Remarks of Commissioner Brian D. Quintenz at FIA’s 40th Annual Law and Compliance Conference
May 2, 2018
Good afternoon and thank you for that very kind introduction. I’m delighted to be here with you today at FIA’s 40th Annual Law and Compliance Conference. Before I begin, let me quickly say that the views contained in this speech are my own and do not represent the views of the Commission.
I’d like to take you back to last summer and my first day on the job as a CFTC Commissioner. It happens that the day came with a surprise. That morning, in a weekly senior staff briefing, Chairman Giancarlo announced it was a special day – not because of me at all, but rather because it was the day of the annual CFTC versus SEC softball game. I enthusiastically agreed to participate.
So, after work, I ventured down to the Ellipse and joined Chairman Giancarlo, Chairman Clayton, and our respective staffs. And, just for the record, I’d like everyone to know that I hit a double – please ignore whatever you may have heard about any associated fielding error.
In reflecting on that experience, I remember thinking that while our staffs were competing on the field, there was great comradery off of it. And that makes sense – because when it comes to protecting our financial markets and making them the best regulated in the world, we are all really on the same team.
The CFTC’s mission is to foster open, transparent, competitive, and financially-sound derivatives markets that can be used for price discovery and managing risks. The SEC’s mission is to protect investors, maintain fair, orderly, and efficient securities markets, and facilitate capital formation. And yet, despite their different missions and their regulation of distinct markets that serve fundamentally different purposes, the SEC and CFTC undoubtedly have common regulatory interests: promoting market integrity, preventing fraud and manipulation, and fostering market innovation and fair competition. In fact, in many instances the SEC’s and CFTC’s oversight is interconnected, as is the case for security futures products, swap dealers and security-based swap dealers, swap and security-based swap execution facilities (SEFs), and investment managers and commodity pool operators (CPOs). Indeed, in the case of many Dodd-Frank Act reforms, Congress explicitly required both agencies to “consult and coordinate to the extent possible … for the purposes of assuring regulatory consistency and comparability.”
Given the agencies’ shared regulatory objectives, I want to discuss an effort that is underway at both the SEC and CFTC to coordinate and harmonize regulatory oversight, as well as the ways in which I hope that cooperation can be strengthened in the future. In particular, I want to focus today on harmonizing requirements for dual registrants, our coordination of enforcement actions, and ongoing efforts to update the Memorandum of Understanding (MOU) between our agencies.
The CFTC and SEC have a long history of overseeing dual registrants: a financial institution registers with both the CFTC, as a futures commission merchant (FCM), and with the SEC, as a broker-dealer, in order to facilitate customers’ derivatives and securities transactions; an investment firm registers with both the CFTC, as a commodity trading advisor (CTA) and CPO, and with the SEC, as an investment adviser, in order to operate investment vehicles that invest in securities and assume derivatives positions. Under the Dodd-Frank Act, firms must register with the CFTC, as a swap dealer, and with the SEC, as a security-based swap dealer, if they engage in dealing activity in swaps and security-based swaps.
I believe a sensible regulatory framework for these dual registrants is one in which similarly-situated market participants are treated identically, if not similarly, under our agencies’ respective regulations. Harmonization of regulatory requirements benefits the registrants themselves, our financial markets, and the American public. Registrants benefit because they are subject to consistent regulatory requirements. This consistency facilitates compliance by reducing registrants’ costs and eliminating unnecessary confusion about each agency’s respective requirements. Markets benefit because needlessly conflicting requirements stifle innovation and competition, and can create harmful regulatory arbitrage. The American public benefits because firms’ reduced compliance and operational costs will ultimately lead to lower costs to investors and companies using the derivatives markets to transfer risk.
The more transparent and efficient the rules of our markets are, the more they facilitate broad-based economic growth and capital formation. Quite simply, differences should only exist between the two agencies to the extent they reflect a concrete and irreconcilable difference between the securities and derivatives markets. Otherwise, I believe the regulatory requirements for dual registrants should be either identical or substitutable. Identical – meaning that even minor details of the regulatory regimes should be the same – is a high standard to meet. A substitutability concept may allow for the rules of one agency to satisfy the rules of another – much like the process of deference the CFTC uses in international comparability determinations.
While any harmonization progress is good, I would also hope that we avoid outcomes which are “almost completely harmonized.” To me, that is code language for “still different.” Indeed, if identical or substitutable rules are not achieved, we must remember that even small, seemingly superficial differences between regulations can impose outsized costs on registrants and the marketplace.
We need to harmonize conflicting or overlapping regulatory requirements for swap dealers and security-based swap dealers. For example, with respect to business conduct standards, the SEC’s and CFTC’s regulations impose similar, but slightly different, disclosure requirements on dealers. In addition, the business conduct regimes impose different onuses on church plans to identify if they want to be treated as a “special entity.” Under the CFTC regime, church plans are excluded from the definition of “special entity,” unless they affirmatively choose to opt-in; under the SEC regime, church plans are automatically included in the “special entity” definition, unless they affirmatively choose to opt-out. These differences may seem superficial, but they impose real world headaches and documentation nightmares as dealers struggle to ensure they have the correct representations recorded for the same counterparties to comply with both agencies’ regulations. Moreover, in the case of church plans under the CFTC regime, it is my understanding that a grand total of zero plans have elected special entity status – zip, zilch, nada, bubkis – perhaps a telling market signal to a public policy prescription.
Thus far I have focused my remarks on tweaks and minor adjustments to our rule sets that would promote an identical approach, allowing both agencies to accomplish their shared goals in the same manner. However, thinking more broadly, I think there are certain areas of overlapping jurisdiction where deference to the other agency, rather than harmonization, could be a good solution. For example, in the CPO space, I think it is worth revisiting the Commission’s 2012 decision to eliminate the exclusion of investment managers of registered investment companies (RICs) from the definition of CPO. Currently, these CPOs are subject to two distinct, but overlapping, regulatory regimes – including similar but divergent recordkeeping and reporting requirements. More efficient, effective oversight over these investment vehicles is possible. For example, perhaps sole registration with the SEC is appropriate in instances where the focus of the investment vehicle’s business is primarily securities rather than derivatives, but derivatives activity can be disclosed and shared with the CFTC and NFA.
Other areas where deference may be appropriate include SEFs and swap data repositories (SDRs). The Dodd-Frank Act set forth requirements for both SEFs and security-based SEFs and for both SDRs and security-based SDRs. Likely, the same company will list, or collect information for, both swaps and security-based swaps. Therefore, it would make sense for a firm to follow one set of rules, instead of two, for trading and reporting swaps and security-based swaps. Similarly, a single rule set for SEFs, and a single rule set for SDRs, would advance the CFTC’s and SEC’s policy objectives efficiently and simply.
Whether it is small tweaks to rule sets, or larger endeavors, we have heard from many market participants through the Project KISS initiative about areas where greater SEC-CFTC coordination or deference could be beneficial. Additional thoughts and ideas are always welcome.
Having had numerous conversations with CFTC staff, the staff at the SEC, and my counterpart in this harmonization effort, SEC Commissioner Hester Pierce, to create a short list of low hanging fruit with which we can develop some momentum, I am very optimistic that all of us have the right perspective and correct motivations to make this joint review by the agencies a highly productive process. Our registrants, Congress, and taxpayers expect government agencies to communicate and coordinate, and I am very hopeful we will eliminate the burdens and complexities of complying with both regulatory regimes.
Given that almost eight years has passed since Dodd-Frank required the SEC and CFTC to “consult and coordinate … for purposes of assuring regulatory consistency,” I am pleased that both agencies are finally undertaking a cooperative review of Title VII regulations.
Of course, coordination extends beyond the rule writing process. The CFTC Division of Enforcement greatly values cooperation with federal and state criminal and civil enforcement authorities. The Commission and the SEC have a long history of robust and effective cooperative enforcement. Coordination of investigative and prosecutorial actions sends consistent messages to the marketplace and promotes efficient use of the Commission’s resources.
In particular, in the cryptocurrency space, the CFTC has formed an internal cryptocurrency enforcement task force to develop the necessary expertise to prosecute fraud in this evolving asset class. The task force shares information and works cooperatively with counterparts at the SEC with similar virtual currency expertise. Both agencies’ Divisions of Enforcement have demonstrated their commitment to work closely to prosecute fraud and ensure that differences in product nomenclature do not enable bad actors to slip through jurisdictional cracks. Over the past several months, the CFTC has worked closely with the SEC in bringing civil enforcement actions against fraud, market manipulation and disruptive trading involving virtual currency. Finally, with respect to jurisdictional considerations, the CFTC has been, and continues to be, in close communication with the SEC.
To further this commitment to regulatory coordination between the agencies, the CFTC and the SEC are working to update the existing MOU to improve the sharing of information. The current MOU was entered into a decade ago, prior to the enactment of Dodd-Frank. Since that time, a number of new products and regulations have been developed or adopted that are outside the scope of the MOU. An updated agreement will facilitate information sharing between the agencies related to swaps and security-based swaps data, dual registrants, financial technology (fintech) developments, and market events. Updating the MOU is an important reaffirmation of our agencies’ mutual commitment to regulatory coordination and market innovation.
Audit Trail Harmonization
Harmonization and coordination efforts are not only necessary between the SEC and CFTC. As Project KISS has shown, there are a number of CFTC regulations that can benefit from harmonization and simplification. One such area is audit trail requirements. Audit trail requirements are designed to provide the Commission with the information necessary to reconstruct how a transaction was executed after-the-fact. These records are critical to the Commission’s ability to conduct surveillance inquiries and investigations in order to protect customers and ensure market integrity. However, the Commission’s current audit trail requirements are redundant, placing similar recordkeeping obligations on FCMs, exchange members, designated contract markets, and SEFs. The overlapping requirements impose significant costs on market participant and exchanges, which must each store and maintain massive amounts of duplicative transactional data. In my view, the rules could be updated to reduce redundant recordkeeping requirements and better reflect the modern reality of real-time, electronic trading systems, all while ensuring the Commission receives the data it needs to fulfill its mission.
More generally, exploring how Commission regulations can be updated to reflect the challenges of big data, such as audit trail requirements, is one area where the Technology Advisory Committee (TAC) may also be able to provide input. At the Committee’s last meeting, the TAC recommended that the Commission create four subcommittees to provide actionable advice regarding cryptocurrencies, distributed ledger technologies, cybersecurity, and the modern trading environment. Since that time, the TAC’s Designated Federal Officer, Dan Gorfine, has been working to establish these subcommittees and I look forward to their first meetings.
We are now well into spring and softball season is about to start. The annual CFTC versus SEC softball game is coming up and I am looking forward to some friendly competition. This time when I play, I expect to recognize some familiar faces. I know that both of our agencies are committed to coordinating and harmonizing regulatory requirements for the benefit of our registrants and our markets.
 CEA Section 3(b).
 What We Do, Securities and Exchange Commission, https://www.sec.gov/Article/whatwedo.html.
 Section 712(a) of the Dodd-Frank Act.
 For example, CFTC regulation 23.431(a)(3)(i) requires pre-trade disclosure of the mid-market mark; SEC regulations have no such requirement. CFTC regulation 23.431(b) requires swap dealers to provide scenario analyses to counterparties upon request; SEC regulations have no such requirement.
 17 C.F.R. § 23.401(c)(6); 17 C.F.R. § 240.15Fh–2 (d)(4).
 Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations; Harmonization of Compliance Obligations for Registered Investment Companies Required to Register as Commodity Pool Operators; Final Rule and Proposed Rule, 77 Fed. Reg. 11252 (Feb. 24, 2012) (amending Rule 4.5 to reinstate a trading threshold and marketing restriction for RICs claiming exclusion from the definition of CPO).
 Section 712(a) of the Dodd-Frank Act.
 Joint Statement from CFTC and SEC Enforcement Directors Regarding Virtual Currency Enforcement Actions (Jan. 19, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/mcdonaldstatement011918.
 CFTC v. My Big Coin Pay Inc. et al., No. 1:18-cv-10077-RWZ (D. Mass. Jan 16, 2018); CFTC v. McDonnell, No. 18-cv-0361 (E.D.N.Y. Jan 18, 2018); CFTC v. Entrepreneurs Headquarters Limited, No. 18-cv-00345 (E.D.N.Y. Jan. 18, 2018).
 Memorandum of Understanding Between the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission Regarding Coordination in Areas of Common Regulatory Interest (Mar. 11, 2008), https://www.sec.gov/news/press/2008/2008-40_mou.pdf.
 Records of Commodity Interest and Related Cash or Forward Transactions, 80 Fed. Reg. 80247, 80250 (Dec. 24, 2015).
 See, e.g., 17 C.F.R. § 1.35 (FCMs and members of an exchange); 17 C.F.R. § 38.551-38.552 (DCMs); and 17 C.F.R. § 37.205 (SEFs).