SEC Adopts Rules to Improve Clearing Agency Governance and Mitigate Conflicts of Interest

The U.S. Securities and Exchange Commission (SEC) has published a press release to announce the finalization of new rule 17 CFR Part 240, § 240.17Ad-25 under the Securities Exchange Act of 1934 to enhance governance standards of registered clearing agencies and to mitigate the risks of conflicts of interest among Board members, nominating committees, and other relevant stakeholders. The final rule follows a corresponding consultation in August 2022 and – apart from minor changes as noted in due course – implements the proposed rule as is (please see EventID 16897 for more information on the consultation).
Pursuant to the final rule, clearing agencies will be subject to the following key requirements for purposes of mitigating conflicts of interest and improve governance:
(1) Composition of the Board of Directors: The final rule mandates that a majority of the members of the Board of Directors of a registered clearing agency must be independent directors. However, if a majority of the voting interests are held by clearing members (participants), then at least 34% of the Board members must be independent directors (in the draft version, the set limit was 50%). Furthermore, a clearing agency must continually assess and affirmatively determine that a director doesn’t have a material relationship with the agency or its affiliates. This determination involves:
– identifying relationships between a director and the agency or any affiliate;
– evaluating whether these relationships might impair the director’s independence; and
– documenting this evaluation and determination in writing.
(2) Creation of a „Nominating Committee“: The final rule requires the establishment of a „Nominating Committee“ that evaluates nominees for director positions, assesses their independence, and sets fitness standards for directors. The majority of members on this committee must also be independent directors, and so must be the Chair of the committee. The assessment process and the fitness criteria must include the following and be approved by the Board of Directors:
– nominees‘ expertise, availability, and integrity;
– whether a nominee’s inclusion would complement the existing Board members;
– representation of diverse skills, knowledge, experience, and perspectives within the Board of Director;
– views of stakeholders affected by the decisions of the clearing agency (the term ; and
– determination of whether each nominee or director meets the criteria for an independent director and if they have any known material relationships that could compromise their independence.
(3) Creation of a risk management committee: The final rules requires that each registered clearing agency establish a risk management committee (or committees) as a subset of the Board of Directors. This committee is tasked with assisting the Board in overseeing the risk management functions of the registered clearing agency. The membership of the risk management committee must be re-evaluated annually and should consistently include representatives from the owners and participants of the registered clearing agency. This ensures diverse viewpoints and relevant expertise in managing risks. The risk management committee is responsible for providing an independent and informed opinion on all matters presented to it. This opinion should be based on risk assessment and support the overall risk management, safety, and efficiency of the registered clearing agency.
(4) Creation of policies regarding conflicts of interest: The final rule mandates registered clearing agencies to establish, implement, maintain, and enforce written policies and procedures reasonably designed to identify and document conflicts of interest and mitigate or eliminate such. This includes establishing measures to manage situations where conflicts arise and ensuring that these conflicts do not unduly influence decision-making.
(5) Specific obligations of directors: The final rule requires that directors document and promptly inform the registered clearing agency of any relationship or interest that reasonably could affect their independent judgment or decision-making. This involves disclosing potential conflicts of interest that might compromise their ability to act impartially.. Accordingly, clearing agencies must create adequate policies and procedures to mandate such reporting. The requirement that clearing agencies have to adopt policies and procedures to require directors to oversee „critical service providers“ of the agency has been removed. This function remains within the responsibility of managers of a clearing agency.
(6) Consultation with stakeholders: The final rule requires the Board of Directors of a registered clearing agency to solicit and consider viewpoints of participants and other relevant stakeholders with respect to „material developments in its risk management and operations“.