SEC Adopts Rules to Mitigate Conflicts of Interest in Registered Clearing Agency Boards | Practical Law

SEC Adopts Rules to Mitigate Conflicts of Interest in Registered Clearing Agency Boards | Practical Law

The SEC adopted final rules designed to improve governance of SEC-registered clearing agencies. The rules are designed to mitigate conflicts of interest that may influence clearing agency boards of directors or equivalent governing bodies.

SEC Adopts Rules to Mitigate Conflicts of Interest in Registered Clearing Agency Boards

by Practical Law Finance
Published on 05 Dec 2023 • USA (National/Federal)
The SEC adopted final rules designed to improve governance of SEC-registered clearing agencies. The rules are designed to mitigate conflicts of interest that may influence clearing agency boards of directors or equivalent governing bodies.
On November 16, 2023, the SEC adopted final rules (17 CFR § 240.17ad-25) under the Securities Exchange Act of 1934, as amended (Exchange Act) designed to reduce the likelihood that conflicts of interest may influence the board of directors or equivalent governing body of a registered clearing agency. The final rules:
  • Require that a majority of the board of directors of a registered clearing agency – or 34 percent, if a majority of the voting rights are directly or indirectly held by participants – be independent directors, defined by the rules as “a director that has no material relationship with the registered clearing agency, or any affiliate thereof."
  • Establish independent-director requirements for the composition of certain board committees and identify circumstances that would preclude a director from being an independent director.
  • Require registered clearing agencies to establish board-nominating and risk-management committees and to specify requirements with respect to purpose and composition of these committees, among other things.
  • Require each registered clearing agency to implement policies and procedures:
    • designed to identify, mitigate, or eliminate conflicts of interest and document those efforts;
    • that obligate directors to promptly report potential conflicts of interest;
    • for the management of core service-provider relationship risks, with delineated roles for senior management and the board; and
    • requiring the board to solicit, consider, and document its consideration of the views of participants and other relevant stakeholders regarding material developments in the registered clearing agency’s risk management and operations.
The final rules incorporate public comments received on the proposed rule (see Legal Updates, SEC Proposes Clearing Agency Risk-Management Revisions and SEC Proposes Rule to Mitigate Conflicts of Interest in Securities Clearing Agencies).
The SEC also issued a related press release and fact sheet on the final rules.
The effective date of the final rules is February 5, 2024. Compliance with the final rules is required by December 5, 2024, except for the independence requirements for the board and board committees, for which the compliance date is December 5, 2025.