Memorandum Concerning the Securities and Exchange Commission and the Commodity Futures Trading Commission ______
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Memorandum Concerning the Securities and Exchange Commission and the Commodity Futures Trading Commission ______________________________________ JOHN CRAWFORD TIM KARPOFF ANGELA ALLEN NICOLE ALLEN MICHAEL MARGOLIS This paper was prepared for the Volcker Alliance as background for its project on structural reform of the federal financial regulatory system. The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Volcker Alliance. Any errors or omissions are the responsibility of the authors. ______________________________________ Mr. John Crawford is an associate professor at the University of California, Hastings College of Law. Mr. Tim Karpoff is a partner at the law firm of Jenner & Block, and previously served as Counsel to the Chairman of the Commodity Futures Trading Commission and as Director of the United States Department of the Treasury’s Office of Financial Institutions Policy. Ms. Angela Allen, Ms. Nicole Allen, and Mr. Michael Margolis are associates at Jenner & Block. I. The Securities and Exchange Commission .............................................................................. 1 A. Background ....................................................................................................................... 1 1. History and Statutes .................................................................................................. 2 2. SEC Organization and Relation to Other Regulatory Entities .................................. 7 a. Structure of the SEC ........................................................................................... 7 b. SEC Staffing and Budget ................................................................................. 10 c. Rulemaking Process and Constraints ............................................................... 12 d. Relationship with FSOC and Other Regulatory Entities .................................. 13 e. Congressional Oversight .................................................................................. 14 f. Relationship with Foreign and International Regulatory Bodies ..................... 14 B. How and What the SEC Regulates ................................................................................. 16 1. Regulatory Tools ..................................................................................................... 16 a. National Examination Program ........................................................................ 16 b. Enforcement ..................................................................................................... 19 2. Markets, Entities, Products, and Activities ............................................................. 20 a. Exchanges and Alternative Trading Systems ................................................... 21 b. Broker-Dealers ................................................................................................. 24 c. Asset Management Industry ............................................................................. 25 d. Investment Companies ..................................................................................... 27 e. Private Funds .................................................................................................... 33 f. Self-Regulatory Organizations ......................................................................... 37 1) National Securities Exchanges .................................................................. 37 2) Financial Industry Regulatory Authority (FINRA) .................................. 37 3) Municipal Securities Rulemaking Board (MSRB) ................................... 38 4) Public Company Accounting Oversight Board (PCAOB) ........................ 39 5) Securities Investor Protection Corporation (SIPC) ................................... 39 6) Financial Accounting Standards Board (FASB) ....................................... 40 7) Clearing Agencies ..................................................................................... 40 g. Transfer Agents ................................................................................................ 42 h. Credit Rating Agencies .................................................................................... 43 i. Securitization, Structured Finance, and Asset-backed Securities .................... 45 3. Derivatives ............................................................................................................... 49 II. The Commodity Futures Trading Commission ..................................................................... 51 A. Background ..................................................................................................................... 51 B. History and Statutes ........................................................................................................ 52 C. Commission Organization .............................................................................................. 57 D. Markets ........................................................................................................................... 58 1. Product Types .......................................................................................................... 59 a. Futures .............................................................................................................. 59 b. Swaps ............................................................................................................... 60 2. Nature of the Underlying Asset ............................................................................... 62 3. The Growth of International Markets and Cross-border Transactions .................... 65 4. Entities Overseen by the CFTC ............................................................................... 66 i a. Regulated Entities ............................................................................................ 67 b. Entities Related to the Clearing Process .......................................................... 67 5. Derivatives Clearing Organization .......................................................................... 68 a. Clearing Member ............................................................................................. 70 6. Futures Commission Merchant ............................................................................... 71 7. Execution Platforms ................................................................................................ 72 a. Designated Contract Market ............................................................................ 73 b. Swap Execution Facility .................................................................................. 74 c. Swap Data Repository ...................................................................................... 75 d. Swap Dealer ..................................................................................................... 76 e. Major Swap Participant .................................................................................... 77 f. Eligible Contract Participant ............................................................................ 77 g. Entities Related to Managed Funds .................................................................. 77 1) Commodity Trading Advisor .................................................................... 78 2) Commodity Pool Operator ........................................................................ 78 h. Unregulated Entities ......................................................................................... 79 i. Core Divisions of the CFTC ............................................................................ 80 8. Supporting Offices .................................................................................................. 81 a. Staffing Levels ................................................................................................. 82 E. Exercise of the CFTC’s authorities ................................................................................ 83 1. Rule Making Process and Constraints ..................................................................... 83 a. Process .............................................................................................................. 84 1) Cost-Benefit Analysis and Other Administrative Requirements .............. 85 2) CEA Requirements ................................................................................... 85 2. Administrative Procedures Act ............................................................................... 86 3. Regulatory Flexibility Act ....................................................................................... 86 4. Paperwork Reduction Act ....................................................................................... 86 5. Executive Orders ..................................................................................................... 86 a. Impact on CFTC Rulemaking .......................................................................... 87 F. Enforcement, Oversight and Supervision ....................................................................... 88 1. Enforcement ............................................................................................................ 88 a. Tips, Surveillance, and Origins of Enforcement Actions ................................ 89 b. Investigative Process .......................................................................................