On November 16, 2023, the SEC took a significant step towards fortifying the stability of clearing agencies by implementing innovative rules aimed at diminishing the influence of conflicts of interest on their boards of directors or equivalent governing bodies.
What is a Clearing Agency?
Clearing agencies, also known as clearinghouses, are broadly defined under Section 3(a)(23)(A) of the Exchange Act undertake a variety of functions. Two common functions of registered clearing agencies are the functions of a central counterparty (“CCP”) or a central securities depository (“CSD”). Under Rule 17Ad-22(a)(2), a clearing agency performs the functions of a CCP when it interposes itself between the counterparties to securities transactions, acting functionally as the buyer to every seller and the seller to every buyer. As defined in Rule 17Ad-22(a)(3), a clearing agency performs the functions of a CSD when it provides the services of a clearing agency that is a securities depository under Section 3(a)(23)(A) of the Exchange Act. Generally, a clearing agency performs the functions of a CSD when it operates a centralized system for the handling of securities certificates.
Fostering Resilience in Clearinghouses
SEC Chair Gary Gensler expressed his support for this adoption, emphasizing its role in cultivating more resilient clearinghouses. He underscored Congress’s acknowledgment of the Commission’s pivotal responsibility concerning clearinghouses. The adoption is designed to elevate standards, focusing on promoting board independence, considering relevant stakeholder perspectives, and minimizing conflicts of interest within the board and senior management. These final rules collectively serve the interests of investors, issuers, and the interconnected markets.
Evolving Governance Standards
The newly established rules outline governance requirements that encompass board composition, independent directors, nominating committees, and risk management committees. Additionally, these regulations mandate the implementation of new policies and procedures addressing conflicts of interest, risk management related to service-provider relationships, and a board obligation to factor in stakeholder viewpoints. Enacted under Section 765 of the Dodd-Frank Act, these rules specifically target mitigating conflicts of interest for security-based swap clearing agencies.
Illuminating Responsibilities and Transparency
The rules contribute to enhancing the governance of registered clearing agencies by delineating specific board responsibilities, augmenting transparency in board governance, and, at a broader level, refining the alignment of incentives among owners and participants of a registered clearing agency. To achieve these objectives, the rules introduce new requirements concerning board and committee composition, independent directors, conflict of interest management, and board oversight.
Publication and Compliance Timeline
The adopting release is now available on SEC.gov and will soon be featured in the Federal Register. The compliance date is set for 12 months after the Federal Register publication, except for the independence requirements for the board and board committees, which extend to 24 months after the publication in the Federal Register.
The attorneys at Sallah Astarita & Cox, LLC are former SEC Staff Attorneys and brokerage firm counsel, with over 100 years of collective experience. If you have received a subpoena from the SEC, a document request from FINRA, or have a dispute with a brokerage firm, call 212-509-6544 for a free consultation. The firm represents investors and financial professionals nationwide.