The securities and futures industry have asked the SEC to repropose the proposed regulations implementing the derivatives provisions of the Dodd-Frank Act in a manner reflecting the incorporation of prior public comments, and then allow for a final comment period for all the rules in their entirety that runs from the date of the last proposed rule. In a letter to the SEC, SIFMA and the Futures Industry Association said that by providing market participants with the opportunity to comment more meaningfully on the new regulatory structure, the Commission will be better able to draft effective final rules and ensure that it has used a process providing for the least possibility of unintended consequences, adverse market impact and anti-competitive impact while still achieving the objectives of Dodd-Frank. The letter was also signed by the US Chamber of Commerce, ISDA, and the Financial Services Roundtable. A similar letter was sent to the CFTC.
In order to ensure that the substance of the final rules works efficiently as a whole, said the letter, it is essential that market participants have an opportunity for additional review to comment on the entire framework as envisioned by Congress in Title VII. The industry groups endorsed Professor Hal Scott’s recommendation that the Commission decide a sequence for issuance of final rules, re-propose the entire set of rules, along with plans for implementation, and permit another round of comment on the substance of the proposed set of rules. See testimony of Hal Scott, Director of the Committee on Capital Markets Regulation and Professor and Director of the Program on International Financial Systems at Harvard Law School, before the House Agriculture Committee (April 13, 2011).
The process for finalizing the SEC proposed rules is critical, noted the groups, and market participants should have an opportunity to review and comment on revised versions of the rules, and their interdependencies, prior to implementation. Historically, an iterative approach to rulemaking has been taken when regulations have an unusually large impact on market structure and participants. Allowing for more than one round of comments helps ensure that market participants can more fully assess the implications of new regulations in their entirety.
As an example of this, the associations pointed to the SEC’s adoption of Regulation NMS. After the initial release of proposed Regulation NMS, the Commission held public hearings, sought supplemental comments, and re-proposed the entire Regulation NMS for additional comment. In the view of the industry groups, Title VII of Dodd-Frank requires the Commission and market participants to implement regulatory changes on an even larger scale, an undertaking meriting a more considered review than is possible with only one round of proposed rules.
The groups said that the ability of market participants to review and provide comments on the proposed Title VII regulatory framework in a timely and comprehensive fashion is further complicated by the need for such entities to simultaneously address many other changes resulting from Dodd-Frank that will impact their businesses, As an indicator of the size of that undertaking, as of the beginning of this month, with approximately 62 percent of the 387 required rules still to be proposed, regulators had published over three million words of implementing regulation in the Federal Register.
The letter to the SEC clarified that the need for a second or subsequent comment period on rule proposals is distinct from the ongoing discussions of phase-in of implementation of the rules across markets. Although phase-in is critical for a smooth implementation of the changes required under the Dodd-Frank Act, acknowledged the groups, it is also essential that rules be appropriately tailored, work in tandem, and avoid unduly impairing market liquidity or adversely impacting investors. It is not enough to phase-in implementation if the final rules themselves are unworkable or in conflict.
In addition, given the highly interdependent relationship between many proposed regulations, even relatively modest aspects of key provisions, such as the block trade definition, the swap and security-based swap definitions, dealer and major swap participant definitions, territorial scope, and capital and margin requirements, will dramatically affect the implementation and impact of many other provisions across many other rules. For example, all security-based swaps that are required to be cleared are required to be executed on an exchange or a swap execution facility if one makes the security-based swap available for trading. The way in which a ``makes available for trading’’ determination is made will depend on the Commission’s trade execution platform rules. The requirement to trade swaps on an electronic system will have significantly different implications on liquidity for different types of instruments that may fall in the definition of swap or security-based swap, terms that have to be further defined by the SEC and CFTC.
While changes to some of the proposed rules may require re-proposal under the Administrative Procedure Act, noted the groups, their recommendation goes beyond any specific requirements under the APA. In the industry’s view, given the complexity and interdependency of many of these rules, market participants should have the ability to review and comment on a complete set of rules that has addressed prior comments. This approach is within the spirit of the APA, reasoned the groups, and supports the practical need for further fine-tuning of rules that will have a dramatic impact across the swap markets.
Despite the deadlines imposed by Congress in the Dodd-Frank Act, said the letter, it is clear that many members of Congress believe that the Commission should take any necessary additional time to solicit more feedback. The groups noted, in this regard, a February 8, 2011 letter from a bi-partisan group of 12 Senators to the regulators stating the hope that the agencies would take the time to implement Title VII thoughtfully, paying particularly close attention to the array of unintended consequences that may arise. Also cited was an April 15, 2011 letter from 24 Democratic Congressmen to regulators emphasizing that the importance of the rule-making process be thorough so that it ends up with the right result.