SEC Proposes Rules for Clearing Agencies

Rules and more rules. The Commission seems to continually be proposing new rules. This is not to say that new rules, or at least updated rules, are not needed in many areas. The agency under Chair Gary Gensler, however, seems to have a never-ending agenda of proposed new rules.

The latest proposed rules focus on conflicts of interest at clearing agencies, the basic plumbing of the markets. The statutory authority traces to Section 765 of Dodd-Frank. There Congress directed the Commission to address conflicts of interest for security-based swap clearinghouses.

The Commission’s new proposed rules would cover the Dodd-Frank provision but apply more broadly to all clearing facilities. The proposed rules would also build on those adopted in 2012 for clearinghouses which were strengthened in 2016.

The rules proposed have several key provisions:

·1) To establish policies and procedures regarding conflicts of interest which include board members;

·2) The provisions adopted by the clearing agencies must promote consideration of the views of owners, participants and other relevant stakeholders;

·3) Any new provisions adopted must cover the functioning, composition and membership of the nominate and management committees; and

·4) The provisions must be structured so that the majority of the board members are independent.

Finally, clearinghouses will be required to develop policies and procedures to oversee it the firm’s relationship with certain critical service providers. Chairman Gary Gensler, Statement on Proposal to Enhance Clearing Agency Governance (Aug. 8, 2022)(here).

While the proposals are built on familiar concepts such as eliminating conflicts and having a board majority of independent directors, two Commissioners stated they do not support the proposals. Commissioner Mark Uyada raised a number of concerns despite initially stating that an effective regulatory framework is “particularly important . . .” in view of the impact of clearing agencies. His concerns included the fact that the rules may limit competition, increase market concentration, appear overly broad and do not clearly mirror differences among clearing agencies. Commissioner Mark T. Uyeda, Statement on Clearing Agency Governance and Conflicts of Interest (Aug. 8, 2022)(here).

Commissioner Hester M. Peirce also did not support the proposals. She effectively summarized her concerns by stating: “The proposal takes an overly prescriptive, regulator-knows-best approach to these matters that risks diluting the duties of directors to the clearing agency and depriving clearing agencies of the flexibility and expertise needed to effective governance.” Commissioner Hester M. Peirce, Dissenting from Shareholder Governance for Clearing Agencies (Aug. 8, 2022)(here).