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2010-29021

  • FR Doc 2010-29021[Federal Register: November 19, 2010 (Volume 75, Number 223)]

    [Proposed Rules]

    [Page 70881-70888]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr19no10-17]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 3

    RIN 3038-AC96

    Designation of a Chief Compliance Officer; Required Compliance

    Policies; and Annual Report of a Futures Commission Merchant, Swap

    Dealer, or Major Swap Participant

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rule.

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    SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

    is proposing rules to implement new statutory provisions enacted by

    Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection

    Act (Dodd-Frank Act) regarding the compliance activities of certain

    registrants. The proposed rules require each futures commission

    merchant, swap dealer, and major swap participant to designate a chief

    compliance officer. The proposed rules also prescribe qualifications

    and duties of the chief compliance officer. Finally, the proposed rules

    require that the chief compliance officer prepare, certify, and furnish

    to the Commission an annual report containing an assessment of the

    registrant's compliance activities.

    DATES: Comments must be received on or before January 18, 2011.

    ADDRESSES: You may submit comments, identified by RIN 3038-AC96 and CCO

    Designation, by any of the following methods:

    Agency web site, via its Comments Online process at http:/

    /comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

    Mail: David A. Stawick, Secretary of the Commission,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the Commission to consider

    information that you believe is exempt from disclosure under the

    Freedom of Information Act, a petition for confidential treatment of

    the exempt information may be submitted according to the procedures

    established in CFTC Regulation 145.9, 17 CFR 145.9.

    The Commission reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, such as obscene language. All

    submissions that have been redacted or removed that contain comments on

    the merits of the rulemaking will be retained in the public comment

    file and will be considered as required under the Administrative

    Procedure Act and other applicable laws, and may be accessible under

    the Freedom of Information Act.

    FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Associate

    Director, Division of Clearing and Intermediary Oversight, (202) 418-

    5684, sjosephson@cftc.gov; or Claire Noakes, Attorney Advisor, Division

    of Clearing and Intermediary Oversight, (202) 418-5444,

    cnoakes@cftc.gov; Commodity Futures Trading Commission, Three Lafayette

    Centre, 1155 21st Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\

    Title VII of the Dodd-Frank Act amended the Commodity Exchange Act

    (CEA) \2\ to establish a comprehensive new regulatory framework to

    reduce risk, increase transparency, and promote market integrity within

    the financial system by, among other things: (1) Providing for the

    registration and comprehensive regulation of swap dealers and major

    swap participants; (2) imposing clearing and trade execution

    requirements on standardized derivative products; (3) creating rigorous

    recordkeeping and real-time reporting regimes; and (4) enhancing the

    Commission's rulemaking and enforcement authorities with respect to all

    registered entities and intermediaries subject to the Commission's

    oversight.

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    \1\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376

    (2010). The text of the Dodd-Frank Act may be accessed at: http://

    www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_

    enrolledbill.pdf.

    \2\ 7 U.S.C. 1 et seq.

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    The Dodd-Frank Act addresses the compliance activities of certain

    registrants in detail by requiring each futures commission merchant,

    swap dealer, and major swap participant to designate a chief compliance

    officer.\3\ The Dodd-Frank Act also establishes duties of the chief

    compliance officer of a swap dealer or major swap participant,\4\ and

    requires that the chief compliance officer of a swap dealer or major

    swap participant annually prepare, sign, and certify a report that is

    furnished to the Commission discussing the registrant's compliance

    policies and activities.\5\ The Dodd-Frank Act requires the Commission

    to prescribe rules regarding the annual report prepared by the chief

    compliance officer of a swap dealer or major swap participant.\6\ With

    regard to futures commission merchants, the Dodd-Frank Act does not set

    forth specific duties for the chief compliance officer or establish

    specific procedures for the preparation and submission of an annual

    report. Rather, the Dodd-Frank Act states that the chief compliance

    officer shall ``perform such duties and responsibilities as shall be

    set forth in regulations to be adopted by the Commission.'' \7\

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    \3\ 7 U.S.C. 6d(d), 6s(k)(1).

    \4\ 7 U.S.C. 6s(k)(2).

    \5\ 7 U.S.C. 6s(k)(3)(A-B).

    \6\ 7 U.S.C. 6s(k)(3)(A).

    \7\ 7 U.S.C. 6d(d).

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    The Commission has determined to apply the same duties and

    responsibilities to a chief compliance officer of a futures commission

    merchant as are required for a chief

    [[Page 70882]]

    compliance officer of a swap dealer or a major swap participant. In

    particular, the Commission is prescribing rules that (i) require the

    chief compliance officer of a registrant prepare, sign, and certify an

    annual report discussing the registrant's compliance policies and

    activities that is furnished to the Commission; (ii) clarify that a

    chief compliance officer of a registrant would be a ``principal'' as

    defined under Commission regulation 3.1(a); and (iii) require that

    specified recordkeeping and inspection requirements for the compliance

    documents discussed in the proposed rule be satisfied. The proposed

    rules also would require that each futures commission merchant, swap

    dealer, and major swap participant provide the chief compliance officer

    with the responsibility and authority, in consultation with the board

    of directors or the senior officer, to develop and enforce appropriate

    policies and procedures to fulfill the assigned duties of the position.

    The Commission specifically requests comment on its decision to apply

    the duties and responsibilities for chief compliance officers set forth

    for swap dealers and major swap participants to futures commission

    merchants.

    The proposed rules reflect consultation with staff of the following

    agencies: (i) The Securities and Exchange Commission; (ii) the Board of

    Governors of the Federal Reserve System; (iii) the Office of the

    Comptroller of the Currency; and (iv) the Federal Deposit Insurance

    Corporation. Staff from each of these agencies has had the opportunity

    to provide oral and/or written comments to the proposal, and the

    proposed rules incorporate elements of the comments provided.

    The Commission requests comment on all aspects of the proposed

    rules, as well as comment on the specific provisions and issues

    highlighted in the discussion below.

    II. Proposed Regulations

    A. Chief Compliance Officers

    The Dodd-Frank Act requires that each futures commission merchant,

    swap dealer, and major swap participant designate an individual to

    serve as its chief compliance officer. The proposed rules codify this

    requirement, and prescribe certain qualifications of the position. The

    individual serving as chief compliance officer must have the

    appropriate background and skills to perform the compliance duties of

    the position, and must not fall into the categories that would

    disqualify him or her from registration under section 8a(2) and (3) of

    the CEA.\8\ Although the chief compliance officer would not register

    with the Commission, as the primary individual with responsibility for

    ensuring the registrant's legal compliance, the chief compliance

    officer would have to meet the same standard as those individuals who

    are required to register, as set forth in the list of statutory

    disqualifications. Furthermore, the proposed rules amend the definition

    of ``principal'' that applies to all registrants under regulation

    3.1(a) to clarify that the chief compliance officer position is

    considered to be similar in status and responsibility to the enumerated

    list of positions found in that definition, such as the chief executive

    officer. Like other principals of registrants, the chief compliance

    officer would have to submit a Form 8-R, and, if required, fingerprint

    cards to the National Futures Association, and would be subject to a

    background check.

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    \8\ 7 U.S.C. 12a(2-3).

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    The Dodd-Frank Act requires that the chief compliance officer of a

    swap dealer or major swap participant ``report directly to the board or

    to the senior officer'' of the entity. The proposed rules establish the

    reporting structure to which the chief compliance officer would be

    subject by specifying that only the board of directors or the senior

    officer of the registrant would be permitted to take action to

    designate the chief compliance officer or determine the compensation of

    the chief compliance officer. The rule text substitutes the term

    ``board of directors'' for ``board,'' and the term ``board of

    directors'' is defined to include any governing body of an

    organization. The clarification is intended to account for all forms of

    business associations (for example, partnerships and limited liability

    companies) that may have forms of governing bodies other than boards of

    directors. The proposed rules also extend the reporting structure

    requirement to futures commission merchants.

    The Commission specifically seeks comment on the degree of

    flexibility in the reporting structure for chief compliance officers

    that should be afforded under the proposed rules. Specifically, the

    Commission requests comment on: (i) Whether it would be more

    appropriate for a chief compliance officer to report to the senior

    officer or the board of directors; (ii) whether the senior officer or

    board of directors generally is a stronger advocate of compliance

    matters within an organization; (iii) whether the proposed rules allow

    for sufficient flexibility with regard to a registrant's business

    structure; (iv) whether the proposed reporting structure should be

    amended to address any issues related to affiliates; and (v) whether

    the rule should include a provision requiring a majority of a board of

    directors to remove the chief compliance officer.

    The Commission also is seeking comment on whether additional

    limitations should be placed on the persons who may be designated as a

    chief compliance officer. For example, should the Commission restrict

    the chief compliance officer position from being held by an attorney

    who represents the registrant or its board of directors, such as an in-

    house or general counsel? The rationale for such a restriction is based

    on the concern that the interests of defending the registrant would be

    in tension with the duties of the chief compliance officer.

    The Commission specifically seeks comment on whether there is a

    need to insulate the chief compliance officer of registrants from undue

    pressure and coercion. Is it necessary to adopt rules to address the

    potential conflict between and among compliance interests, commercial

    interests, and ownership interests of a futures commission merchant,

    swap dealer, and major swap participant? If there is no need for such a

    provision, how would such possible conflicts be addressed?

    The Dodd-Frank Act sets forth certain duties to be performed by a

    chief compliance officer of a swap dealer or major swap participant,

    and requires the Commission to promulgate rules concerning the duties

    of a chief compliance officer of a futures commission merchant. The

    proposed rules codify the duties set forth in the Act and apply them

    uniformly to futures commission merchants, swap dealers, and major swap

    participants. The Commission believes the statutory duties are largely

    self-explanatory, but in the interest of clarity, those duties will be

    discussed briefly below.

    The duty to report to the board or the senior officer under section

    4s(k)(2)(A) of the CEA \9\ is addressed in the rule as discussed above.

    The duty to review compliance under section 4s(k)(2)(B) of the CEA \10\

    is combined with the duty to ensure compliance under section

    4s(k)(2)(E),\11\ and the duty to administer required policies under

    section 4s(k)(2)(D).\12\ The duty to resolve conflicts of interest

    under section 4s(k)(2)(C) of the CEA \13\ is codified in

    [[Page 70883]]

    the rules. The duty to identify noncompliance issues and establish

    procedures for their remediation in section 4s(k)(2)(F) of the CEA \14\

    is codified as well, as are other duties with respect to noncompliance

    issues in section 4s(k)(2)(G).\15\ Underlying all of these duties are

    two fundamental acknowledgements: The chief compliance officer can only

    ensure the registrant's compliance to the full capacity of an

    individual person, and the duties of the chief compliance officer do

    not elevate the position above the board of directors, or otherwise

    contradict basic and well-established tenets of law regarding the

    allocation of responsibility within a business association.

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    \9\ 7 U.S.C. 6s(k)(2)(A).

    \10\ 7 U.S.C. 6s(k)(2)(B).

    \11\ 7 U.S.C. 6s(k)(2)(E).

    \12\ 7 U.S.C. 6s(k)(2)(D).

    \13\ 7 U.S.C. 6s(k)(2)(C).

    \14\ 7 U.S.C. 6s(k)(2)(F).

    \15\ 7 U.S.C. 6s(k)(2)(G).

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    The Commission would also require the chief compliance officer to

    meet annually with the board of directors or the senior officer to

    discuss the effectiveness of the compliance policies adopted by the

    registrant, as well as the administration of those policies by the

    chief compliance officer. The session would create an opportunity for a

    chief compliance officer and the directors or the senior officer to

    speak freely about any sensitive issues of concern to any of them,

    including any reservations about the cooperativeness or compliance

    practices of the registrant's employees.

    The term ``compliance policies'' is defined to include all the

    written policies and procedures that are required to be adopted or

    established by a registrant under the CEA and the rules of the

    Commission. Specifically, the Commission intends for chief compliance

    officers to administer compliance policies that include, but are not

    limited to, all the new policies and the code of ethics required to be

    established or adopted by a registrant under these proposed rules, as

    well as all the policies currently required to be established or

    adopted by a registrant under the existing rules, such as risk

    management policies, trading rules, customer record protection

    procedures, and safeguards for electronic signatures. Finally, the

    proposed rules include as a duty the statutory requirement to prepare,

    sign,\16\ and certify \17\ the annual report, which is further

    discussed below.

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    \16\ 7 U.S.C. 6s(k)(3)(A).

    \17\ 7 U.S.C. 6s(k)(3)(B)(ii).

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    B. Annual Report

    The Dodd-Frank Act requires that the chief compliance officer of a

    swap dealer or major swap participant annually prepare, sign, and

    certify a report containing a description of the registrant's

    compliance with the CEA and regulations promulgated under the CEA, and

    a description of each policy and procedure of the chief compliance

    officer, including the code of ethics and conflicts of interest

    policies. The Dodd-Frank Act also requires, and the Commission is

    codifying, that a swap dealer and major swap participant furnish the

    report to the Commission simultaneously with each appropriate financial

    report that is required to be furnished to the Commission. The report

    would include a certification by the chief compliance officer that,

    under penalty of law, the annual report is accurate and complete. As

    discussed below, the Commission is proposing to apply these

    requirements to futures commission merchants as well.

    More specifically, the Commission would require the annual report

    to be furnished simultaneously with the futures commission merchant's

    Form 1-FR-FCM or FOCUS report, and the swap dealer or major swap

    participant's financial condition report, the scope of which shall be

    defined in a future rulemaking pursuant to new section 4s of the CEA.

    The proposed rules elaborate on the certification of the annual report

    by specifying that the chief compliance officer must sign a statement

    that to the best knowledge and reasonable belief of the chief

    compliance officer, and under penalty of law, the information contained

    in the annual report is accurate and complete.

    The proposed rules would also permit a registrant to request an

    extension of time to furnish the report; require that any material

    error or omission within a previously furnished annual report be

    promptly corrected; and allow for annual reports to cross-reference

    sections from recently furnished annual reports by the same entity,

    even in a different registration capacity.

    Regarding the last provision, for example, if a company has

    submitted an annual report in the previous reporting period with a

    description of a compliance policy that is unchanged, then the company

    could incorporate by reference that description in an annual report

    furnished in the current reporting period, if it remains an accurate

    description that fulfills a content requirement of the current year's

    annual report. As another example, if a company is registered as both a

    swap dealer and a futures commission merchant, and the description of

    the company's code of ethics is the same under each registrant's annual

    report, then a cross-reference to one of the reports would satisfy the

    content requirements of the other report.

    Importantly, the Commission would extend to chief compliance

    officers of futures commission merchants the Dodd-Frank Act's

    requirement that a chief compliance officer of a swap dealer or major

    swap participant prepare, sign, and certify an annual report to be

    furnished to the Commission. An annual report is intended to promote

    compliance behavior by requiring a registrant to conduct a periodic

    self-evaluation and to inform the Commission of possible compliance

    weaknesses that should be addressed. The Commission believes that it is

    beneficial to receive self-evaluation and compliance information from

    futures commission merchants as well as from swap dealers and major

    swap participants. Furthermore, the Commission believes this comports

    with Congressional intent in requiring that futures commission

    merchants designate a chief compliance officer under the Dodd-Frank

    Act.

    The contents of the annual report are specified in the Dodd-Frank

    Act to include a description of the compliance of the registrant with

    the CEA and the Commission's rules, and each policy and procedure of

    the chief compliance officer of the registrant, including the code of

    ethics and conflict of interest policies. The proposed rules codify

    these requirements by reference to the defined term ``compliance

    policies,'' and also require a discussion of any material changes to

    the registrant's compliance policies made during the reporting period.

    Additionally, the proposed rules would require that the annual

    report include a certification of compliance under the provisions of

    sections 619 and 716 of the Dodd-Frank Act, which may impose

    obligations on registrants. Section 619, subject to limited exceptions,

    prohibits banking entities, as defined in that section, from engaging

    in proprietary trading or acquiring or retaining any equity,

    partnership, or other ownership interest in, or sponsoring, a hedge

    fund or private equity fund. Section 716 prohibits any swaps entity

    from receiving federal assistance, as defined in that section. The

    Commission requests comment on this proposed rule, including the scope

    of its application.

    The annual report also would be required to contain a discussion of

    the execution of the chief compliance officer's duty to resolve

    conflicts of interest and to identify and resolve noncompliance issues.

    Additionally, the annual report would be required to contain a

    description of the financial, managerial, operational, and staffing

    resources set aside for compliance with

    [[Page 70884]]

    the CEA and the Commission's rules, including any deficiencies in such

    resources. The annual report would also be required to delineate the

    roles and responsibilities of various registrant personnel in

    addressing any conflicts, including any necessary coordination with, or

    notification of regulators, self-regulatory organizations, and others

    who may be involved in addressing the conflict.

    Finally, the Commission would require that both the annual report

    and any related records be subject to the record keeping and inspection

    provisions of regulation 1.31. The requirement with respect to records

    related to the annual report is intended to preserve the Commission's

    ability to reconstruct why certain information was included or excluded

    in an annual report, in the event of an audit or investigation.

    The Commission specifically seeks comment regarding: (i) The

    required content of the annual report; (ii) whether any additional

    content should be included therein; (iii) whether the Commission should

    require explicit approval of the annual report by the registrant's

    board of directors prior to the submission of the annual report to the

    Commission; (iv) whether additional provisions are necessary to ensure

    that individual directors or employees have an adequate opportunity to

    register their concerns or objections to the contents of the annual

    report; and (v) whether additional guidance is needed on what efforts

    by the chief compliance officer would be required to permit the chief

    compliance officer to certify that, to the best of his knowledge and

    reasonable belief, the annual report is accurate and complete.

    Liability for false, incomplete, or misleading statements or

    representations made in the annual report could rest with the

    registrant or the chief compliance officer or both, either directly or

    vicariously, and could be administrative, civil, and/or criminal.

    Possible violations could include, among other things, a claim of

    failure to supervise or false statements to the Commission. The

    Commission could seek an injunction against future violations, civil

    monetary penalties, and/or any other appropriate remedial relief.

    Criminal penalties could be sought by appropriate criminal authorities.

    III. Transition Period

    Futures commission merchants are currently required to be

    registered under regulation 3.10. The Dodd-Frank Act requires the

    Commission to promulgate rules providing for the registration of swap

    dealers and major swap participants no later than July 21, 2011.\18\ In

    order to provide for sufficient time for existing and new registrants

    to come into compliance with these proposed rules, the Commission is

    proposing to establish a delayed compliance date. The Commission

    specifically seeks comment on how long it might take for a registrant

    to hire a chief compliance officer and how long it might take for the

    registrant to implement the required policies and procedures under

    these proposed rules.

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    \18\ 7 U.S.C. 6s(b)(5).

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    IV. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA),\19\ requires that agencies,

    in proposing rules, consider the impact of those rules on small

    businesses. The Commission previously has established certain

    definitions of ``small entities'' to be used by the Commission in

    evaluating the impact of its rules on such entities in accordance with

    the RFA.\20\ The proposed rules would affect futures commission

    merchants, swap dealers, and major swap participants, entities that are

    required to be registered with the Commission. The Commission

    previously has determined that registered futures commission merchants

    are not small entities for the purposes of the RFA. The Commission's

    determination was based, in part, upon the obligation of futures

    commission merchants to meet minimum financial requirements established

    by the Commission to enhance the protection of customers' segregated

    funds and protect the financial condition of futures commission

    merchants generally.\21\

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    \19\ 5 U.S.C. 601-611.

    \20\ 47 FR 18618, Apr. 30, 1982.

    \21\ Id. at 18619, 18620.

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    Swap dealers and major swap participants are new categories of

    registrant. Accordingly, the Commission has not previously addressed

    the question of whether such persons are, in fact, small entities for

    the purposes of the RFA. However, like futures commission merchants,

    swap dealers will be subject to minimum capital and margin

    requirements. Swap dealers are expected to comprise the largest global

    financial firms, and the Commission is required to exempt from

    designation entities that engage in a de minimis level of swaps dealing

    in connection with transactions with or on behalf of customers.

    Accordingly, for purposes of the RFA for this rulemaking, the

    Commission is hereby proposing that swap dealers not be considered

    small entities for essentially the same reasons that futures commission

    merchants previously have been determined not to be small entities and

    in light of the exemption from the definition of swap dealer for those

    engaging in a de minimis level of swap dealing. The Commission

    anticipates that this exemption would tend to exclude small entities

    from registration.

    The Commission also has previously determined that large traders

    are not small entities for RFA purposes.\22\ In that determination, the

    Commission considered that a large trading position was indicative of

    the size of the business. Major swap participants, by the statutory

    definition, maintain substantial positions in swaps or maintain

    outstanding swap positions that create substantial counterparty

    exposure that could have serious adverse effects on the financial

    stability of the United States banking system or financial markets.

    Accordingly, for purposes of the RFA for this rulemaking, the

    Commission is hereby proposing that major swap participants not be

    considered small entities for the same reasons that large traders have

    previously been determined not to be small entities.

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    \22\ Id. at 18620.

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    The Commission is carrying out Congressional mandates by proposing

    this regulation. Specifically, the Commission is proposing these rules

    to comply with the Dodd-Frank Act, the aim of which is to reduce

    systemic risks presented by swap dealers and major swap participants

    through comprehensive regulation. The Commission does not believe that

    there are regulatory alternatives to those being proposed that would be

    consistent with the statutory mandate. Therefore, the Chairman, on

    behalf of the Commission, hereby certifies, pursuant to 5 U.S.C.

    605(b), that these proposed rules will not have a significant economic

    impact on a substantial number of small entities.

    B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \23\ imposes certain

    requirements on Federal agencies in connection with their conducting or

    sponsoring any collection of information as defined in the PRA. Certain

    provisions of this proposed rule would result in new collection of

    information requirements within the meaning of the PRA. The Commission

    therefore is submitting this proposal to the Office of Management and

    Budget (OMB) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR

    1320.11. The title for this

    [[Page 70885]]

    collection of information is ``Annual Report for Chief Compliance

    Officer of Registrants.'' The OMB has not yet assigned this collection

    a control number. An agency may not conduct or sponsor, and a person is

    not required to respond to, a collection of information unless it

    displays a currently valid control number.

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    \23\ 44 U.S.C. 3501 et seq.

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    The collection of information under these proposed rules is

    necessary to implement certain provisions of the CEA, as amended by the

    Dodd-Frank Act, and to assure that futures commission merchants, swap

    dealers, and major swap participants maintain comprehensive policies

    and procedures. The Commission's staff would use the information

    collected when conducting examination and oversight of futures

    commission merchants, swap dealers, or major swap participants for

    compliance with the CEA and Commission regulations.

    If adopted, responses to this new collection of information would

    be mandatory. The Commission will protect proprietary information

    according to the Freedom of Information Act and 17 CFR part 145,

    ``Commission Records and Information.'' In addition, section 8(a)(1) of

    the CEA strictly prohibits the Commission, unless specifically

    authorized by the CEA, from making public ``data and information that

    would separately disclose the business transactions or market positions

    of any person and trade secrets or names of customers.'' The Commission

    also is required to protect certain information contained in a

    government system of records according to the Privacy Act of 1974.\24\

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    \24\ 5 U.S.C. 552a.

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    1. Information Provided by Reporting Entities/Persons

    The burden associated with the proposed regulation is estimated to

    be 136 hours, at a cost of $13,600 annually for each respondent. Burden

    means the total time, effort, or financial resources expended by

    persons to generate, maintain, retain, disclose, or provide information

    to or for a federal agency. This burden will result from the

    requirements that the respondent: (1) Prepare and file a Form 8-R

    designating the chief compliance officer; (2) draft and maintain

    various compliance policies and procedures; (3) annually prepare and

    furnish to the Commission an annual report that describes the

    respondent's compliance policies and resources and the respondent's

    compliance with the CEA and Commission regulations; (4) amend a

    previously furnished annual report when material errors or omissions

    are identified; and (5) maintain records related to respondent's

    compliance policies and annual reports.

    The respondent burden for preparing and filing a Form 8-R

    designating the respondent's chief compliance officer as a principal of

    the firm is expected to be 1 hour. It is estimated that each respondent

    would spend 80 hours annually in connection with the proposed

    requirement that respondent's chief compliance officer establish

    various compliance policies and procedures. This estimate includes the

    time needed to review applicable laws and regulations; develop

    compliance policies and procedures; and consult with respondent's board

    of directors or senior officer on compliance policies, as required. It

    is estimated that each respondent will spend an additional 40 hours

    drafting and submitting its annual report. This estimate includes the

    time needed to collect and analyze the information that underlies the

    contents of the annual report, to formulate recommendations to existing

    compliance policies, and to draft the report. The Commission notes that

    it has attempted to reduce the burden of this particular requirement by

    including a provision in the proposed regulation that: (1) Permits a

    respondent to incorporate by reference sections of an annual report

    that has been furnished within the current or immediately preceding

    reporting period and (2) where a respondent is registered in more than

    one capacity with the Commission, to incorporate by reference sections

    in the annual report that the registrant has furnished within the

    current or immediately preceding reporting period as another type of

    registrant. The Commission additionally estimates that a respondent may

    spend an average of 5 hours annually amending an annual report if

    material errors are found. Finally, each respondent is expected to

    spend 10 hours annually satisfying the record retention requirements of

    the rule. This would include the time to be expended maintaining

    records of the firm's compliance policies; compiling and indexing

    records relevant to the annual report; and maintaining reports and

    other materials furnished to the respondent's board of directors or

    senior officer in connection with its review of the report. The

    Commission does not expect respondents to incur any start-up costs in

    connection with this proposed regulation as it anticipates that

    respondents already maintain compliance personnel and systems for

    regulatory reporting and recordkeeping.

    There are 159 futures commission merchants currently registered

    with the Commission and it is anticipated that there will be

    approximately 250 swap dealers and 50 major swap participants that will

    register with the Commission. Thus, the total number of respondents is

    expected to be 459. According to the Bureau of Labor Statistics, the

    mean hourly wage of an employee under occupation code 13-1041,

    ``Compliance Officers, Except Agriculture, Construction, Health and

    Safety, and Transportation,'' that is employed by the ``Securities and

    Commodity Contracts Intermediation and Brokerage'' industry is

    $38.77.\25\ Because futures commission merchants, swap dealers and

    major swap participants include large financial institutions whose

    employee salaries may exceed the mean wage, the Commission has taken

    the more conservative approach of estimating the cost burden of these

    proposed regulations based upon an average compliance officer salary of

    $100 per hour. Accordingly, the estimated burden was calculated as

    follows:

    ---------------------------------------------------------------------------

    \25\ http://www.bls.gov/oes/current/oes131041.htm.

    Preparation and Filing of Form 8-R

    Number of respondents: 459

    Estimated number of responses: 459

    Estimated total burden on respondents: 1 hour

    Frequency of collection: One initial collection and on occasion

    thereafter

    Aggregate reporting burden: 459 respondents x 1.0 hours = 459

    burden hours

    Drafting and Updating Compliance Policies and Procedures

    Number of respondents: 459

    Estimated number of responses: 459

    Estimated total annual burden on respondents: 80 hours

    Frequency of collection: Annually

    Aggregate reporting burden: 459 respondents x 80 hours = 36,720

    burden hours

    Preparation and Furnishing Annual Report

    Number of respondents: 459

    Estimated number of responses: 459

    Estimated total annual burden on respondents: 40 hours

    Frequency of collection: Annually

    Aggregate reporting burden: 459 respondents x 40 hours = 18,360

    burden hours

    Preparation and Furnishing Amended Annual Report

    Number of respondents: 459

    Estimated number of responses: 459

    Estimated total annual burden on respondents: 5 hours

    Frequency of collection: Annually

    Aggregate reporting burden: 459

    [[Page 70886]]

    respondents x 5 hours = 2,295 burden hours

    Recordkeeping Related to Compliance Policies and Annual Report

    Number of respondents: 459

    Estimated number of responses: 459

    Estimated total annual burden on respondents: 10 hours

    Frequency of collection: Annually

    Aggregate reporting burden: 459 respondents x 10 hours = 4,590

    hours

    Based upon the above, the aggregate cost for all respondents is

    62,424 burden hours [136 hours x 459 respondents] and $6,242,400

    [62,424 burden hours x $100 per hour].

    2. Information Collection Comments

    The Commission invites the public and other federal agencies to

    comment on any aspect of the reporting and recordkeeping burdens

    discussed above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission

    solicits comments in order to: (i) Evaluate whether the proposed

    collection of information is necessary for the proper performance of

    the functions of the Commission, including whether the information will

    have practical utility; (ii) evaluate the accuracy of the Commission's

    estimate of the burden of the proposed collection of information; (iii)

    determine whether there are ways to enhance the quality, utility, and

    clarity of the information to be collected; and (iv) minimize the

    burden of the collection of information on those who are to respond,

    including through the use of automated collection techniques or other

    forms of information technology.

    Comments may be submitted directly to the Office of Information and

    Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at

    OIRAsubmissions@omb.eop.gov. Please provide the Commission with a copy

    of submitted comments so that all comments can be summarized and

    addressed in the final rule preamble. Refer to the ADDRESSES section of

    this notice of proposed rulemaking for comment submission instructions

    to the Commission. A copy of the supporting statements for the

    collections of information discussed above may be obtained by visiting

    RegInfo.gov. OMB is required to make a decision concerning the

    collection of information between 30 and 60 days after publication of

    this document in the Federal Register. Consequently, a comment to OMB

    is most assured of being fully effective if received by OMB (and the

    Commission) within 30 days after publication.

    C. Cost-Benefit Analysis

    Section 15(a) of the CEA requires the Commission to consider the

    costs and benefits of its actions before issuing new rules under the

    Act. By its terms, it does not require the Commission to quantify the

    costs and benefits of new rules or to determine whether the benefits of

    the proposed rules outweigh their costs. Rather, it requires the

    Commission to ``consider the cost and benefits'' of the subject rules.

    Section 15(a) of the CEA further specifies that the costs and

    benefits of the proposed rules shall be evaluated in light of five

    broad areas of market and public concern: (1) Protection of market

    participants and the public; (2) efficiency, competitiveness, and

    financial integrity of the futures markets; (3) price discovery; (4)

    sound risk management practices; and (5) other public interest

    considerations. The Commission may, in its discretion, give greater

    weight to any one of the five enumerated areas of concern and may, in

    its discretion, determine that, notwithstanding its costs, a particular

    rule is necessary or appropriate to protect the public interest or to

    effectuate any of the provisions or to accomplish any of the purposes

    of the CEA.

    The proposed rules would improve compliance by registrants with

    applicable laws and rules by requiring designation of a chief

    compliance officer, prescribing the duties of that position, and

    requiring preparation of a report on compliance activities of the

    registrant, to be furnished to the Commission for its review.

    With respect to costs, the Commission has determined that costs to

    futures commission merchants, swap dealers, and major swap participants

    include the costs associated with the designation of a chief compliance

    officer, maintaining compliance policies, preparing the annual report,

    and satisfying applicable recordkeeping requirements. As noted above,

    the Commission has estimated these costs of preparing the annual report

    and the recordkeeping costs to be $13,600 per year per respondent.

    However, there is little doubt that futures commission merchants, swap

    dealers, and major swap participants already expend resources on

    compliance activities and compliance personnel. For these entities, the

    proposed rule would not substantially increase costs.

    With respect to benefits, the Commission has determined that there

    would be benefits to both the registrants and to the financial system

    as a whole if registrants undertake regular and comprehensive self-

    evaluations regarding their level of compliance with laws and

    regulations. Also, the decision to devote sufficient resources to

    compliance with laws and regulations is a core component of sound risk

    management practices. Providing periodic notification to the Commission

    of how compliance is undertaken, whether there are compliance issues,

    and what resources are allocated for compliance activities would enable

    the Commission to better exercise its oversight authority and further

    the goal of avoiding market disruptions and financial losses to market

    participants and the general public.

    The Commission invites public comment on its cost-benefit

    considerations. Commenters are also invited to submit any data or other

    information that they may have quantifying or qualifying the costs and

    benefits of these proposed rules with their comment letters.

    List of Subjects in 17 CFR Part 3

    Administrative practice and procedure, Brokers, Commodity futures,

    Major swap participants, Reporting and recordkeeping requirements, Swap

    dealers.

    For the reasons stated in the preamble, the Commission proposes to

    amend 17 CFR part 3 as follows:

    PART 3--REGISTRATION

    Authority and Issuance

    1. The authority citation for part 3 is revised to read as follows:

    Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1,

    6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12,

    12a, 13b, 13c, 16a, 18, 19, 21, 23, unless otherwise noted.

    2. Amend Sec. 3.1 by revising paragraph (a)(1) and by adding

    paragraphs (g) and (h) to read as follows:

    Sec. 3.1 Definitions.

    (a) * * *

    (1) If the entity is organized as a sole proprietorship, the

    proprietor; if a partnership, any general partner; if a corporation,

    any director, the president, chief executive officer, chief operating

    officer, chief financial officer, and any person in charge of a

    principal business unit, division or function subject to regulation by

    the Commission; if a limited liability company or limited liability

    partnership, any director, the president, chief executive officer,

    chief operating officer, chief financial officer, the manager, managing

    member or those members vested with the management authority for the

    entity, and any person in charge of a principal business unit, division

    or function subject to

    [[Page 70887]]

    regulation by the Commission; and, in addition, any person occupying a

    similar status or performing similar functions, such as the chief

    compliance officer, having the power, directly or indirectly, through

    agreement or otherwise, to exercise a controlling influence over the

    entity's activities that are subject to regulation by the Commission;

    * * * * *

    (g) Compliance policies. Compliance policies means all policies,

    procedures, codes, safeguards, rules, programs, and internal controls

    required to be adopted or established by a registrant pursuant to the

    Act and Commission regulations, including a code of ethics.

    (h) Board of directors. Board of directors means the board of

    directors, board of governors, or equivalent governing body of a

    registrant.

    3. Add Sec. 3.3 to read as follows:

    Sec. 3.3 Chief compliance officer.

    (a) Designation. Each futures commission merchant, swap dealer, and

    major swap participant shall designate an individual to serve as its

    chief compliance officer, and provide the chief compliance officer with

    the full responsibility and authority to develop and enforce, in

    consultation with the board of directors or the senior officer,

    appropriate policies and procedures to fulfill the duties set forth in

    the Act and Commission regulations.

    (1) The chief compliance officer shall report to the board of

    directors or the senior officer of the futures commission merchant,

    swap dealer, or major swap participant. The board of directors or the

    senior officer shall approve the compensation of the chief compliance

    officer and meet with the chief compliance officer at least once a year

    to discuss the effectiveness of the compliance policies, as defined in

    Sec. 3.1(g), as well as the administration of those policies by the

    chief compliance officer.

    (2) The board of directors or the senior officer of the futures

    commission merchant, swap dealer, or major swap participant may not

    delegate its authority over the chief compliance officer, including

    authority to remove the chief compliance officer.

    (b) Qualifications. The individual designated to serve as chief

    compliance officer shall have the background and skills appropriate for

    fulfilling the responsibilities of the position. No individual

    disqualified from registration under section 8a(2)-(3) of the Act may

    serve as a chief compliance officer.

    (c) Submission with registration. Each application for registration

    as a futures commission merchant under Sec. 3.10, a swap dealer under

    Sec. 23.21, or a major swap participant under Sec. 23.21, must

    include a designation of a chief compliance officer by submitting a

    Form 8-R for the chief compliance officer as a principal of the

    applicant pursuant to Sec. 3.10(a)(2).

    (d) Chief compliance officer duties. The chief compliance officer's

    duties shall include, but are not limited to:

    (1) Establishing, in consultation with the board of directors or

    the senior officer, compliance policies, as defined in Sec. 3.1(g);

    (2) In consultation with the board of directors or the senior

    officer, resolving any conflicts of interest that may arise;

    (3) Reviewing and ensuring compliance by the futures commission

    merchant, swap dealer, or major swap participant with compliance

    policies, as defined in Sec. 3.1(g), and all applicable laws, rules,

    and regulations, including, but not limited to the requirements set

    forth in the Act and Commission regulations;

    (4) Establishing procedures, in consultation with the board of

    directors or the senior officer, for the remediation of noncompliance

    issues identified by the chief compliance officer through a compliance

    office review, look-back, internal or external audit finding, self-

    reported error, or validated complaint;

    (5) Establishing procedures, in consultation with the board of

    directors or the senior officer, for the handling, management response,

    remediation, retesting, and closing of noncompliance issues; and

    (6) Preparing, signing, and certifying the annual report required

    under paragraph (d) of this section.

    (d) Annual report. The chief compliance officer annually shall

    prepare a written report that covers the most recently completed fiscal

    year of the futures commission merchant, swap dealer, or major swap

    participant, and provide the annual report to the board of directors or

    the senior officer. The annual report shall, at a minimum:

    (1) Contain a description of the compliance by the futures

    commission merchant, swap dealer, or major swap participant with

    respect to the Act and Commission regulations and each of the

    registrant's compliance policies, as defined in Sec. 3.1(g);

    (2) Review each applicable requirement under the Act and Commission

    regulations, and with respect to each:

    (i) Identify the policies and procedures that ensure compliance

    with the requirement under the Act and Commission regulations;

    (ii) Provide an assessment as to the effectiveness of these

    policies and procedures; and

    (iii) Discuss areas for improvement, and recommend potential or

    prospective changes or improvements to its compliance program and

    resources devoted to compliance;

    (3) Provide a statement of certification of compliance with

    sections 619 and 716 of the Dodd-Frank Wall Street Reform and Consumer

    Protection Act, and any rules adopted pursuant thereto;

    (4) List any material changes to compliance policies during the

    coverage period for the report;

    (5) Describe the financial, managerial, operational, and staffing

    resources set aside for compliance with respect to the Act and

    Commission regulations, including any deficiencies in such resources;

    (6) Describe any non-compliance issues identified, and the

    corresponding action taken; and

    (7) Delineate the roles and responsibilities of its board of

    directors or senior officer, relevant board committees, and staff in

    addressing any conflicts of interest, including any necessary

    coordination with, or notification of, other entities, including

    regulators.

    (e) Furnishing the annual report to the Commission.

    (1) Prior to furnishing the annual report to the Commission, the

    chief compliance officer shall provide the annual report to the board

    of directors or the senior officer of the futures commission merchant,

    swap dealer, or major swap participant for its review. Furnishing the

    annual report to the board of directors or the senior officer shall be

    recorded in the board minutes or otherwise, as evidence of compliance

    with this requirement.

    (2) The annual report shall be furnished electronically to the

    Commission not more than 90 days after the end of the fiscal year of

    the futures commission merchant, swap dealer, or major swap

    participant, simultaneously with the submission of Form 1-FR-FCM, as

    required under Sec. 1.10(b)(2)(ii), simultaneously with the Financial

    and Operational Combined Uniform Single Report, as required under Sec.

    1.10(h), or simultaneously with the financial condition report, as

    required under section 4s(f) of the Act, as applicable.

    (3) The report shall include a certification by the chief

    compliance officer that, to the best of his or her knowledge and

    reasonable belief, and under penalty of law, the information contained

    in the annual report is accurate and complete.

    [[Page 70888]]

    (4) The futures commission merchant, swap dealer, or major swap

    participant shall promptly furnish an amended annual report if material

    errors or omissions in the report are identified. An amendment must

    contain the certification required under paragraph (e)(3) of this

    section.

    (5) A futures commission merchant, swap dealer, or major swap

    participant may request from the Commission an extension of time to

    furnish its annual report, provided the registrant's failure to timely

    furnish the report could not be eliminated by the registrant without

    unreasonable effort or expense. Extensions of the deadline will be

    granted at the discretion of the Commission.

    (6) A futures commission merchant, swap dealer, or major swap

    participant may incorporate by reference sections of an annual report

    that has been furnished within the current or immediately preceding

    reporting period to the Commission. If the futures commission merchant,

    swap dealer, or major swap participant is registered in more than one

    capacity with the Commission, and must submit more than one annual

    report, an annual report submitted as one registrant may incorporate by

    reference sections in the annual report furnished within the current or

    immediately preceding reporting period as the other registrant.

    (f) Recordkeeping.

    (1) The futures commission merchant, swap dealer, or major swap

    participant shall maintain:

    (i) A copy of the compliance policies, as defined in Sec. 3.1(g),

    and all other policies and procedures adopted in furtherance of

    compliance with the Act and Commission regulations;

    (ii) Copies of materials, including written reports provided to the

    board of directors or the senior officer in connection with the review

    of the annual report under paragraph (d) of this section; and

    (iii) Any records relevant to the annual report, including, but not

    limited to, work papers and other documents that form the basis of the

    report, and memoranda, correspondence, other documents, and records

    that are created, sent or received in connection with the annual report

    and contain conclusions, opinions, analyses, or financial data related

    to the annual report.

    (2) All records or reports that a futures commission merchant, swap

    dealer, or major swap participant are required to maintain pursuant to

    this section shall be maintained in accordance with Sec. 1.31 and

    shall be made available promptly upon request to representatives of the

    Commission and to representatives of the applicable prudential

    regulator, as defined in 1a(39) of the Act.

    Issued in Washington, DC, on November 10, 2010, by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    Statement of Chairman Gary Gensler

    Designation of a Chief Compliance Officer; Required Compliance

    Policies; and Annual Report of a Futures Commission Merchant, Swap

    Dealer, or Major Swap Participant

    I support the proposed rulemaking establishing requirements for

    the designation, qualifications and duties of a chief compliance

    officer of swap dealers, major swap participants and futures

    commission merchants. These rules are intended to ensure that

    sufficient resources are devoted to compliance with laws and

    regulations, which is a core component of sound risk management

    practices. The proposed rules fulfill the Dodd-Frank Act's

    requirements that intermediaries have chief compliance officers and

    establish and administer compliance policies, as well as resolve

    certain conflicts of interest.

    [FR Doc. 2010-29021 Filed 11-18-10; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: November 19, 2010