S.E.C. Approves Ethical Regulatory Measures for Derivatives Industry
The S.E.C. has proposed ethics rules for the derivatives industry that would spell out a code of conduct for the heretofore unregulated market. The proposal would require banks, hedge funds, and other firms trading in derivatives to disclose a host of information, including potential conflicts of interest and serious risks that might be posed by certain deals.
“The standards we propose today are intended to establish a framework that protects investors and also promotes efficiency, competition and capital formation,” said S.E.C. chairwoman Mary L. Schapiro at a public meeting held today in Washington. The proposal was unanimously agreed upon by the agency’s five commissioners. The decision is open to public discussion for the next 60 days, and should be finalized by the end of this year.
The Financial Industry Regulatory Authority, or Finra, already sets standards for and regulates the derivatives market, but in order to protect retail investors, while the S.E.C. seeks to protect pensions plans and local governments that use derivatives to hedge risk.
The new rules would affect roughly 200 brokerage houses and Wall Street banks, requiring they tell derivatives customers “material information” about security-based swaps, including the makeup of the product and the risk, disclose conflicts of interest, and generally act in the “best interests” of their customers. The proposal is strictest on firms that trade with public pension funds and endowments.
Firms like Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), and J.P. Morgan (NYSE:JPM) are just a few of the large public firms to be affected by the new rules, with smaller private firms like Bloomberg L.P., Tradeweb, and Javelin Capital Markets also being restricted by the S.E.C.’s ethical regulations.
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