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GAO Report
Highlights the Need for the CFTC and SEC to Work
Together Updating Shad-Johnson
At the
request of Senator Richard G. Lugar and House
Representatives Thomas W. Ewing and John D. Dingle,
the United States General Accounting Office released a
report calling for a cooperative effort between the
Commodity Futures Trading Commission and the
Securities and Exchange Commission on issues related
to the Shad-Johnson Accord.
The report concentrated on the
following four main concerns of the regulators:
- "the extent to which
U.S. securities, foreign futures, and
over-the-counter markets trade stock-based
derivatives that are economically similar to the
futures prohibited from trading by the accord;
- the potential effect of the
accord trading prohibitions on derivatives
market participants;
- concerns about calls to
release the accord trading prohibitions; and,
- jurisdictional and other
approaches to addressing these concerns."
Shad-Johnson
Accord
The Shad-Johnson Accord (an
agreement between the named Chairmen of the Securities
and Exchange Commission and Commodity Futures Trading
Commission) was entered into in 1982 to clarify the
jurisdictions of the SEC and CFTC over
securities-based options and futures, and was codified
by Congress in Section 2 of the Securities Act of
1933, Section 3 of the Securities Exchange Act of 1934
and in Section 2(a)(1)(B) of the Commodity Exchange
Act. The
Accord addressed uncertainties concerning the
regulation of securities-based derivative products and
bestowed the authority to regulate options on
securities, certificates of deposit, and stock groups
on the SEC. The regulation of futures and options on
futures on exempted securities, certificates of
deposit, and broad-based stock indexes was left to the
CFTC. In addition, the accord banned single stock
futures and futures on narrow-based stock indices. A
Congressional enactment, not contemplated by the
accord, gave the SEC a veto power over CFTC approved
securities index futures contracts when it allowed the
SEC to independently decide if the indices complied
with the accord's requirements.
The
Impact of CFTC Reauthorization
Initially, the Shad-Johnson
Accord was required to address some of the regulatory
vagaries brought by the amendments to the CEA in 1974
regarding jurisdiction over securities-based futures.
That need for cooperation between the SEC and CFTC is
once again being propelled by regulatory action.
Because the Commodity Futures
Trading Commission's authorization period ends on
September 30, 2000, efforts have been underway to come
up with the regulatory scheme that will prevail over
the next several years. While Congress has been
working to come up with an acceptable plan for the CEA,
the President’s Working Group and GAO have each
issued reports addressing Shad-Johnson issues and the
CEA. See, GAO Report: CFTC Reauthorization Issues
(GAO 1999) COMM. FUT. LAW REP. at ‘98-’99 Tr.
Binder ¶27,733; and, Over the Counter Derivatives
Markets and the Commodity Exchange Act: Report of the
President’s Working Group on Financial Markets
(Pres. W.G., Nov. 1999) COMM. FUT. LAW REP. ¶27,901.
The momentum of the reauthorization process has
allowed many to consider the efficacy of Shad-Johnson.
On several occasions, including at a December 1999
roundtable, Mr. Johnson, one of the named dealmakers
of the Accord, advocated taking a good hard look at
the agreement which he said was designed to be a
temporary fix of the regulatory uncertainty existing
at that time.
Current
CFTC and SEC Activity
At the request of Senators Lugar
and Gramm, on March 2, 1999, the CFTC and SEC issued a
joint letter from CFTC Chairman William J. Rainer and
SEC Chairman Arthur Levitt, stating that they were
working together to come up with a Memorandum of
Understanding on their joint regulation of the single
stock futures. Such a new agreement, they said, would
address the concerns of both agencies. The connection
between CEA reauthorization and the repeal of
Shad-Johnson’s ban on single stock futures is
evident when one considers the concern for the
reauthorization schedule shown by the following
comment of Senator Lugar, the Chairman of the Senate
Agricultural Committee primarily responsible with the
drafting of a new CEA plan:
"The SEC and CFTC
agreed in their letter to share the regulation of
these products and to continue to work diligently
to provide Congress with a comprehensive proposal
by the end of the Congressional year. However,
this time frame runs contrary to our legislative
efforts…. Delaying the resolution of this issue
until October puts into serious doubt whether
Congress can enact legislation this year to
re-authorize the Commodity Exchange Act and to
implement the President’s Working Group findings
on over-the-counter derivatives. It had been our
intention to reform the Shad-Johnson Accord with
the input of the CFC and SEC. It now appears that
some other means of resolving the Shad-Johnson
issue may be necessary."
While some have said that the
repeal of Shad-Johnson is necessary for competition in
today’s global marketplace, others have expressed an
interest in maintaining a regulatory status quo in the
interest of market safety. However, no final
regulatory scheme for the CEA has yet been introduced
with or without new provisions related to
Shad-Johnson. Although all CEA reauthorization talks
since the 1982 enactment have unsuccessfully addressed
the need to revamp the Accord, the climate spurring
regulatory changes such as financial modernization
coupled with the willingness of the CFTC Chairman to
move the CFTC toward more of an oversight agency might
make this the reauthorization time during which the
Accord actually is overhauled.
GAO
Recommendations
The GAO made no recommendations
different from what the CFTC and SEC have already said
they were in the process of doing. Specifically, the
GAO recommended that the Chairmen of the CFTC and SEC
work together to develop, "an appropriate legal
and regulatory framework for allowing the trading of
futures on single stocks and all stock indexes,"
and also that they submit to Congress legislative
proposals for appealing the Shad-Johnson trade
prohibitions.
The key issue seems to be the
timetable under which a joint recommendation from the
agencies might be made in order to encompass the
regulatory changes that will take place with CFTC
reauthorization.
GAO Report: CFTC and SEC, Issues
Related to the Shad-Johnson Jurisdictional Accord
(GAO, April 6, 2000) is published in COMM. FUT. L.
REP. at ¶28,075.
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