Innovations such as blockchain, AI, and DeFi promise to disrupt our markets in ways that are exciting to discuss.  Equally important, though perhaps less exciting, is discussing how regulatory agencies should align their oversight when new ideas cut across jurisdictional lines.

A. Innovation Challenges Regulatory Boundaries

Innovation rarely respects jurisdictional lines and often does not fit neatly into the statutory distinctions between “securities” and “commodities” written decades ago.  Yet the regulatory system in which we operate is reliant on clear borders for regulatory efficiency: securities on one side, and futures and commodities on the other.  When innovation crosses this line, one might call it “regulatory disruption.”

Regulatory disruption can result in overlapping oversight, which can have its own negative consequences.

B. A Cautionary Tale in Regulatory Duplication: CFTC Rule 4.5

Let me illustrate with an example.  CFTC Rule 4.5 under the Commodity Exchange Act had long provided an exclusion for registered investment companies—meaning mutual funds and ETFs—that happened to use a limited amount of commodity interests.  These funds were already subject to comprehensive regulation under the Investment Company Act of 1940.  The CFTC had reasonably recognized that there was no need to layer its own commodity pool operator requirements on top of the SEC’s rules.[1]

But in 2012, the CFTC moved to essentially eliminate that exclusion.  Under the amended Rule 4.5, an SEC-registered investment company using such derivatives beyond a very low threshold—whether for hedging or investment—was required to register with the CFTC as a commodity pool operator.

This change was claimed to be necessary to bring oversight of swaps into the CFTC’s remit after the Dodd-Frank Act.[2]  In practice, it was a jurisdictional land grab.  Mutual funds had long used commodity interests as part of ordinary portfolio management, particularly for fixed income, where derivatives can often trade more easily and cheaply than the underlying securities.  Given the SEC rules on disclosure, reporting, governance, and risk controls, the new CFTC requirements did not fill a regulatory gap.  They duplicated regulation that already existed.  This was evident in the extensive “harmonization” rulemaking process that followed.[3]

What did this mean for industry?  First, it meant dual registration.  Fund sponsors who were already SEC registrants now had to register with the CFTC.  That entailed new filings, new fees, and new compliance infrastructure.  Second, it meant duplicative reporting.  Advisers had to build parallel systems to track, reconcile, and report essentially the same information in two slightly different formats to two different regulators.  Finally, it meant conflicting requirements.  The SEC and CFTC had different standards for recordkeeping, advertising, and the use of third-party administrators.  Funds found themselves caught between two sets of rules that were not harmonized.[4]

All of this translated into real cost.  Industry feedback at the time foresaw millions of dollars in incremental compliance expenses—costs that were ultimately borne by investors.[5]  Yet there was no evidence that the CFTC’s overlay produced any incremental benefit in terms of market integrity or investor protection.

C. Regulatory Engagement

As technology continues to evolve in the financial sector, how can we avoid repeating this mistake?

The SEC and CFTC share responsibility for markets that are increasingly interwoven.  The agencies need to look past technical definitions and focus on the functional aspects of novel products themselves.  What risks do they create?  What practicalities already operate to mitigate those risks?  How are remaining risks best addressed?  And how can duplication of effort be avoided?

Today’s call for harmonization and a new era of collaboration from the leaders of both agencies importantly makes the point that we should answer these questions before announcing jurisdictional claims.  Where one regulator already has a robust framework, the other should think carefully before layering its own rules on top.  We must remember alternative tools available to us—information-sharing agreements, joint examinations, and harmonized reporting forms—that help us work toward accountability without imposing duplicate requirements.

The benefits of successful regulatory engagement are clear: consistent rules, efficient compliance, and investor confidence.  The consequences of failure are equally clear: duplicative oversight, higher costs, and no discernible improvement in investor protection or market integrity.

D. Finding a Path Forward Together

The pace of innovation in our markets is not slowing—quite the opposite. Today, we have an opportunity to avoid the mistakes of the past and instead, together, build a regulatory architecture that evolves with our markets—not against them through a harmonized regulatory approach.

ENDNOTES

[1] Press Release, “CFTC Issues Final Rule Amending Registration and Compliance Obligations for Commodity Pool Operators and Commodity Trading Advisers” (CFTC Release No. 6176-12), available at https://www.cftc.gov/PressRoom/PressReleases/6176-12.

[2] See CFTC, Adopting Release “Commodity Pool Operators and Commodity Trading Advisors:  Amendments to Compliance Obligations” (Feb. 8, 2012), at 2-4, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/federalregister020912b.pdf.

[3] The CFTC proposed harmonization rules at the same time as it adopted the amendments to Rule 4.5  See  Willkie Farr & Gallagher LLP, “CFTC Adopts Harmonization Rules (Aug. 28 2013), available at https://reaction.willkie.com/rs/emsdocuments/CFTC_Adopts_Harmonization_Rules.pdf.

[4]  See Letter from MFA Alternatives,  Harmonization (2012), available at MFA-harmonization-comments-final-4-24-12.pdf (“MFA Harmonization Letter”); Letter from SIFMA AMG, Rule 4.5 Harmonization (2012), chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.sifma.org/wp-content/uploads/2017/05/sifma-amg-submits-comments-to-the-cftc-on-registered-investment-companies-registering-as-commodity-pool-investors.pdf? (“SIFMA Harmonization Letter”).

[5] See SIFMA Harmonization Letter, at 2.

These remarks were delivered on September 29, 2025, by Mark T. Uyeda, commissioner of the U.S. Securities and Exchange Commission, at the SEC-CFTC Roundtable on Regulatory Harmonization Efforts.