Treasury Proposes Massive Overhaul of US Financial Services Regulation Affecting Fed, SEC, CFTC

The US Treasury has proposed the most complete overhaul of federal financial regulation since the current regulatory structure was erected in the 1930s. The proposal would create new federal regulators for market stability, business conduct, corporate finance and prudential finance. In the short term, Treasury recommends legislation merging the SEC and CFTC under a principles-based regime.

Under the proposed reform, the new Market Stability Regulator would be the Federal Reserve Board, while the Prudential Financial Regulator would assume the role of the current federal prudential regulators, the OCC and OTS. The SEC’s current regulatory and enforcement duties over financial institutions would be assumed by the Business Conduct Regulator, while the Commission’s responsibilities over corporate disclosures, corporate governance, and accounting oversight would be assumed by the Corporate Finance Regulator.

The Treasury model represents an objectives-based regulatory approach currently used by Australia and the Netherlands; and a rejection of the unitary regulator model used by the UK Financial Services Authority. Treasury also rejected the functional regulation model enshrined in the Gramm-Leach-Bliley Act of 1999

The current system of functional regulation with separate regulators maintained across segregated lines of banking and securities and futures is not compatible with the evolving markets. The most damaging part of functional regulation is that no single regulator has either enough information or sufficient authority to monitor systemic risk or broad dislocations across the financial system.

As the Market Stability Regulator, the Fed would be given broad powers to focus on the overall financial system. The Fed could gather and disclose information, collaborate with other regulators on rulemaking, and take corrective action to preserve market stability. The Fed would have access to detailed information about SEC-regulated financial institutions and their holding companies in order to assess their impact on market stability. The Fed would also be authorized to mandate additional disclosure for federally chartered financial institutions. Similarly, the Fed would be empowered to require financial institutions to limit their risk exposures to certain asset classes or certain types of counterparties.

Payment and settlement systems are the mechanisms used to transfer funds and financial instruments between financial institutions and between financial institutions and their customers. Currently, there is no uniform payment and settlement system, resulting in an idiosyncratic system. The plan recommends a single federal payment and settlements regime under Fed supervision.


The Prudential Financial Regulator would focus on financial institutions with express government guarantees, such as federal deposit insurance. It is also envisioned that the GSEs would eventually come under prudential regulation since the federal government has charged them with a specific mission.

The Business Conduct Regulator (CBRA) would be responsible for all financial products in order to bring consistency where overlapping requirements currently exist. The CBRA would also charter and license a wide range of financial services providers, such as broker-dealers, hedge funds, private equity funds, venture capital funds, and mutual funds. The establishment of a federal charter would result in the creation of national standards for financial capacity, expertise, and other requirements that must be satisfied to enter the business of providing financial services. These firms would also have to remain in compliance with the standards and provide regular updates on financial conditions to CBRA and the Federal Reserve Board.

CBRA would have broad authority over securities and futures firms and their markets, including operational ability, professional conduct, testing and training, fraud and manipulation, and duties to customers, such as best execution and suitability. Given the scope of CBRA’s duties, the Treasury plan envisions an important role for SROs, particularly in the areas of rulemaking, compliance, and enforcement.

Since the original reason for bifurcating the regulation of securities and futures no longer exists, Treasury recommends an SEC-CFTC merger to provide unified oversight and regulation of the futures and securities industries. Recognizing the need to preserve the principles-based regulation embraced by the CFTC, Treasury recommends that the SEC prepare for the merger by taking a number of specific steps.

The SEC should use its exemptive authority to adopt core principles to apply to securities clearing agencies and exchanges. These core principles should be modeled after the core principles adopted for futures exchanges and clearing organizations under the Commodity Futures Modernization Act.

The SEC should also issue rules updating and streamlining the SRO rulemaking process to recognize the market and product innovations of the past two decades. The rules should include a firm time limit for the SEC to publish SRO rule filings and expand the type of rules deemed effective upon filing, including trading rules and administrative rules.

Importantly, the SEC should also streamline the approval process for any securities products common to the marketplace, similar to what the Commission has done for certain derivatives securities products. An updated, streamlined, and expedited approval process will allow U.S. securities firms to remain competitive with the over-the-counter markets and international institutions.

Also on a global competitive note, the SEC should use its exemptive power under the Investment Company Act to allow the trading of products already being actively traded in non-US jurisdictions. Similarly, Congress should expand the Investment Company Act to allow the registration of a new global investment company.

Legislation merging the SEC and CFTC would need to include many items. For example, Treasury believes the legislation should, consistent with the CFMA, statutorily permit all clearing agency and market SROs to self-certify all rulemakings, except that involving corporate listing and market conduct standards, which would then become effective upon filing. The SEC would retain its right to abrogate the rulemakings at any time. By limiting self-certified SRO rule changes to non-retail investor related rules, investor protection will be preserved.

In addition, merger legislation would have to harmonize differences between futures regulation and federal securities regulation, including margin and segregation rules, insider trading, broker-dealer insolvency, customer suitability, short sales, SRO mergers, implied private rights of action, the SRO rulemaking approval process, and the agency funding mechanisms.

Due to the complexities and nuances of the differences in futures and securities regulation, legislation should establish a joint CFTC-SEC staff task force with equal agency representation with the mandate to harmonize these differences. In addition, the task force should be charged with recommending the structure of the merged agency, including its offices and divisions.

Finally, the legislation would have to deal with the continuing convergence of the services provided by broker-dealers and investment advisers within the securities industry. These entities operate under a statutory regime reflecting the brokerage and investment advisory industries as they existed decades ago.

Thus, Treasury recommends statutory changes to harmonize the regulation and oversight of broker-dealers and investment advisers offering similar services to retail investors. In that vein, the establishment of an SRO for the investment advisory industry would enhance investor protection and be more cost-effective than direct SEC regulation. Thus, to effectuate this statutory harmonization, Treasury recommends that investment advisers be subject to a self-regulatory regime similar to that of broker-dealers