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Whistleblower Protections Top CFTC, SEC Enforcement Wish List

Federal regulators Friday called on Congress to bolster their enforcement authority over the futures and securities markets in a joint report that was forwarded to Capitol Hill.

The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) recommended that Congress enact legislation to encourage whistleblowers to come forward with information on misconduct in the futures and securities markets, as well as advance a measure that would give the CFTC the authority to order customer restitution in enforcement matters.

And the two agencies called on lawmakers to take action to bolster the CFTC's authority over disruptive trading practices. "Legislation should be enacted to enhance the CFTC's enforcement authorities with respect to certain disruptive practices that undermine market integrity and the price formation process in the futures markets," the SEC-CFTC report said.

The SEC and CFTC also urged Capitol Hill to expand the scope of insider trading prohibitions under the Commodity Exchange Act (CEA) to make illegal the misappropriation and trading on the basis of material nonpublic information from any government authority.

They further suggested that legislation be passed to give the SEC the authority to penalize a party for "aiding and abetting" in the commission of a wrongdoing under the Securities and Investment Company Act. "The CFTC has specific statutory enforcement authority for aiding and abetting all violations of the CEA and CFTC rules and regulations. Expanding the SEC's statutory authority...would close the gap between the SEC and CFTC's regulatory regimes," the report said.

It proposed that the agencies create a joint agency enforcement task force to "harness synergies" from shared market surveillance data. And the report supports the development of a SEC-CFTC program for the regular sharing of staff through detail assignments.

In June the White House called on the CFTC and the SEC to "make recommendations to Congress for changes to statutes and regulations that would harmonize regulation of futures and securities." CFTC Chairman Gary Gensler and SEC Chairman Mary Schapiro have been working since then to identify the gaps in their regulations (see NGI, June 22).

The report contains 20 recommendations to expand enforcement powers, strengthen market and intermediary oversight and improve operational coordination between the two agencies.

"In this report our agencies rose above the usual challenges and came together to offer meaningful recommendations to improve our oversight of the financial markets," Gensler said.

This "is another step forward in our effort to reform the regulatory landscape and ensure greater harmonization between our agencies. I believe these recommendations will help to fill regulatory gaps, eliminate inconsistent oversight and promote greater collaboration," Schapiro said.

The 96-page report proposes that the CFTC be given authority to require futures commission merchants (FCM), who execute trades, and introducing brokers (IB), who provide investment advice but do not handle transactions, to implement conflict-of-interest procedures that would separate the activities of persons in a firm engaged in research or analysis of commodity prices from those involved in trading or clearing activities. FCMs and IBs are often affiliated.

Congress also was urged to amend the CEA to provide the CFTC with clear authority with respect to exchange and clearinghouse rules that the agency determines are necessary for them to comply with the CEA. "The CFTC currently lacks sufficient authority to ensure that exchanges and clearinghouses it regulates are operating within the principles, rules and regulations established under the CEA."

And it recommends legislation to empower the CFTC to require foreign boards of trade (FBOT) to register with the CFTC. Specifically, the CFTC proposes that "the CEA be amended to grant the agency authority to require registration of an FBOT that seeks to provide direct access to members or other participants located in the United States and, when appropriate, relying on the foreign regulator to avoid duplicative regulation," the report said.

In addition, the SEC and CFTC should seek to align their record-retention requirements for intermediaries by harmonizing the length of time records are require to be maintained, according to the report. Currently, the CFTC requires records to be retained for five year, while the SEC requires from three to six years.

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