(The news featured below is a selection from the news covered in SEC Today, which is distributed to subscribers of SEC Today.)

SEC and Fed Seek Working Group Involvement in CFTC Reauthorization

The Senate Agriculture Committee, with the concerns of the SEC and the Federal Reserve Board in the background, moved the Commodity Futures Trading Commission's reauthorization bill towards full Senate consideration. Both the SEC and the Fed are seeking a larger role for the President's Working Group on Financial Markets in the reauthorization process. The Commodity Futures Modernization Act of 2000 ("CFMA") was based, in large part, on the Working Group's report on the OTC derivatives market and the Commodity Exchange Act. The Act incorporated the unanimous recommendations of the Working Group on the proper legal and regulatory treatment of OTC derivatives.

In an earlier letter to Senator Mike Crapo (R-ID), a member of the committee, then-acting SEC Chairman Cynthia Glassman urged the committee not to act until the Working Group has had the opportunity to provide its views to the committee. In a separate letter to Crapo, Fed Chairman Alan Greenspan concurred with the senator's view that departures from the consensus achieved in the CFMA are of concern to all of the federal agencies represented on the Working Group, which is composed of the chairs of the SEC, the CFTC and the Fed, and the Secretary of the Treasury.

According to Greenspan, the issues presented in the current reauthorization bill are complex and the potential for the legislation to have unintended consequences is considerable, including the uncertainty about the enforceability of legitimate transactions that do not involve fraud. Greenspan emphasized that it would be a mistake to enact legislation that has not been thoroughly evaluated by the Working Group and affected market participants.

The legislation would extend the authority to appropriate funds for the CFTC through 2010. The bill also would amend and clarify the CFTC's jurisdiction over certain futures transactions and financial products. The CFTC, an independent federal regulator of the futures trading industry, is subject to periodic reauthorization, with its current authority set to expire on September 30, 2005. In the past, Congress has used the reauthorization process to consider amendments to the Commodity Exchange Act, which provides the basis for federal regulation of commodity futures trading. The last reauthorization resulted in the enactment of the landmark Commodity Futures Modernization Act of 2000. The CMFA included major changes in the Commodity Exchange Act regarding the regulation of exchange-traded futures contracts, OTC derivatives, and security futures contracts based on individual stocks, which were previously prohibited.

Four prominent industry associations have also expressed deep concern for the adverse and unintended consequences of the proposed legislation. In a letter to Senate Agriculture Committee Chairman Saxby Chambliss (R-GA ), the industry representatives were primarily concerned about modifications to the "Treasury Amendment," which had been painstakingly crafted in the CFMA to balance the differing interests of all the federal financial regulators. The letter was sent by the Futures Industry Association, the Securities Industry Association, the International Swaps & Derivatives Association and the Bond Market Association.

The trade groups contended that some of the proposed changes would render illegal foreign exchange activities currently allowed under the Commodity Exchange Act and that, in the industry's view, do not give rise to any of the abuses that the proposed amendments are intended to address. In addition, the provisions affecting the CFTC's antifraud authority raise troublesome questions of scope, construction and policy that go well beyond any reasonable concerns raised by the Seventh Circuit's Zelener decision.

The bill is slated for full Senate consideration in September. One section of the draft clarifies that the CFTC's antifraud authority under section 4b of the Commodity Exchange Act clearly covers principal-to-principal transactions such as non-intermediated off-exchange futures transactions, including energy transactions. According to the Committee, the legislative language used to accomplish this change is identical to the consensus language that the CFTC submitted to the Committee on June 24, 2005 after it completed consultations with affected groups from the futures, securities and derivatives industries.

Another section adds language requiring that, for futures commission merchants ("FCMs") and broker dealers to qualify for the otherwise regulated exception to CFTC jurisdiction of their retail foreign exchange activities, each person who participates in the solicitation or recommendation of the transactions must register with the CFTC or the SEC, and be a member of the National Futures Association or a registered securities association, as applicable. In addition, the provision would no longer permit unregistered affiliates of FCMs and broker-dealers to qualify for the otherwise regulated exception to CFTC jurisdiction of their retail foreign exchange.

The draft also directs the CFTC and the SEC to exercise existing authority in the Commodity Exchange Act provided by the CFMA to jointly promulgate a final rule for additional U.S. listings of futures contracts on broad-based indexes on U.S. debt instruments, other U.S. securities, foreign equities and foreign debt instruments within 180 days of enactment.