Common Ground: The SEC and CFTC Enter Historic Memorandum of Understanding Aimed at Harmonizing Regulatory Interests

Regulatory silos are coming down. In what marks the third joint announcement by the two primary US financial regulatory agencies in less than three months, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) (together, Agencies) published a comprehensive framework for coordination and collaboration between the two Agencies.[1] The March 11 Memorandum of Understanding (MOU) is meant to “guide coordination and collaboration between the two agencies to support lawful innovation, uphold market integrity, and ensure investor and customer protection,”[2] and comes on the heels of other recent cross-agency collaboration efforts, reflecting the Agencies’ shared emphasis on “modernized coordination” in an “increasingly convergent” and rapidly evolving financial ecosystem. The MOU builds on the SEC and CFTC’s harmonization roundtables and joint speeches on a variety of topics (see Katten’s prior publications on these harmonization efforts here and here).

The coordination is intended to provide a framework that will allow the SEC and CFTC (Agencies) to work in good faith when there is jurisdictional overlap between the agencies to improve regulatory clarity, consistency and efficiency, and create regulations that consider the economic realities of the marketplace. On the same day, the Agencies also announced a Joint Harmonization Initiative “to advance coordinated oversight and promote regulatory clarity,” which will solicit public input and seek to support coordination across the policymaking, examination and enforcement functions of each Agency, as well as to streamline cross-market regulatory actions.[3] “For decades, regulatory turf wars, duplicative agency registrations, and different sets of regulations between the SEC and CFTC have stifled innovation and pushed market participants to other jurisdictions,” noted SEC Chairman Paul S. Atkins.

SEC Chairman Atkins expects the MOU “will serve as a roadmap for a new era of harmonization between the agencies — one that is critical to support U.S. leadership in this next chapter of financial innovation.” CFTC Chairman Michael S. Selig predicted that by working together, the Agencies will “eliminate duplicative, burdensome rules and close gaps in regulation for the benefit of all Americans and usher in a Golden Age of American finance.”

Leveraging Coordination to Issue New Framework and Guidance 

The SEC and CFTC plan to focus their coordination on a handful of key areas where their jurisdiction and regulatory work overlap, including:

1. clarifying product definitions through joint interpretations and rulemakings;
2. modernizing clearing, margin, and collateral frameworks;
3. reducing frictions for dually registered exchanges, trading venues and intermediaries;
4. providing a fit-for-purpose regulatory framework for crypto assets and other emerging technologies; and
5. streamlining regulatory reporting for trade data, funds and intermediaries. 

In doing so, the Agencies have committed to fostering innovation and using the “minimum effective dose” of regulation and will encourage the development of “alternative compliance” frameworks and regulated “super-apps,” opening the door to new possibilities for integrated financial services across traditionally segregated regulatory domains.[4] 

To accomplish these goals, the Agencies intended to (i) hold regular meetings to identify and discuss regulatory issues early on; (ii) share data related to common areas of regulatory interest; (iii) inform each other of issues that may have overlapping regulatory interests, supervisory developments, material events, enforcement actions, and proposals to list novel products; and (iv) implement staff cross-training across the Agencies. 

Coordination on Examinations, Enforcement and Economic Analysis, Risk Monitoring, and Surveillance 

In addition to positioning the Agencies to coordinate on new regulatory matters, the SEC and CFTC also agreed to enhance coordination on a number of their core activities. 

Examinations. For firms that are dually registered, such as Investment Advisers/Commodity Pool Operators, Broker-Dealers/Futures Commission Merchants, the Agencies will look for opportunities to minimize the burden on firms. In particular, the Agencies will share information on a voluntary basis, seek “to avoid duplicative examinations,” and will strive “to conduct coordinated exam planning, joint or aligned examinations where appropriate, and share exam findings and supervisory insights.” 

Enforcement. Recognizing that enforcement activity may overlap across their jurisdictions, the Agencies expressed a desire to “promote consistency, efficiency, and proportionality in enforcement outcomes while avoiding duplicative relief and conflicting remedial obligations.” To accomplish this, the Agencies will endeavor to identify any overlapping jurisdiction at the outset of investigations, confer as it relates to areas of mutual interest and jurisdictional overlap before issuing Wells notices, coordinate when enforcement matters may present issues of interest for both Agencies, and where parallel enforcement actions are practicable, “confer on potential charges and relief, sequencing of filings, litigation strategy, and public communications.”

Economic Analysis, Risk Monitoring and Surveillance. The Agencies also intended to “work toward practical interoperability” by developing, where feasible, “compatible data standards and analytical tools that enhance each [Agency's] ability to detect market abuse and operational vulnerabilities.”  

Practical Considerations for Market Participants 

While these proposed coordination efforts are in their early stages, market participants may begin to see the benefits of this coordinated approach. In particular, the proposed reduced burden through coordinated exam planning and joint examinations should provide welcome relief to dually registered firms that have had to juggle overlapping examinations in the past. Additionally, as the Agencies move forward with rulemakings, the commitment to coordination should provide regulatory clarity that has historically been absent, especially as it relates to novel and emerging products like digital assets or event contracts. 

Common Ground to Reduce Friction and Support Innovation

While not a binding authority, the MOU provides a roadmap market participants can use to understand how the Agencies intend to coordinate and cooperate across many aspects of their regulatory functions. If adhered to, the MOU could reduce regulatory friction between the Agencies, enhance market integrity, and support innovation across emerging markets. It could also, as SEC Chairman Atkins put it, “deliver the [regulatory] clarity market participants deserve.” 

For more information regarding the MOU or the SEC and CFTC’s recent collaboration efforts, and how this may impact regulatory compliance and enforcement going forward, please contact one of the authors of this article or your primary Katten attorney.