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2017-09229

  • Federal Register, Volume 82 Issue 87 (Monday, May 8, 2017)

    [Federal Register Volume 82, Number 87 (Monday, May 8, 2017)]

    [Proposed Rules]

    [Pages 21330-21337]

    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]

    [FR Doc No: 2017-09229]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 3

    RIN 3038-AE56

    Chief Compliance Officer Duties and Annual Report Requirements

    for Futures Commission Merchants, Swap Dealers, and Major Swap

    Participants; Amendments

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rule.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

    ``CFTC'') is proposing to amend its regulations regarding certain

    duties of chief compliance officers (``CCOs'') of swap dealers

    (``SDs''), major swap participants (``MSPs''), and futures commission

    merchants (``FCMs'') (collectively, ``Registrants''); and certain

    requirements for preparing and furnishing to the Commission an annual

    report containing an assessment of the Registrant's compliance

    activities.

    DATES: Comments must be received on or before July 7, 2017.

    ADDRESSES: You may submit comments, identified by RIN 3038-AE56, by any

    of the following methods:

    CFTC Web site: https://comments.cftc.gov. Follow the

    instructions for submitting comments through the Comments Online

    process on the Web site.

    Mail: Christopher Kirkpatrick, 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

    www.cftc.gov. You should submit only information that you wish to make

    available publicly. If you wish the Commission to consider information

    that is exempt from disclosure under the Freedom of Information Act

    (``FOIA''),\1\ a petition for confidential treatment of the exempt

    information may be submitted according to the procedures set forth in

    Sec. 145.9 of the Commission's regulations.\2\

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    \1\ 5 U.S.C. 552.

    \2\ 17 CFR 145.9. Commission regulations referred to herein are

    found at 17 CFR chapter I.

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    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 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 FOIA.

    FOR FURTHER INFORMATION CONTACT: Eileen T. Flaherty, Director, 202-418-

    5326, eflaherty@cftc.gov; Erik Remmler, Deputy Director, 202-418-7630,

    eremmler@cftc.gov; Laura Gardy, Associate Director, 202-418-7645,

    lgardy@cftc.gov; Pamela M. Geraghty, Special Counsel, 202-418-5634,

    pgeraghty@cftc.gov; or Fern B.

    [[Page 21331]]

    Simmons, Special Counsel, 202-418-5901, fsimmons@cftc.gov, Division of

    Swap Dealer and Intermediary Oversight, Commodity Futures Trading

    Commission, Three Lafayette Centre, 1155 21st Street NW., Washington,

    DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    A. Statutory and Regulatory Background

    As amended by the Dodd-Frank Wall Street Reform and Consumer

    Protection Act (``Dodd-Frank Act''),\3\ sections 4d(d) and 4s(k) of the

    Commodity Exchange Act (``CEA'' or ``Act'') require each Registrant to

    designate an individual to serve as its CCO.\4\ Sections 4s(k)(2) and

    (3) set forth certain requirements and duties for CCOs of SDs and MSPs,

    including the requirement to prepare and sign an annual compliance

    report (``CCO Annual Report'').\5\ CEA section 4d(d) requires CCOs of

    FCMs to ``perform such duties and responsibilities'' as are established

    by Commission regulation or the rules of a registered futures

    association.\6\ In 2012, the Commission adopted regulations 3.3(d)

    through (f) implementing the duties described in CEA sections 4d(d) and

    4s(k).\7\

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    \3\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376

    (2010).

    \4\ 7 U.S.C. 6d(d) and 6s(k)(1).

    \5\ 7 U.S.C. 6s(k)(2) and (3).

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

    \7\ 17 CFR 3.3(d)-(f). See Swap Dealer and Major Swap

    Participant Recordkeeping, Reporting, and Duties Rules, 77 FR 20128

    (Apr. 3, 2012) (``CCO Rules Adopting Release''). For purposes of

    this release, these rules will be referred to as the ``CCO Rules.''

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    B. Consistency With SEC Rules

    Using language identical to CEA section 4s(k), the Dodd-Frank Act

    amended the Securities Exchange Act of 1934 (``Exchange Act'') by

    adding section 15F(k) to establish the same CCO requirements for

    security-based swap dealers and major security-based swap participants

    (collectively, ``SEC Registrants'').\8\ In compliance with sections

    712(a)(1)-(2) of the Dodd-Frank Act, the Commission and SEC staffs

    consulted and coordinated together and with prudential regulators in

    developing the respective CCO rules for purposes of regulatory

    consistency and comparability.\9\

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    \8\ 15 U.S.C. 78o-10(k).

    \9\ Public Law 111-203, 124 Stat. 1376, 1641-1642 (codified at

    15 U.S.C. 8302(a)(1)-(2)).

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    The SEC initially proposed rule 15Fk-1 to implement CCO

    requirements and duties for SEC Registrants in July 2011.\10\ In May

    2013, after the CFTC adopted the CCO Rules, the SEC re-opened the

    comment period for its outstanding Dodd-Frank Act Title VII

    rulemakings, including rule 15Fk-1.\11\ In its reopening release, the

    SEC sought comment on, among other things: (1) The relationship of the

    proposed SEC rules to any parallel CFTC requirements; and (2) the

    extent to which the SEC should emphasize consistency with the CFTC

    rules or should tailor its rules to the security-based swap market.\12\

    Comments received by the SEC largely urged the SEC to harmonize its

    business conduct rules, including rule 15Fk-1, with those of the CFTC

    because the industry had already implemented the CFTC's

    regulations.\13\ Specifically, with respect to supervision and CCO

    obligations, commenters urged that the SEC's final rules ``be informed

    by industry experience complying with . . . the CFTC internal business

    conduct standards'' among others.\14\ A number of comments also

    suggested specific conforming modifications to the SEC's proposed

    rules.\15\

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    \10\ See Business Conduct Standards for Security-Based Swap

    Dealers and Major Security-Based Swap Participants, 76 FR 42396

    (proposed Jul. 18, 2011).

    \11\ See Reopening of Comment Periods for Certain Rulemaking

    Releases and Policy Statement Applicable to Security-Based Swaps, 78

    FR 30800 (May 23, 2013).

    \12\ Id. at 30802.

    \13\ Business Conduct Standards for Security-Based Swap Dealers

    and Major Security-Based Swap Participants, 81 FR 29960, 29964 (May

    13, 2016) (``SEC Adopting Release'').

    \14\ Id. at 29964 n.31.

    \15\ Id.

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    SEC staff continued to consult with CFTC staff leading up to

    adoption of the SEC's business conduct standards rules, which became

    effective July 12, 2016.\16\ As explained in the SEC Adopting Release,

    the SEC modified the proposed rules ``to harmonize with CFTC

    requirements to create efficiencies for entities that have already

    established infrastructure for compliance with analogous CFTC

    requirements'' where such modifications ``will continue to provide the

    protections (as explained in the context of the particular rule) that

    the rules were intended to accomplish.'' \17\

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    \16\ 17 CFR 240.15Fk-1. See SEC Adopting Release, 81 FR at

    29960.

    \17\ SEC Adopting Release, 81 FR at 29964.

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    C. Further Harmonization

    Although the SEC's CCO rules are largely harmonized with the CFTC's

    corresponding regulations, rule 15Fk-1 as adopted differs in several

    respects. Based on CFTC staff experience in implementing the CCO Rules,

    review of the comments to the proposed SEC rule 15Fk-1, and discussions

    with SEC staff, the Commission believes that some of the differences

    adopted by the SEC are beneficial for market participants and

    regulatory oversight.

    The CCO Rules, among other things, seek to ensure that the CCO is

    actively engaged in compliance activities with the appropriate

    authority, resources, and access to the board of directors or senior

    officer to administer the firm's compliance activities.\18\ As

    described below, the proposed amendments to the CCO Rules preserve

    these objectives and should increase efficiencies, reduce regulatory

    burden, particularly for dual registrants, and further clarify the

    scope of CCO duties.

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    \18\ See, e.g., CCO Rules Adopting Release, 77 FR at 20161-2.

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    II. The Proposal

    A. Regulation 3.1--Definitions

    The Commission proposes to add a definition of ``senior officer''

    to Sec. 3.1 to provide greater clarity regarding the CCO reporting

    line required by CEA section 4s(k)(2)(A) and Sec. 3.3(a)(1) of the

    Commission's regulations.\19\ The Commission has not previously

    formally defined this term for purposes of the CCO Rules. However,

    Commission staff has generally interpreted this term to refer to a

    Registrant's most senior officer, typically the chief executive officer

    or the equivalent. This interpretation is consistent with the SEC's

    definition of ``senior officer'' in SEC rule 15Fk-1(e)(2). Accordingly,

    the Commission is proposing to define ``senior officer'' in new

    paragraph (j) to Sec. 3.1 as ``the chief executive officer or other

    equivalent officer of a registrant.''

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    \19\ 7 U.S.C. 6s(k)(2)(A); 17 CFR 3.3(a)(1).

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    This definition is in keeping with the Commission's continued

    belief that, as stated in the CCO Rules Adopting Release, a ``direct

    reporting line'' from the CCO to the board of directors or highest

    executive officer ensures CCO independence.\20\ The ``chief executive

    officer'' is typically the highest executive level, but the definition

    includes the phrase ``other equivalent officer'' to acknowledge that a

    firm may have a different title for the highest executive officer.

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    \20\ See CCO Rules Adopting Release, 77 FR at 20160. As noted in

    the release, reporting to a senior officer of a division of a larger

    company would be appropriate only when that division is registered

    as a swap dealer (i.e., a limited swap dealer designation under 17

    CFR 1.3(ggg)(3)). Id.

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    Request for comment: The Commission requests comment regarding the

    proposed definition in Sec. 3.1. The Commission specifically requests

    comment on the following questions:

    [[Page 21332]]

    Should the proposed definition for ``senior officer'' be

    revised? If yes, please provide alternative suggestions.

    Should other definitions be added?

    B. Regulation 3.3(d)--Chief Compliance Officer Duties

    Paragraph (d) of Sec. 3.3 implements the CCO duties required by

    CEA section 4s(k). Generally, paragraph (d) requires the CCO to: (1)

    Establish and administer policies and procedures, including those

    related to ensuring compliance and remediating noncompliance issues;

    (2) resolve any conflicts of interest; and (3) prepare the CCO Annual

    Report. Based on the practical experience gained from four years of

    implementation, the Commission has determined that certain CCO Rules

    could be revised to more accurately convey the Commission's intent with

    respect to the scope of the CCO's duties and to further harmonize with

    the SEC's recently finalized CCO rules. In this regard, the proposed

    amendments are intended to maintain and clarify the underlying goal of

    the CCO's active engagement in compliance monitoring while reducing

    regulatory burdens that provide limited corresponding benefit.\21\

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    \21\ See CCO Rules Adopting Release, 77 FR at 20161-2.

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    1. Regulation 3.3(d)(1)--Duty To Administer Compliance Policies and

    Procedures

    Paragraph (d)(1) of Sec. 3.3 implements CEA section 4s(k)(2)(D),

    which requires a CCO to ``be responsible for administering each policy

    and procedure that is required to be established pursuant to this

    section.'' \22\ The current text of Sec. 3.3(d)(1) states that the

    CCO's duties include ``administering the registrant's policies and

    procedures reasonably designed to ensure compliance with the Act and

    Commission regulations.'' \23\ The Commission is proposing to amend

    Sec. 3.3(d)(1) to require the CCO to administer ``each of the

    registrant's policies and procedures relating to its business as a

    futures commission merchant, swap dealer, or major swap participant

    that are required to be established pursuant to the Act and Commission

    regulations.''

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    \22\ 7 U.S.C. 6s(k)(2)(D).

    \23\ 17 CFR 3.3(d)(1).

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    The proposed change clarifies that the CCO is responsible for

    administering the policies and procedures specifically related to the

    Registrant's business as a SD, MSP, or FCM, as applicable, not all of

    the Registrant's business that may otherwise be subject to CFTC

    regulation. Further, the proposed change more closely tracks the

    language of CEA section 4s(k)(2)(D) and is consistent with the

    Commission's stated intent when finalizing the CCO Rules.\24\ Finally,

    the amended rule text more closely tracks the language of the SEC's

    parallel rule \25\ and should alleviate concerns regarding consistency

    with the SEC's interpretation of identical statutory language as it

    applies to dual CFTC Registrants and SEC Registrants.

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    \24\ CCO Rules Adopting Release, 77 FR at 20158. (``[T]he

    Commission is clarifying in the final rules that the CCO's duties

    extend only to the activities of the registrant that are regulated

    by the Commission, namely swaps activities of SDs and MSPs and the

    derivatives activities included in the definition of FCM under

    section 1(a)(28) of the CEA.'').

    \25\ 17 CFR 240.15Fk-1(b)(4).

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    2. Regulation 3.3(d)(2)--Resolving Conflicts of Interest

    Paragraph (d)(2) of Sec. 3.3 requires the CCO to, in consultation

    with the board of directors or the senior officer, resolve any

    conflicts of interest that may arise. The Commission is proposing to

    modify Sec. 3.3(d)(2) to clarify that the CCO must take ``reasonable

    steps'' to resolve conflicts. This proposed change makes explicit an

    implied reasonableness standard and recognizes that resolution of non-

    material conflicts need not always require the CCO's direct expertise

    or directly involve the board of directors or senior officer.\26\

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    \26\ The CEA and Exchange Act require CCO's to ``in consultation

    with the board of directors, a body performing a function similar to

    the board, or the senior officer of the organization, resolve any

    conflicts of interest that may arise.'' 7 U.S.C. 6s(k)(2)(C) and 15

    U.S.C. 78o-10(k)(2)(C).

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    The Commission is of the view that a CCO's duty to resolve

    conflicts of interest should not be interpreted to require the CCO to

    personally resolve every potential conflict of interest that may arise

    or require consultation with the board of directors or senior office.

    If strictly interpreted, the current rule text creates an undue burden

    on CCOs, likely taking them away from more important compliance

    activities. The proposed changes are intended to clarify that routinely

    encountered conflicts could be resolved in the normal course of

    business consistent with the CCO's general administration of internal

    policies and procedures, which must include conflicts of interest

    policies.\27\ With this amendment, the CCO and his or her resources may

    more effectively engage in working to resolve conflicts practically and

    within normal business operations procedures.

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    \27\ See 7 U.S.C. 6s(k)(3)(A)(ii) (requiring policies and

    procedures to include conflicts of interest policies).

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    Similarly, the SEC in its adopting release noted that the CCO's

    role in resolving conflicts of interest would likely include the

    recommendation of actions to resolve the conflict, as well as the

    escalation and reporting of issues related to resolution, but not

    executing the business decisions to ultimately resolve the

    conflict.\28\ The SEC articulated this understanding in its final rule

    15Fk-1(b)(3) by requiring a CCO to ``take reasonable steps'' to resolve

    conflicts of interests. The Commission believes it is appropriate to

    incorporate this language into Sec. 3.3(d)(2) to more accurately

    reflect its interpretation of the statutory requirement.

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    \28\ See SEC Adopting Release, 81 FR at 30057 (stating that

    ``the primary responsibility for the resolution of conflicts

    generally lies with the business units . . . .'').

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    3. Regulation 3.3(d)(3)--Ensuring Compliance

    The Commission proposes to amend paragraph (d)(3) of Sec. 3.3 to

    incorporate further guidance regarding the extent of a CCO's compliance

    duties. Current Sec. 3.3(d)(3) effectuates CEA section 4s(k)(2)(E)

    \29\ by requiring CCOs to take ``reasonable steps to ensure compliance

    with the Act and Commission regulations relating to the swap dealer's

    or major swap participant's swaps activities, or to the futures

    commission merchant's business as a futures commission merchant.'' \30\

    The Commission proposes to amend Sec. 3.3(d)(3) by clarifying that the

    CCO's duty in this subsection includes ``ensuring the registrant

    establishes, maintains and reviews written policies and procedures

    reasonably designed to achieve compliance'' with the Act and Commission

    regulations. This change is consistent with the SEC's parallel

    rule.\31\

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    \29\ 7 U.S.C. 6s(k)(2)(E) imposes a duty on CCOs to ``ensure

    compliance with this Act [CEA] (including regulations) relating to

    swaps, including each rule prescribed by the Commission under this

    section.''

    \30\ 17 CFR 3.3(d)(3).

    \31\ 17 CFR 240.15Fk-1(b)(2).

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    When finalizing Sec. 3.3(d)(3), the Commission intended to address

    commenter concerns that fully ``ensuring compliance'' with the CEA

    could be an impracticable standard for CCOs and that the regulatory

    responsibility for ensuring compliance is ultimately borne by the

    registrant.\32\ The Commission modified the proposal in the final rule

    by limiting the CCO duties to taking ``reasonable steps to ensure

    compliance'' rather than simply ``ensure compliance.'' \33\

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    \32\ See CCO Rules Adopting Release, 77 FR at 20162.

    \33\ In making this modification, the Commission considered the

    SEC's similar interpretation of the duty to ensure compliance in its

    proposed rule effectuating identical statutory language. See id.

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    [[Page 21333]]

    Notwithstanding the change made to the final CCO Rules, during the

    more than four years of implementing Sec. 3.3(d)(3), CCOs and their

    representatives have expressed concern about the uncertainty as to the

    breadth of their required authority under the rule. Accordingly, by

    amending Sec. 3.3(d)(3), the Commission intends to address uncertainty

    caused by the current text of Sec. 3.3(d)(3) by specifically

    identifying the CCO's duties with regard to compliance policies and

    procedures.\34\ The amended language also will further harmonize with

    the SEC's final interpretation of the role of the CCO.\35\

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    \34\ See Designation of a Chief Compliance Officer; Required

    Compliance Policies; and Annual Report of a Futures Commission

    Merchant, Swap Dealer, or Major Swap Participant, 75 FR 70881, 70883

    (proposed Nov. 19, 2010) (``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.'').

    \35\ In finalizing its rules for SEC Registrants, the SEC

    departed from its proposed language and similarly concluded that,

    ``it is the responsibility of the SBS Entity, not the CCO in his or

    her personal capacity, to establish and enforce required policies

    and procedures.'' See SEC Adopting Release, 81 FR at 30056.

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    4. Regulations 3.3(d)(4) and (5)--Remediation of Noncompliance Issues

    Paragraphs (d)(4) and (5) currently require a CCO to establish

    procedures, in consultation with the board of directors or the senior

    officer, for (1) the remediation of noncompliance issues identified by

    the CCO and (2) the handling, management response, remediation,

    retesting, and closing of noncompliance issues.\36\ The Commission

    proposes to remove the consultation requirement in paragraphs (d)(4)

    and (5) as superfluous and clarify that the policies and procedures be

    ``reasonably designed'' to achieve the stated purpose. In removing the

    consultation requirement, the Commission acknowledges that in carrying

    out their duties, a CCO should manage and remediate compliance issues

    by consulting, as appropriate, with business lines, senior management,

    the board of directors, and independent review groups.

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    \36\ 17 CFR 3.3(d)(4) and (5).

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    Furthermore, the Commission is proposing to amend Sec. 3.3(d)(4)

    to include remediating matters identified ``through any means'' by the

    chief compliance officer in addition to the specific detection methods

    listed in the rule text. This change addresses a concern discussed in

    the SEC Adopting Release that the list of specific methods in the

    current regulatory text could be viewed as a limit on noncompliance

    event discovery methods.\37\ The flexibility added by this change is

    particularly meaningful given advances in automated compliance

    monitoring technology.

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    \37\ See SEC Adopting Release, 81 FR at 30056.

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    Request for comment: The Commission requests comment regarding the

    proposed amendments to the CCO duties in Sec. 3.3(d). The Commission

    specifically requests comment on the following questions:

    Are the proposed revisions to the CCO duties appropriate?

    If not, what modifications to the duties should be made?

    Do the proposed amendments create added efficiencies for

    dual CFTC and SEC Registrants?

    To what extent do the proposed amendments reduce burdens

    and costs for Registrants?

    Do any of the proposed amendments create any additional

    burdens or costs for Registrants?

    Should the Commission revise any other requirements under

    Sec. 3.3(d)? If so, which ones and why?

    Should the Commission seek to further harmonize the

    requirements under Sec. 3.3(d) with parallel SEC requirements?

    C. Proposed Amendments to Regulations 3.3(e) and (f)--CCO Annual

    Reporting

    CEA section 4s(k)(3) requires the CCO to annually prepare and sign

    the CCO Annual Report and Commission Sec. 3.3(e) and (f) implement

    this requirement.\38\ The Commission proposes to revise, reorganize,

    and clarify Sec. 3.3(e) and (f) to further reduce burdens to

    Registrants, incorporate related proposed amendments to Sec. 3.3(d),

    and further harmonize with the SEC's parallel rules. When the

    Commission proposed Sec. 3.3(e) and (f), it stated that the intended

    purposes for these rules were to: (1) Promote compliance behavior

    through periodic self-evaluation; and (2) inform the Commission of

    possible compliance weaknesses.\39\ Further, in the adopting release,

    the Commission noted that the rules will assist the Registrant and the

    Commission in determining whether the Registrant remains in compliance

    with the CEA and Commission regulations.\40\ The Commission is

    reaffirming these stated purposes and believes that the proposed

    revisions will more effectively further these goals.

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    \38\ 7 U.S.C. 6s(k)(3) and 17 CFR 3.3(e) and (f).

    \39\ 75 FR at 70883.

    \40\ See CCO Rules Adopting Release, 77 FR at 20193 (``The

    annual compliance report will help FCMs, SDs, MSPs, and the

    Commission to assess whether the registrant has mechanisms in place

    to address adequately compliance problems that could lead to a

    failure of the registrant. It also will assist the Commission in

    determining whether the registrant remains in compliance with the

    CEA and the Commission's regulations . . . . '').

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    1. Regulation 3.3(e)--Annual Report

    Paragraph (e)(1) of Sec. 3.3 implements CEA section

    4s(k)(3)(A)(ii) and requires the CCO Annual Report to include a

    description of the Registrant's written policies and procedures

    (``WPPs''), including the code of ethics and conflicts of interest

    policies. The Commission is proposing to amend Sec. 3.3(e)(1) to

    further clarify which WPPs must be described in the CCO Annual Report

    by referencing the WPPs described in paragraph (d), as amended.

    Paragraphs (e)(2)(i), (ii), and (iii) of Sec. 3.3 currently

    require the CCO Annual Report to identify the Registrant's WPPs

    designed to reasonably comply with the CEA and Commission regulations,

    assess the effectiveness of the WPPs, and discuss any areas of

    improvement and recommended changes or improvements to the Registrant's

    compliance program.\41\ The current language of Sec. 3.3(e)(2) applies

    these three requirements to each applicable CFTC regulatory requirement

    to which the Registrant is subject. In other words, for each applicable

    CFTC requirement the CCO Annual Report must identify a WPP, assess the

    WPP, and discuss related areas of improvement.

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    \41\ See 17 CFR 3.3(e)(2)(i)-(iii).

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    After adoption of the rule, Commission staff received industry

    feedback indicating that the amount of time and resources needed for

    the review described above makes the process burdensome when compared

    to the intrinsic value of this portion of the report, particularly

    given that many of the WPPs do not change from year to year.\42\

    Commission staff has also observed that many of the CCO Annual Reports

    provide the detail required in a rote manner, but contain limited

    substantive discussion regarding areas of improvement and recommended

    changes to the compliance program, especially where such modifications

    may relate to the remediation of

    [[Page 21334]]

    material noncompliance issues.\43\ This observation raises concerns as

    to whether the CCO Annual Report requirements are promoting an active,

    on-going self-evaluation or, instead, encouraging a more limited,

    ``check-the-box'' appraisal.

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    \42\ To alleviate some of this burden, Commission staff

    indicated in guidance that a chart may provide an appropriate

    mechanism for efficiently addressing the requirements of Sec.

    3.3(e)(2) for purposes of the CCO Annual Report. CFTC Staff Advisory

    No. 14-153 at 6 (Dec. 22, 2014) (``CCO Annual Report Advisory'').

    However, the Commission believes that while use of a chart may

    streamline the presentation of information, it does not

    fundamentally change the burden of the underlying review and

    assessment.

    \43\ See 17 CFR 3.3(e)(5).

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    Based on the foregoing, the Commission is proposing to amend Sec.

    3.3(e)(2) to eliminate the requirement to address ``each applicable

    requirement under the Act and Commission regulations'' and make other

    conforming edits. In addition, Sec. 3.3(e)(2)(i) is being deleted

    because Registrants are already required by Sec. 3.3(e)(1) to describe

    their WPPs.\44\ The Commission believes that the intent of CEA section

    4s(k)(3)(A) and the purpose of the CCO Annual Report may be met where

    Registrants provide summaries of their WPPs coupled with a detailed

    discussion of their annual assessment and recommended improvements.\45\

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    \44\ Although the requirement to identify WPPs that are

    reasonably designed to ensure compliance is being deleted, the

    Commission notes that it can gain access to each of the Registrant's

    policies and procedures through the Commission's authority to

    request the production of books and records under Sec. 1.31, 17 CFR

    1.31.

    \45\ Consistent with the CCO Annual Report Advisory, Registrants

    may continue to use a chart to present assessment and review

    findings, as well as other information required by Sec. 3.3(e).

    However, the use of a chart does not alleviate the requirement to

    provide meaningful, substantive discussion where required. CCO

    Annual Report Advisory at 9-11.

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    As a related change, Sec. 3.3(f) specifically contains the full

    requirements regarding delivery of the CCO Annual Report. To eliminate

    confusion and unnecessary duplication, the Commission proposes to amend

    Sec. 3.3(e) to remove the duplicative text regarding the duty to

    furnish the CCO Annual Report.

    The Commission is also proposing to amend Sec. 3.3(e)(4), which

    requires that the Registrant describe in the CCO Annual Report its

    financial, managerial, operational, and staffing resources set aside

    for compliance with the Act and Commission regulations. Commission

    staff has received a number of questions regarding whether the

    description need only cover resources for the activities for which the

    Registrant is registered or must also address other activities covered

    by the Act and Commission regulations. The Commission is proposing to

    amend Sec. 3.3(e)(4) to clarify that the discussion is limited to

    resources allocated to the specific activities for which the Registrant

    is registered. It is the Commission's view that the CCO Annual Report

    is meant to be a report regarding a Registrant's business as an FCM,

    SD, or MSP, and therefore information need only be included in the CCO

    Annual Report to the extent it is related to, or impacts, that part of

    the Registrant's business.

    The changes to Sec. 3.3(e)(2) in this proposal closely parallel

    SEC rule 15Fk-1(c)(2).\46\ The Commission believes that greater

    efficiencies can be achieved for dual CFTC and SEC Registrants when the

    structure and content requirements for both CCO Annual Reports is

    consistent.

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    \46\ See SEC Adopting Release, 81 FR at 30058; 17 CFR 240.15Fk-

    1(c)(2)(A).

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    Finally, to fully implement the amendments to Sec. 3.3(e), the

    Commission is proposing to renumber current Sec. 3.3(e)(3) as Sec.

    3.3(e)(6), to account for the proposed renumbering of the other content

    requirements in current Sec. 3.3(e)(2).

    2. Regulation 3.3(f)--Furnishing the Annual Report to the Commission

    CEA section 4s(k)(3)(B) requires the CCO Annual Report to, among

    other things, be furnished to the Commission and include a

    certification that the report is accurate and complete. Paragraph (f)

    of Sec. 3.3 implements this requirement.

    Section 3.3(f)(1) only requires delivery of the CCO Annual Report

    to the board of directors or the senior officer of the Registrant in

    addition to the Commission. The Commission is proposing to amend Sec.

    3.3(f)(1) to require a Registrant to provide its CCO Annual Report to

    its audit committee (or equivalent body), the board of directors, and

    the senior officer prior to furnishing it to the Commission.\47\ This

    amendment would align this requirement with that of the SEC's

    corresponding rule, 15Fk-1(c)(2)(ii)(B). In requiring the SEC CCO

    Annual Report to be delivered to the audit committee, the SEC stated

    that requiring submission to the audit committee, in addition to the

    board and the senior officer, further ensures that all groups with

    overall responsibility for governance and internal controls remain

    informed of the SEC Registrant's compliance program.\48\ The Commission

    agrees with this policy goal and also believes that further aligning

    our rules provides for greater efficiency.

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    \47\ Per its longstanding position, the Commission is

    reiterating that in the event a Registrant does not have a board of

    directors, under the proposed amendment, the CCO Annual Report would

    be furnished to the senior officer and audit committee, or other

    equivalent body or group performing the auditing function.

    \48\ SEC Adopting Release, 81 FR at 30059.

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    Request for comment: The Commission requests comment regarding the

    proposed amendments to the CCO Annual Report's requirements in Sec.

    3.3(e) and (f). The Commission encourages all comments, including

    background information, actual market examples, best practice

    principles, and estimates of any asserted costs and expenses. Regarding

    the proposed CCO Annual Report amendments, the Commission specifically

    requests comment on the following questions:

    Are the proposed amendments to the CCO Annual Report's

    content requirements in Sec. 3.3(e) appropriate? If not, what

    modifications to the content requirements should be made?

    What, if any, transition or ongoing costs or savings would

    result from such changes? Please provide details and estimates

    regarding any asserted costs or savings.

    Would the proposed amendments to the CCO Annual Report's

    submission requirements in Sec. 3.3(f)(1) cause undue burden? Is it

    appropriate for the audit committee to receive the CCO Annual Report?

    Should the Commission make any other changes to Sec.

    3.3(f) to further harmonize with the SEC?

    III. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \49\ requires that

    agencies consider whether a proposed rule will have a significant

    economic impact on a substantial number of small entities and, if so,

    provide a regulatory flexibility analysis of the impact. The proposed

    amendments define the term ``senior officer;'' clarify the scope of a

    CCO's duties and the content requirements of the CCO Annual Report; and

    modify the CCO Annual Report delivery requirement. The proposed

    amendments would affect FCMs, SDs, and MSPs that are required to be

    registered with the Commission. The Commission has previously

    established certain definitions of ``small entities'' to be used in

    evaluating the impact of its regulations on small entities in

    accordance with the RFA, and has previously determined that FCMs, SDs,

    and MSPs are not small entities for purposes of the RFA.\50\ Therefore,

    the Commission believes that the amendments to the CCO Rules would not

    have a significant economic impact on a substantial number of small

    [[Page 21335]]

    entities. Accordingly, the Acting Chairman, on behalf of the

    Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that the

    proposed amendments will not have a significant economic impact on a

    substantial number of small entities.

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    \49\ 5 U.S.C. 601 et seq.

    \50\ See Policy Statement and Establishment of Definitions of

    ``Small Entities'' for Purposes of the Regulatory Flexibility Act,

    47 FR 18618, 18619 (Apr. 30, 1982) (FCMs); Further Definition of

    ``Swap Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap

    Participant,'' ``Major Security-Based Swap Participant'' and

    ``Eligible Contract Participant,'' 77 FR 30596, 30701 (May 23, 2012)

    (SDs and MSPs).

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    B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \51\ provides that a

    federal 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 issued by the Office of Management and

    Budget (``OMB''). The collection of information related to this

    proposed rule is OMB control number 3038-0080--Annual Report for Chief

    Compliance Officer of Registrants. As a general matter, the proposed

    amendments to the CCO Rules: (1) Define the term ``senior officer'';

    (2) clarify the scope of the CCO duties and the content requirements of

    the CCO Annual Report; and (3) add the Registrant's audit committee as

    a party that must receive the CCO Annual Report. The Commission

    believes that the proposed amendments will not impose any new

    information collection requirements that require approval of OMB under

    the PRA. As such, the proposed amendments do not impose any new burden

    or any new information collection requirements in addition to those

    that already exist in connection with the preparation and delivery of

    the CCO Annual Report pursuant to the Commission's regulations.

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    \51\ 44 U.S.C. 3501 et seq.

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    C. Cost-Benefit Considerations

    As discussed above, the Commission is proposing amendments to the

    CCO Rules that would: (1) Define the term ``senior officer''; (2)

    provide greater specificity regarding the scope of the CCO's duties;

    (3) clarify the content requirements for the CCO Annual Report; and (4)

    require a Registrant's audit committee (or equivalent body), board of

    directors, and the senior officer to receive the CCO Annual Report. The

    baseline for this cost and benefit consideration is existing Sec.

    3.3.\52\

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    \52\ The Commission notes that adding a definition of ``senior

    officer'' would be effected by amending Sec. 3.1. The Commission

    believes this addition in and of itself has no impact for purposes

    of determining the costs and benefits of the proposal, and,

    therefore, is restricting its analysis of the costs and benefits to

    the proposed amendments to Sec. 3.3. Nevertheless, the Commission

    is seeking public comment on whether the definition of ``senior

    officer'' has any cost and benefit considerations.

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

    The proposed amendments to Sec. 3.3(d) do not change the CCO

    duties, but rather provide greater specificity regarding the scope of

    the CCO's duties and further harmonize with the SEC's security-based

    swap dealer CCO duties. The Commission expects that greater clarity

    concerning CCO responsibilities will reduce the potential burdens on

    CCOs and improve the benefits of compliance by allowing CCOs to better

    focus on the fundamental compliance aspects of their responsibilities.

    Additionally, by further harmonizing the CFTC's and SEC's CCO duties,

    CCOs of dual registrants should be able to fulfill their duties more

    cost effectively.

    Because the proposed amendments to Sec. 3.3(d) do not expand the

    CCO duties, the Commission preliminarily believes that the proposal

    would not impose any additional costs to Registrants, market

    participants, the markets, or the general public. The Commission,

    however, invites comment regarding the nature of, and the extent to

    which, costs associated with the CCO duties described in Sec. 3.3(d)

    could change as a result of the adoption of the proposal and, to the

    extent they can be quantified, monetary and other numerical estimates

    thereof.

    As discussed more fully above, in implementing Sec. 3.3(e) and

    (f), the Commission received consistent feedback from Registrants that

    the exercise of documenting their assessment on a requirement-by-

    requirement basis was creating a significant economic burden with

    respect to time and resources. The proposed amendments to eliminate the

    requirement-by-requirement assessment are intended to reduce the cost

    to Registrants of producing the CCO Annual Report while maintaining its

    critical purpose. By reducing the burden associated with this aspect of

    the CCO Annual Report, CCO and other compliance resources may be better

    focused on other compliance functions. In addition, the amendments

    would harmonize certain CFTC and SEC CCO Annual Report content

    requirements in an effort to reduce the costs to dual registrants of

    complying with two regulatory regimes. The Commission believes that the

    foregoing amendments would also provide relief for Registrants from

    resource and time pressures in preparing their CCO Annual Reports.

    The Commission recognizes that the CCO Annual Reports may contain

    less content if the proposed amendments are adopted because of the

    removal of the process of documenting a review for hundreds of

    individual regulatory requirements. However, many of the requirements

    are inter-related and are better addressed collectively.\53\ In

    addition, eliminating this process should allow Registrants to focus

    more fully on completing their internal review processes and encourage

    more focused discussion of material issues in the CCO Annual Report.

    While the proposed amendments may require less description and

    classification, the Commission believes that a more focused,

    substantive discussion of the Registrant's assessment and material

    compliance issues will result in a CCO Annual Report that is a more

    effective tool for informing both the Registrant's senior management

    and the Commission as to the status of compliance at the firm.

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

    \53\ For example, under the current regulations 3.3(e) and (f),

    an assessment of Sec. Sec. 23.400 through 23.451, 17 CFR 23.400

    through 23.451, governing business conduct standards for swap

    dealers and major swap participants with counterparties would

    require a separate assessment of each rule, and in many cases, each

    subsection as a separate ``requirement.'' However, because these

    regulations all address external business conduct standards, it may

    be appropriate to address these rules together.

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

    1. Section 15(a) Factors

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

    costs and benefits of its actions before promulgating a regulation

    under the CEA or issuing certain orders.\54\ Section 15(a) further

    specifies that the costs and benefits 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 futures markets; (3) price discovery; (4) sound

    risk management practices; and (5) other public interest

    considerations. The Commission considers the costs and benefits

    resulting from its discretionary determinations with respect to the

    section 15(a) factors.

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

    \54\ 7 U.S.C. 19(a).

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

    The Commission believes that the CCO Rules reinforce the CEA's

    protections for swap markets participants, futures market participants,

    and the public as more fully described in the CCO Rules Adopting

    Release.\55\ This proposal does not seek to diminish either the role of

    the CCO or the value of the CCO Annual Report. On the contrary, the

    Commission believes that the proposal will provide the CCO with greater

    flexibility in accomplishing their duties and focusing compliance

    resources. Further, the proposal should lead to a CCO Annual Report

    that more effectively and efficiently focuses the Registrant's board,

    senior management,

    [[Page 21336]]

    and as proposed, the audit committee, as well as the Commission on

    areas requiring change or improvement.

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

    \55\ See, e.g., CCO Rules Adopting Release, 77 FR at 20193.

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

    a. Protection of Market Participants and the Public

    The proposed amendments will continue to protect market

    participants and the public because they do not fundamentally alter the

    CCO duties or the annual compliance reporting requirements of Sec.

    3.3. While the amendment removing the requirement-by-requirement

    reporting may reduce the reporting detail, the Commission believes that

    change will allow the CCO to focus on identifying and describing in the

    CCO Annual Report material compliance matters that deserve greater

    attention. Accordingly, the Commission preliminarily believes that the

    reduction in content requirements will not affect the protection of

    market participants and the public.

    b. Efficiency, Competitiveness, and Financial Integrity of Markets

    The Commission preliminarily believes that the proposed amendments

    to the CCO Rules could improve resource allocational efficiency for

    Registrants by reducing the burden to produce the CCO Annual Reports

    thereby allowing Registrants to allocate compliance resources used for

    report preparation more efficiently. Furthermore, entities that are

    dually registered with the CFTC and SEC and that must comply with the

    CCO Rules are likely to benefit from greater efficiencies to the extent

    the two agencies' parallel regulations are consistent. The Commission

    preliminarily believes that the proposed amendments to the CCO Rules

    will not have any negative impacts on market efficiency,

    competitiveness, or integrity because each CCO Annual Report addresses

    internal compliance programs of each Registrant and are not publicly

    available, and the amendments affecting CCO duties only clarify those

    duties and do not affect markets.

    c. Price Discovery

    The Commission has not identified a specific effect on price

    discovery as a result of the proposal because the proposal does not

    address any pricing issues. Nevertheless, the Commission seeks public

    comment on this issue.

    d. Sound Risk Management Practices

    The Commission preliminarily believes that the proposed amendments

    to the CCO duties and CCO Annual Report requirements would not have a

    meaningful effect on the risk management practices of Registrants. The

    proposed amendments relating to the CCO's duties and annual report do

    not directly impact a Registrant's risk management practices because

    they clarify the scope of the CCO's duties and CCO Annual Report

    contents, and do not require changes to a Registrant's risk management

    program.\56\ Furthermore, the proposed amendments to the content

    requirements do not affect the Registrant's obligation to address

    material noncompliance issues relating to its risk management program

    in the CCO Annual Report. Finally, the Commission preliminarily

    believes that including the audit committee and both the board of

    directors and the senior officer as recipients of the CCO Annual

    Reports may benefit Registrants' overall risk management practices by

    ensuring that all groups with overall responsibility for governance and

    internal controls are informed of the report contents.

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

    \56\ See, e.g., 17 CFR 23.600.

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

    e. Other Public Interest Considerations

    The Commission has not identified any other public interest

    considerations for this rulemaking.

    Request for Comment: The Commission invites comment on its

    preliminary consideration of the costs and benefits associated with the

    proposal, especially with respect to the five factors the Commission is

    required to consider under CEA section 15(a). In addressing these areas

    and any other aspect of the Commission's preliminary cost-benefit

    considerations, the Commission encourages commenters to submit any data

    or other information they may have quantifying and/or qualifying the

    costs and benefits of the proposal.

    List of Subjects in 17 CFR Part 3

    Registration.

    For the reasons stated in the preamble, the Commodity Futures

    Trading Commission proposes to amend 17 CFR part 3 as set forth below:

    PART 3--REGISTRATION

    0

    1. The authority citation for part 3 continues 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, and 23, as amended by Title VII of Pub.

    L. 111-203, 124 Stat. 1376.

    0

    2. In Sec. 3.1, add paragraph (j) to read as follows:

    Sec. 3.1 Definitions.

    * * * * *

    (j) Senior officer. Senior officer means the chief executive

    officer or other equivalent officer of a registrant.

    0

    3. In Sec. 3.3, revise paragraphs (d), (e), and (f)(1) to read as

    follows:

    Sec. 3.3 Chief compliance officer.

    * * * * *

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

    duties shall include, but are not limited to:

    (1) Administering each of the registrant's policies and procedures

    relating to its business as a futures commission merchant, swap dealer,

    or major swap participant that are required to be established pursuant

    to the Act and Commission regulations;

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

    officer, taking reasonable steps to resolve any conflicts of interest

    that may arise;

    (3) Taking reasonable steps to ensure compliance with the Act and

    Commission regulations relating to the registrant's business as a

    futures commission merchant, swap dealer or major swap participant,

    including through ensuring that the registrant establishes, maintains,

    and reviews written policies and procedures reasonably designed to

    achieve compliance;

    (4) Establishing, maintaining, and reviewing written policies and

    procedures reasonably designed to remediate noncompliance issues

    identified by the chief compliance officer through any means, including

    any: Compliance office review, look-back, internal or external audit

    finding, self-reporting to the Commission and other appropriate

    authorities, or complaint that can be validated;

    (5) Establishing written procedures reasonably designed for the

    handling, management response, remediation, retesting, and resolution

    of noncompliance issues; and

    (6) Preparing and signing the annual report required under

    paragraphs (e) and (f) of this section.

    (e) 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. The annual report shall, at a minimum, contain a

    description of:

    (1) The written policies and procedures of the futures commission

    merchant, swap dealer, or major swap participant described in paragraph

    (d) of this section, including the code of ethics and conflicts of

    interest policies;

    (2) The futures commission merchant's, swap dealer's or major swap

    participant's assessment of the

    [[Page 21337]]

    effectiveness of its policies and procedures relating to its business

    as a futures commission merchant, swap dealer or major swap

    participant;

    (3) Areas for improvement, and recommended potential or prospective

    changes or improvements to its compliance program and resources devoted

    to compliance;

    (4) The financial, managerial, operational, and staffing resources

    set aside for compliance with respect to the Act and Commission

    regulations relating to its business as a futures commission merchant,

    swap dealer or major swap participant, including any material

    deficiencies in such resources;

    (5) Any material noncompliance issues identified and the

    corresponding action taken; and

    (6) Any material changes to compliance policies and procedures

    during the coverage period for the report.

    (f) 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, the

    senior officer, and the audit committee (or equivalent body) of the

    futures commission merchant, swap dealer, or major swap participant for

    its review. Furnishing the annual report to the board of directors, the

    senior officer, and the audit committee (or equivalent body) shall be

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

    with this requirement.

    * * * * *

    Issued in Washington, DC, on May 3, 2017, by the Commission.

    Christopher J. Kirkpatrick,

    Secretary of the Commission.

    Note: The following appendix will not appear in the Code of

    Federal Regulations.

    Appendix to Chief Compliance Officer Duties and Annual Report

    Requirements for Futures Commission Merchants, Swap Dealers, and Major

    Swap Participants; Amendments--Commission Voting Summary

    On this matter, Acting Chairman Giancarlo and Commissioner Bowen

    voted in the affirmative. No Commissioner voted in the negative.

    [FR Doc. 2017-09229 Filed 5-5-17; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: May 8, 2017