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, [email protected]; Erik Remmler, Deputy Director, 202-418-7630,
[email protected]; Laura Gardy, Associate Director, 202-418-7645,
[email protected]; Pamela M. Geraghty, Special Counsel, 202-418-5634,
[email protected]; or Fern B.
[[Page 21331]]
Simmons, Special Counsel, 202-418-5901, [email protected], 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.
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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.
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\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.
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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.
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\54\ 7 U.S.C. 19(a).
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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.
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\55\ See, e.g., CCO Rules Adopting Release, 77 FR at 20193.
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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.
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\56\ See, e.g., 17 CFR 23.600.
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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