Weekly RoundUp September 22, 2022

SEC Proposes Rules to Improve Risk Management in Clearance and Settlement and to Facilitate Additional Central Clearing for the U.S. Treasury Market

Editor's Note

In This Issue. The U.S. Securities and Exchange Commission (SEC) proposed rule changes designed to enhance risk management practices for central counterparties in the U.S. Treasury market and to facilitate additional clearing of U.S. Treasury securities transactions; and the SEC’s Examination Division issued a risk alert setting forth its plans to include review of compliance with adopted amendments to advertising and cash solicitation rules in its examination process. These developments are discussed in more detail below.

Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

SEC Proposes Rules to Improve Risk Management in Clearance and Settlement and to Facilitate Additional Central Clearing for the U.S. Treasury Market

On September 14, the SEC proposed rule changes designed to enhance risk management practices for central counterparties in the U.S. Treasury market and to facilitate additional clearing of U.S. Treasury securities transactions. The proposed rule changes would update the membership standards required of covered clearing agencies for the U.S. Treasury market with respect to a member’s clearance and settlement of specified secondary market transactions. Other requirements under the proposed rule would:

  1. Require covered clearing agencies that provide central counterparty services for U.S. Treasury securities to have policies and procedures to require their direct participants to submit for clearing certain eligible secondary market transactions;
  2. Require that covered clearing agencies for U.S. Treasury securities have policies and procedures to calculate, collect, and hold margin for their direct participants’ proprietary transactions separately from transactions submitted on behalf of indirect participants;
  3. Require covered clearing agencies for U.S. Treasury securities to have policies and procedures to ensure that they have appropriate means to facilitate access to clearance and settlement services of all eligible secondary market transactions, including those of indirect participants; and
  4. Amend the broker-dealer customer protection rules to permit margin required and on deposit at a covered clearing agency for U.S. Treasury securities to be included as a debit item in the customer reserve formula, subject to certain conditions.

Comments to the rule proposal must be received within 60 days of publication in the Federal Register.

“The Securities and Exchange Commission plays a critical role in how the Treasury market functions, including to help ensure that these markets stay efficient, competitive, and resilient. One aspect of that role is our oversight of clearinghouses for Treasury securities. While central clearing does not eliminate all risk, it certainly does lower it.”
- Gary Gensler, SEC Chair

SEC’s Examination Division Issues Risk Alert Regarding Upcoming Examination Focus on Compliance with the New Investment Adviser Marketing Rule

On December 22, 2020, the SEC adopted amendments to modernize and combine the existing advertising and cash solicitation rules for advisers registered or required to be registered with the SEC (the Marketing Rule). The compliance date for the Marketing Rule is November 4, 2022 (Compliance Date). Read our previous Roundup article for more information about the Marketing Rule.

On September 19, the SEC’s Examination Division issued a risk alert, in advance of the Compliance Date, setting forth its intention to focus on compliance with the Marketing Rule and related books and records requirements through its examination process. The risk alert identifies several areas of focus, including, but not limited to:

  • Written policies and procedures that address compliance with the Marketing Rule, including objective and testable means reasonably designed to prevent violations of the Marketing Rule in the advertisements that the adviser disseminates;
  • Whether investment advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements; and
  • Whether investment advisers are in compliance with performance advertising requirements in the Marketing Rule.

The risk alert also notes that the Examination staff will review for compliance with the books and records rule as related to the Marketing Rule and reminds advisers of their obligation to comply with disclosure requirements under amended Form ADV requiring advisers to provide additional information about their marketing practices.

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Editors
Nicole Griffin
Samantha M. Kirby
William McCurdy