Friday, April 15, 2011

House Oversight Chairs Introduce Legislation Extending Deadline for SEC-CFTC Implementation of Dodd-Frank

The four House oversight Chairs of the SEC and CFTC and the nation’s derivatives markets have introduced legislation extending for 18 months the deadline for regulatory implementation of the derivative provisions of the Dodd-Frank Act. The legislation is designed to give the SEC and CFTC more time to effectively meet the objectives of the derivatives title, to prioritize deliberation over speed, to consider the costs and benefits, and to understand the cumulative impact of the rules that will be applied to the derivatives marketplace. Additionally, HR 1573 would realign the U.S. with the G20 agreement to implement reform by December 2012. The measure was introduced by Financial Services Committee Chair Spencer Bachus (R-AL), Agriculture Committee Chair Frank Lucas (R-OK), Commodities Subcommittee Chair K. Michael Conaway (R-TX), and Capital Markets Oversight Chair Scott Garrett (R-NJ).

To provide clarity to market participants, the legislation would maintain the current timeframe of 360 days after enactment for the SEC and CFTC to issue final rules regarding regulatory designations that will define the market, and maintain the current timeframe for rules requiring record retention and regulatory reporting. It also requires additional public forums to take input from stakeholders before the rules can be made final.

According to Chairman Bachus, the legislation would ensure that the United States is not placed in a globally competitive disadvantage. Despite the best efforts of the regulators, he noted, the rules have not been proposed in a logical sequence, and if implemented on the current timeframe, could weaken U.S. markets during a period of economic recovery. Importantly, the bill would provide regulators with vital information about derivatives transactions to ensure transparency. Chairman Bachus urged the SEC and CFTC to use the additional time and information to engage in the proper due diligence to get the derivatives rules right from the start

Chairman Conaway noted that, because of the short timeframes allowed to meet the staggering mandates of the Dodd-Frank Act, the CFTC has been forced to place speed over deliberation. The Commission needs the proper amount of time to thoughtfully consider the overwhelming comments of concern by market participants thus far. The Chair urged the Commission to use the additional time to move towards an order of sequencing and an implementation schedule of its final rules in a logical order.

In Chairman Garrett’s view, Dodd-Frank set up a totally unrealistic and unworkable timeline for the implementation of a massive and bifurcated new regulatory regime to oversee the OTC derivatives markets. If the SEC and CFTC get this wrong, he said, it will be difficult, if not impossible, for businesses of all shapes and sizes to responsibly hedge their risks, and trading will be forced off of U.S. markets to those overseas.

In order to facilitate compliance with the swap data repositories provisions, the legislation would provide that, before the new deadline of December 31, 2012, the SEC and CFTC may authorize the reporting of swap data and security-based swap data to any person then conducting the business who has provided notice to the relevant Commission of its intention to register as a swap data repository or security-based swap data repository and made such undertakings to the relevant Commission as the SEC or CFTC determine to be appropriate and in the public interest, consistent with Title VII. .

The legislation would add a new section 712(g) to Dodd-Frank requiring the SEC and CFTC before adopting final regulations to conduct public hearings and roundtables and listen to affected market participants, experts and other interested parties. The Commissions must also solicit public comment on the time and resources that would be required of affected parties in order to develop systems and infrastructure necessary, and policies designed, to comply with the proposed regulations and any alternative approaches capable of accomplishing the relevant rulemaking objectives.

Finally, in a nod to international comity, HR 5173 would authorize the SEC and CFTC to exempt non-US persons from the registration and related regulatory requirements of Dodd-Frank to the extent the Commissions determine that the person is subject to a comparable foreign regulatory scheme in its home country and adequate information sharing arrangements are in effect between the SEC or CFTC and the home country regulator. The SEC and CFTC may condition the exemption on compliance with all or any part of the alternate regulatory scheme, and on such other term as the Commission determines appropriate. The SEC and CFTC may also deem any noncompliance with the alternate regulatory scheme a .violation of the corresponding provisions of Dodd-Frank.