SEC and CFTC Announce Historic Memorandum of Understanding

At a pivotal moment when markets are evolving rapidly and becoming more interconnected, the SEC and the CFTC announced a historic Memorandum of Understanding (the “MOU”) to guide coordination between the two agencies to support lawful innovation, uphold market integrity, and ensure investor protection. The MOU reflects both agencies’ commitment to provide clear rules of the road and an end to regulation through enforcement.Both wish to foster lawful innovation with the minimum effective dose of regulation to enhance U.S. competitiveness in finance.

“For decades, regulatory turf wars, duplicative agency registrations, and different . . . regulations between the SEC and CFTC have stifled innovation and pushed market participants to other jurisdictions,” said SEC Chairman Paul S. Atkins. “This updated [MOU]will serve as a roadmap for a new era of harmonization between the agencies – one that is critical to support U.S. leadership in this next chapter of financial innovation. By aligning regulatory definitions, coordinating oversight, and facilitating seamless, secure data sharing between agencies, we will ensure our rules and regulations deliver the clarity market participants deserve.”

“America’s financial markets are the envy of the world because they scale and adapt to meet investor demands. Like our markets, the CFTC’s and SEC’s regulatory frameworks must also evolve and modernize to accommodate the needs of our market participants,” said CFTC Chairman Michael S. Selig. “This [MOU] solidifies the agencies’ commitment to harmonize regulatory frameworks to provide comprehensive and seamless financial market oversight. By working together, we’ll eliminate duplicative, burdensome rules and close gaps in regulation for the benefit of all Americans and usher in a Golden Age of American finance.”

Joint Harmonization Intiative

The agencies also created a Joint Harmonization Initiative (the “Initiative”) to advance coordinated oversight and promote regulatory clarity in areas of common regulatory interest.Mr. Atkins discussed this initiative, which will support coordination across the policymaking, examination and enforcement functions of each agency, particularly for joint applications and shared policy efforts, including:

• Clarifying product definitions through joint interpretations and rulemakings.
• Modernizing clearing, margin, and collateral frameworks.
• Reducing frictions for dually registered exchanges, trading venues, and intermediaries.
• Providing a fit-for-purpose regulatory framework for crypto assets and other emerging technologies.
• Streamlining regulatory reporting for trade data, funds, and intermediaries.
• Coordinating cross-market examinations, economic analyses, risk monitoring, surveillance, and enforcement.

The Initiative will be co-led by Robert Teply (SEC) and Meghan Tente (CFTC).

Digital Asset Market Clarity Act

The Initiative and MOU are all the more critical as the Digital Asset Market Clarity Act is stalled in the Senate and faces significant political and industry-led headwinds.If passed, the legislation would clearly divide oversight, as a matter of law, between the SEC (for digital assets behaving like securities) and the CFTC (for digital commodities).The Senate Agriculture Committee advanced a version of the bill in late January and the Senate Banking Committee has postponed its markup indefinitely.Legislation would future-proof any understanding among regulators as the MOU and Initiative could be rescinded by a future administration. Only the Clarity Act could codify definitions and jurisdiction as a matter of law.Legislation is also needed to clarify the high-stakes battle over “yield” or “rewards” for stable coins that banks are currently opposed to.

Practical Implications for Market Participants

In parallel with the MOU and the Initiative, the CFTC has also issued no-action relief permitting certain entities that are dually regulated by both the SEC and the CFTC to withdraw from CFTC registration, subject to specified conditions, where their activities are already subject to comprehensive SEC oversight.

This relief may be particularly relevant for registered investment advisers and private fund managers that historically maintained CFTC registrations (for example, as commodity pool operators or commodity trading advisors) in connection with derivatives activity within their funds. Where the conditions of the relief are satisfied, firms may be able to withdraw their CFTC registration without enforcement risk while continuing to operate under the SEC’s regulatory framework.