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Dodd-Frank Sets Process for SEC and CFTC to Resolve Jurisdictional Status of Novel Derivatives Products

By Jim Hamilton

The Dodd-Frank Act establishes a new process for the CFTC and SEC to resolve the status of novel derivative products. In the past, said Senator Blanche Lincoln, these types of novel and innovative products have gotten caught up in protracted jurisdictional disputes between the agencies, resulting in delays in bringing products to market and placing U.S. firms and exchanges at a competitive disadvantage to their overseas counterparts. (Cong. Record, July 15, 2010, S5923).

In their Joint Harmonization Report of October 2009, the SEC and CFTC recommended legislation to provide legal certainty with respect to novel derivative product listings, either by a legal determination about the nature of a product or through the use of the agencies? respective exemptive authorities.

According to Senator Lincoln, Dodd-Frank implements these recommendations by establishing a process that requires public accountability by ensuring that jurisdictional disputes are resolved at the Commission rather than staff level, and within a firm time frame. Specifically, either the SEC or the CFTC can request that the other one make a legal determination whether a particular product is a security under SEC jurisdiction or a futures contract or commodity option under CFTC jurisdiction; or grant an exemption with respect to the product. An agency receiving such a request from the other agency is to act on it within 120 days. (Cong. Record, July 15, 2010, S5923).

Dodd-Frank also provides for an expedited judicial review process for a legal determination where the agency making the request disagrees with the other?s determination. The Act also ensures that if either agency grants an exemption, the product will be subject to the other?s jurisdiction, so there will be no regulatory gaps. For example, the Commodity Exchange Act is amended to clarify that the CFTC has jurisdiction over options on securities and security indexes that are exempted by the SEC.

Senator Lincoln strongly urged the SEC and CFTC to work together under these new provisions to alleviate the ills that they themselves have identified. The SEC and CFTCs should make liberal use of their exemptive authorities to avoid spending taxpayer resources on legal fights over whether these novel derivative products are securities or futures, and to permit these important new products to trade in either or both a CFTC- or SEC-regulated environment. (Cong. Record, July 15, 2010, S5923).

Full post as published by Jim Hamilton's World of Securities Regulation on August 16, 2010 (boomark / email).