
Comments
Principles for Issuers
Principle 16.	There should be full, accurate and timely disclosure of financial results, risk and other information that is material to investors’ decisions.
Description	Background Disclosure obligations associated with the public offering of securities stem from federal securities laws. Monitoring issuers’ compliance with such obligations is a function entrusted to the SEC. In addition, each exchange’s listing requirements impose a set of disclosure obligations on issuers, which in general replicate federal requirements, although in a few areas they supplement them. Therefore this assessment focuses on the federal framework—although where appropriate complementary requirements of the exchanges are mentioned. Monitoring compliance with such listing requirements is the exchanges’ responsibility. Public offering of securities Under the Securities Act (Sections 3-5), every offer or sale of a security must be registered with the SEC unless an exemption is available. The Securities Act provides exemptions from registration for (i) specific types of securities (such as any security issued or guaranteed by the government (other than foreign governments) or a bank but not a bank holding company, offerings of short-term commercial paper and municipal securities) or (ii) certain types of transactions (in general such exemptions include limitations on the amount that can be raised and/or the type of investors to which the offer can be addressed). The JOBS Act expanded some of the transactional exemptions currently available by (i) allowing general solicitation of certain offers provided that the securities are only sold to accredited investors or qualified institutional buyers depending on the exemption; (ii) exempting from registration offerings up to $50 million, subject to certain conditions including SEC review and the SEC qualifying the offering statement; and (iii) permitting offerings through crowdfunding up to $1 million annually without registration. The SEC has already approved regulations for (i) and issued proposals for consultation for (ii) and (iii). Registration statement and prospectus To register a securities offering under the Securities Act, an issuer must file a registration statement with the SEC. The registration statement includes a prospectus. SEC regulations require a prospectus to include disclosure in specific items: (i) information with respect to the issuer, including financial statements (3 years), subject to scaling for smaller reporting companies and emerging growth companies, and selected financial data; the management’s discussion and analysis of financial condition and results of operations; description of the issuer and its business; material legal proceedings; description of properties; identification of directors and executive officers; executive compensation and corporate governance; security ownership of certain beneficial owners and management; and transactions with related persons, promoters, and certain control persons; (ii) description of the securities to be registered; (iii) risk factors relating to the issuer and the offering; (iv) dilution; (v) use of proceeds; (vi) a plan of distribution; (vii) the manner of determining the offering price; and (vii) the interests of named experts and counsel. In addition to the specific line items, the prospectus and registration statement must include “such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading.” A registration statement must also include certain information that is not required to be contained in a prospectus, such as detailed expenses of the offering and information about the issuer’s indemnification policies and disclosure regarding recent sales of unregistered securities. In addition, the exhibits must include various documents such as the underwriting agreement, the issuer’s certificate of incorporation and bylaws, legal opinions, and material contracts. Presentation of information The SEC’s rules under the Securities Act allow for different methods to present information in the prospectus, depending on the characteristics of the issuer and the offering transaction. In most IPOs, all information must be directly presented in the prospectus. For other types of transactions, an issuer may be permitted to use “incorporation by reference,” under which a prospectus refers to past or future reports that are filed under the Exchange Act. Shelf registration Shelf registration is available to eligible issuers, whereby they can register their securities up to three years in advance of the offering. They initially file a short registration statement that may be reviewed by the SEC staff unless the issuer files an automatically effective shelf registration statement which is available to certain larger issuers. Once it becomes effective, the issuer files a prospectus supplement for each offering with no additional action required by the SEC for the offering to become effective. Distribution of prospectus The Securities Act requires delivery of a prospectus meeting specified requirements under the Securities Act, known as a “final prospectus,” to each investor in a registered offering. Under current rules (updated in 2005) which are based on an “access equals delivery” model, investors are presumed to have access to the Internet, and issuers and intermediaries can satisfy their delivery requirements if the documents are posted to a website. In an IPO, Rule 15c2-8 under the Exchange Act requires a broker or dealer to deliver a preliminary prospectus to investors at least 48 hours before the confirmation of the sale of the securities is sent. Periodic requirements The following issuers are subject to the periodic reporting requirements of the Exchange Act: Issuers that want to list on a national securities exchange (Section 12(b) of the Exchange Act). Issuers with registered offerings unless they satisfy one of the following “thresholds,” in which case their filing obligations are suspended after the initial filing year: (i) the company has fewer than 300 shareholders of record of the class of shares offered (1,200 shareholders of record if the company is a bank or bank holding company). SEC staff indicated that in the case of banks and bank holding companies, 96 bank holding companies elected to suspend obligations. Currently there are roughly 500 reporting banks, but approximately 150 meet the criteria to suspend reporting. Non-Listed Companies: U.S. issuers which, on the last day of their fiscal year, have more than $10 million in total assets and a class of equity securities held by either (i) 2,000 or more record holders; or (ii) 500 or more record holders who are not accredited investors must register that class of securities. For banks or bank holding companies, the requirement applies if the company has more than $10 million in total assets and a class of equity securities held by 2,000 or more record holders (Section 12(g) Exchange Act). These are generally smaller issuers that trade in the OTC markets. According to market participants, the majority of trading is from retail investors. Annual reports Reporting issuers must file annual reports on Form 10-K. The annual report requires disclosure about the company in all of the same areas, and addresses the same topics, as is required in a prospectus for an IPO under the Securities Act, other than offering-related information. The financial statements required to be included in the annual report include three years of statements of income, cash flow, and changes in shareholders’ equity, two years of balance sheets, and a discussion of subsequent events. The issuer must present the information on a consolidated basis and provide comprehensive footnote disclosure. The financial statements must be audited by an independent public accountant registered with the PCAOB. In addition, pursuant to SOX 404 the annual audited financial statements for issuers with a public float of $75 million or more must be accompanied by an attestation of the auditor regarding the effectiveness of the internal controls for financial reporting. The MD&A must accompany the financial statements. The MD&A addresses the financial condition, results of operations, liquidity and capital resources as well as events and uncertainties known to the issuer’s management that may cause the reported results not to be indicative of future financial performance. This disclosure also includes off-balance sheet disclosures and contractual obligations. Large accelerated filers must file annual reports within 60 days, accelerated filers within 75 days and all other U.S. filers within 90 days of the fiscal year-end covered by the report. Quarterly reports Issuers must also file quarterly reports for the first three fiscal quarters on Form 10-Q. They must describe their financial condition and results of operations for the preceding fiscal quarter and the corresponding period from the prior fiscal year and also include condensed financial statements. The financial statements in quarterly reports include balance sheets as of the close of the quarter and the comparable quarter of the preceding year, comparative statements of operations for the quarter and for the beginning of the year through quarter-end and comparative statements of cash flow from the beginning of the year through quarter-end. These financial statements are not required to be audited; however, they are required to be reviewed by an independent public accountant. Financial statements in quarterly reports also are required to be accompanied by an MD&A. The requirements for quarterly reports with respect to non-financial statement and related information are not as extensive and do not require updating of all information required in the annual report. Large accelerated filers and accelerated filers must file a quarterly report within 40 days and all other domestic filers within 45 days after the end of the fiscal quarter covered by the report. SOX reports Section 302 of the Sarbanes-Oxley Act (SOX) and corresponding SEC Rules 13a-14(a) and 15d-14(a) require issuers’ principal executive officer(s) and principal financial officer(s) to certify in each quarterly and annual report that the reports fairly represent the financial condition and results of operation of the issuer, as well as certify on the effectiveness of financial reporting controls. Section 906 of SOX requires that each periodic report be also accompanied by a certification by the same officers that the report fairly presents, in all material respects, the financial condition and results of operations of the issuer. A person who certifies any statement knowing that the report does not comply with the requirements set forth in SOX is subject to criminal sanctions ranging from fines to imprisonment. Material events Domestic issuers must file current reports on Form 8-K upon the occurrence of a set of enumerated events. This is an “exhaustive” list of events (expanded by the SEC in 2004 as a result of SOX). These reports must be filed within 4 business days. In addition, each registered securities exchange generally requires its listed companies to (i) timely disclose information that may affect security values or influence investment decisions; and (ii) timely provide the exchange with other information in order to maintain an orderly market in the company’s securities. (See for example 202.05 of the Listed Company Manual of the NYSE and Nasdaq Rule 5250(b)(1)). As a result of these obligations, in practice the communication of material events by listed issuers usually takes place on shorter deadlines than the 4 business days required under the SEC framework. Selective disclosure Regulation FD requires a reporting issuer to make simultaneous or prompt public disclosure, depending on whether the disclosure was intentional, when it discloses material nonpublic information to certain individuals or entities (generally, securities market professionals, such as stock analysts or holders of the issuer’s securities who may trade on the basis of the information). Regulation FD defines public disclosure as furnishing or filing a Form 8-K, or disseminating the information through another method that is reasonably designed to provide broad, non-exclusionary distribution of information to the public. Shareholder’s voting decisions Any solicitation of a proxy with respect to an equity security registered under Section 12 of the Exchange Act must comply with the proxy rules under Regulation 14A of the Exchange Act. These rules require that a proxy statement contain specific disclosures, including material information about the matters that will be voted on, and that the proxy statement be delivered to shareholders that are being asked to vote on those matters. Scaled disclosure The SEC rules allow certain type of companies to “scale” their disclosure. These companies fall under two categories: Smaller reporting companies, which are companies with public equity float of less than $75 million or less than $50 million in annual revenue, and Emerging growth companies (created under the JOBS Act), which are companies with gross revenues of less than $1 billion during their most recently completed fiscal year. Overall, under the current framework such companies are allowed to include less extensive narrative in their disclosure documents, in particular in connection with compensation, include financial statements for two years only, and are not subject to the auditor attestation of internal control over financial reporting required by SOX. Asset-backed securities Disclosure requirements for ABS, both arising from the Securities Act and the Exchange Act, are contained in Regulation AB, which the SEC initially adopted in 2004. In August 2014, the SEC adopted significant revisions to Regulation AB and other rules regarding the offering process, disclosure, and reporting for ABS as described in Principle 8. In addition, in 2011, the SEC adopted several rules to implement provisions of the Dodd-Frank Act governing the disclosure for ABS, including requiring disclosure of fulfilled and unfulfilled repurchase requests, requiring issuers to review the assets underlying the ABS, and providing for the suspension of the duty to file reports under Section 15(d) of the Exchange Act. Prospectus requirements The prospectus for ABS must include information on the following areas: (i) disclosure about the transaction parties; (ii) static pool information (to the extent material); (iii) pool assets; (iv) review of assets (the review must be designed and effected to provide reasonable assurance that the prospectus disclosure about the assets is accurate in all materia