2018-18432
Federal Register, Volume 83 Issue 166 (Monday, August 27, 2018)
[Federal Register Volume 83, Number 166 (Monday, August 27, 2018)]
[Rules and Regulations]
[Pages 43510-43524]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18432]
[[Page 43510]]
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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
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is amending 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, certifying, and furnishing to the Commission an annual
report containing an assessment of the Registrant's compliance
activities.
DATES: This rule is effective September 26, 2018.
FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, 202-418-
5213, [email protected]; Erik Remmler, Deputy Director, 202-418-7630,
[email protected]; Pamela M. Geraghty, Special Counsel, 202-418-5634,
[email protected]; or Fern B. 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''),\1\ 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.\2\ 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'').\3\ 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.\4\ On November 19, 2010, the Commission proposed
regulations implementing the CCO requirements,\5\ and in April 2012,
the Commission adopted the final CCO regulations (``CCO Rules Adopting
Release'').\6\ For purposes of this release, Sec. 3.3 \7\ and the
related definitions in Sec. 3.1 of the Commission's regulations are
herein referred to as the ``CCO Rules.''
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\1\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376
(2010).
\2\ 7 U.S.C. 6d(d) and 6s(k)(1).
\3\ 7 U.S.C. 6s(k)(2) and (3).
\4\ 7 U.S.C. 6d(d).
\5\ 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
(proposed Nov. 19, 2010).
\6\ 17 CFR 3.3(d)-(f). See Swap Dealer and Major Swap
Participant Recordkeeping, Reporting, and Duties Rules, 77 FR 20128
(Apr. 3, 2012).
\7\ 17 CFR 3.3 (2017). Commission regulations are found at 17
CFR chapter I, and may be accessed through the Commission's website,
www.cftc.gov.
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B. The Proposal
On May 8, 2017, the Commission published for public comment a
Notice of Proposed Rulemaking (``Proposal'') \8\ to amend the CCO
Rules. In particular, the Proposal addressed certain CCO duties and
requirements for preparing and furnishing the CCO Annual Report. The
Proposal sought to incorporate knowledge gained through Commission
staff's experience in administering the implementation of Sec. 3.3 and
to more closely harmonize certain provisions with corresponding
Securities and Exchange Commission (``SEC'') rules for CCOs of
security-based swap dealers and major security-based swap participants
(collectively, ``SEC Registrants'').\9\
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\8\ Chief Compliance Officer Duties and Annual Report
Requirements for Futures Commission Merchants, Swap Dealers, and
Major Swap Participants; Amendments, 82 FR 21330 (proposed May 8,
2017).
\9\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 81 FR 29960 (May
13, 2016) (``SEC Adopting Release'').
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To provide greater clarity regarding the CCO reporting line
required by section 4s(k)(2)(A) of the Act and Sec. 3.3(a)(1), the
Commission proposed to define ``senior officer'' in Sec. 3.1 as ``the
chief executive officer or other equivalent officer of a registrant.''
With regard to CCO duties, the Proposal would include additional
language in Sec. 3.3(d)(1) to clarify that the CCO's duty with respect
to administering policies and procedures would be specific to the
Registrant's business as an SD, MSP, or FCM, as applicable.\10\ The
Proposal would also modify the language in Sec. 3.3(d)(2) to clarify
that the CCO must take ``reasonable steps'' to resolve conflicts of
interest, and to require in Sec. 3.3(d)(3) that a CCO take reasonable
steps to ensure compliance with the Act and Commission regulations by,
among other things, ``ensuring the registrant establishes, maintains,
and reviews written policies and procedures reasonably designed to
achieve compliance.'' The Commission further proposed to amend Sec.
3.3(d)(4) and (5) to remove the requirement in each provision that the
CCO consult with the board of directors or senior officer in connection
with establishing procedures for addressing noncompliance issues. The
Proposal also would clarify that policies and procedures are to be
``reasonably designed'' to achieve their stated purpose, and would
amend Sec. 3.3(d)(4) to include remediating matters identified
``through any means.''
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\10\ As noted in the Proposal, the change to referencing the
Registrant's business as an SD or MSP is not intended to affect the
scope of the duties of the CCO. 82 FR at 21332 (Citing the CCO Rules
Adopting Release, 77 FR 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.'')).
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Regarding the CCO Annual Report requirements, the Proposal would
clarify Sec. 3.3(e) by eliminating the requirement that a Registrant
address ``each'' applicable CFTC regulatory requirement to which it is
subject when assessing its written policies and procedures (``WPPs'').
Additionally, the Commission proposed to clarify that the CCO Annual
Report's discussion of compliance resources be limited to a discussion
of resources for the specific activities for which the Registrant is
registered. Finally, the Proposal would amend Sec. 3.3(f)(1) to add
the Registrant's audit committee (or equivalent body) as a required
recipient of the CCO Annual Report in addition to the board of
directors and the senior officer.
C. Harmonization With SEC Regulations
Using language identical to CEA section 4s(k), the Dodd-Frank Act
amended the Securities Exchange Act of 1934 by adding section 15F(k) to
establish CCO requirements for SEC Registrants.\11\ 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.\12\
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\11\ 15 U.S.C. 78o-10(k).
\12\ 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
[[Page 43511]]
2011.\13\ 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.\14\ SEC staff continued to
consult with CFTC staff leading up to the adoption of rule 15Fk-1 in
May 2016.\15\
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\13\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 76 FR 42396
(proposed Jul. 18, 2011).
\14\ See Reopening of Comment Periods for Certain Rulemaking
Releases and Policy Statement Applicable to Security-Based Swaps, 78
FR 30800 (May 23, 2013).
\15\ 17 CFR 240.15Fk-1. See SEC Adopting Release, 81 FR 29960.
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While the CFTC regulates derivatives markets and the SEC regulates
securities markets, many of the participants in these markets are the
same. Similar activities in these markets are often regulated by each
agency in similar ways under similar statutory mandates.\16\ In this
regard, the CFTC and SEC have taken steps through ongoing communication
and coordination to harmonize similar regulations, including the
regulations addressed in this release.
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\16\ For example, the provisions of the Dodd-Frank Act that
provide for establishing regulations for swap dealers by the CFTC
are nearly identical to most of the provisions of the Dodd-Frank Act
that provide for establishing regulations for security-based swap
dealers by the SEC. See Dodd-Frank Act, Public Law 111-203, 124
Stat. 1376, 1711-1712, 1793 (2010) (codified at 7 U.S.C. 6s and 15
U.S.C. 78o-10).
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Several of the proposed amendments would further harmonize CFTC and
SEC regulations. More specifically, the following provisions in the
Proposal align the CFTC CCO regulations with the corresponding SEC CCO
regulations:
Including a definition of ``senior officer'' in Sec. 3.1
that is identical to the SEC's definition;
Including additional language in Sec. 3.3(d)(1) to
clarify that the CCO's duty with respect to administering policies and
procedures would be specific to the Registrant's business as an SD,
MSP, or FCM, as applicable;
Modifying the language in Sec. 3.3(d)(2) to require
reasonable steps be taken to resolve conflicts of interest;
Requiring the CCO to identify noncompliance issues
``through any means'';
Removing the additional requirement in Sec. 3.3(d)(4) and
(5) that the CCO consult with the board of directors or senior officer
in connection with establishing procedures for addressing noncompliance
issues; and
Replacing the requirement in Sec. 3.3(e) that a
Registrant address ``each'' applicable CFTC regulatory requirement to
which it is subject when assessing its WPPs with a requirement to
address the applicable regulations generally.
Furthermore, in the Proposal, the Commission solicited comments
regarding potential additional rule changes that would further
harmonize the CFTC and SEC regulations. After careful review of the
comments received, the final rule includes the following additional
harmonizing amendments:
In Sec. 3.3(d)(2), the CCO must take reasonable steps to
resolve any ``material'' conflicts of interest;
In Sec. 3.3(d)(4), the CCO must ``take reasonable steps
to ensure the registrant'' establishes, maintains, and reviews written
policies and procedures for the remediation of noncompliance issues;
In Sec. 3.3(d)(5), the CCO must ``take reasonable steps
to ensure the registrant'' establishes written procedures for the
handling of noncompliance issues; and
In Sec. 3.3(f)(3), the CCO Annual Report certification
includes language from the certifying individual that the CCO Annual
Report is accurate and complete ``in all material respects.''
II. Summary of Comments
The Commission received eleven comment letters and Commission staff
participated in one ex parte teleconference concerning the
Proposal.\17\ The majority of commenters generally supported the
Commission's efforts to clarify the role and duties of the CCO, reduce
burdens associated with preparing the CCO Annual Report, and further
harmonize the CCO Rules with parallel SEC rules. One commenter
expressed general support for the proposed modifications and
recognition of the Commission's efforts as a meaningful step towards
increasing regulatory certainty.\18\ Another commenter expressed
concern that a number of the proposals weaken the CCO regulatory regime
(by, among other things, reducing CCO accountability).\19\ Two comments
exclusively sought clarity on the Proposal's impact on the continued
ability of non-U.S. SDs to benefit from the Commission's substituted
compliance determinations that pertain to Sec. 3.3.\20\ Some
commenters cautioned against complete harmonization with the SEC
regarding the requirement to furnish the CCO Annual Report, but
requested more complete alignment in other areas addressing the role
and duties of the CCO.\21\ As outlined below, several commenters
suggested modifications to the rule text and requested further
interpretive guidance regarding the role and duties of the CCO and CCO
Annual Report content.\22\ Additionally, several commenters suggested
modifications to the rule text to add a materiality qualifier to the
CCO Annual Report certification.\23\ For the reasons provided below,
the Commission accepted some of these recommendations in the
amendments, as adopted, and accompanying guidance, and declined to
accept certain other recommendations.
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\17\ Comment letters were submitted by the following entities:
Allen & Overy LLP; Automated Compliance Management, LLC (``ACM'');
Better Markets; Chris Barnard; Futures Industry Association and
Securities Industry and Financial Markets Association (``FIA/
SIFMA''); International Swaps and Derivatives Association (ISDA);
Japanese Bankers Association (``JBA''); National Futures Association
(``NFA''); the Natural Gas Supply Association (``NGSA''); Paws
Nutritional Org.; and TD Ameritrade Futures and Forex LLC (``TD
Ameritrade''). All comment letters are available on the Commission's
website at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1811.
\18\ See NGSA comment letter.
\19\ See Better Markets comment letter.
\20\ See Allen & Overy and JBA comment letters.
\21\ See, e.g., FIA/SIFMA and ISDA comment letters.
\22\ See, e.g., Better Markets, FIA/SIFMA, ISDA, NFA, and TD
Ameritrade comment letters.
\23\ See FIA/SIFMA, ISDA, and NFA comment letters.
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III. Final Rule
A. Regulation 3.1--Definitions
1. Regulation 3.1(j)--``Senior Officer''
The Commission proposed to define ``senior officer'' in Sec. 3.1
as ``the chief executive officer or other equivalent officer of a
registrant.'' The Commission received four comments addressing the
proposed definition.\24\ Chris Barnard and Better Markets supported the
proposed definition. FIA/SIFMA requested that the Commission address
the variety of organizational structures present among Registrants and
define ``senior officer'' to include ``a more senior officer within the
Registrant's group-wide compliance, risk, legal or other control
function who in turn reports to the holding company's board of
directors or CEO (or equivalent officer).'' \25\ FIA/SIFMA further
requested that the Commission expand its interpretation of the phrase
``other equivalent officer'' to include the most senior officer of a
Registrant with supervisory responsibility for all of the
[[Page 43512]]
Registrant's business as an FCM, SD, or MSP. ISDA expressed support for
the Commission's proposed definition, but requested the Commission
provide Registrants the ability to determine individually who would
qualify as an ``equivalent officer.''
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\24\ See Chris Barnard, Better Markets, ISDA, and FIA/SIFMA
comment letters.
\25\ See FIA/SIFMA comment letter. Similarly, while TD
Ameritrade did not comment directly on the proposed definition, it
requested that the Commission consider including a variety of senior
roles at a Registrant for inclusion in the definition of ``other
equivalent officer'' for purposes of allowing the CCO to report to
someone other than the CEO.
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Upon consideration of the comments, the Commission is adopting the
definition as proposed. This definition of ``senior officer'' clarifies
the Commission's long-standing interpretation that compliance with the
statutory requirement to have the CCO ``report directly to the board or
to the senior officer'' \26\ requires a CCO to have a direct reporting
line to the board of directors or the highest executive officer in the
legal entity that is the Registrant.\27\
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\26\ 7 U.S.C. 6s(k)(2)(A) (emphasis added).
\27\ See CCO Rules Adopting Release, 77 FR at 20188. This
concept was incorporated in Sec. 3.3 and therefore applies to FCMs
equally.
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As stated in the Proposal, the ``chief executive officer'' is
typically the highest executive level, but the Commission is including
in the definition the phrase ``other equivalent officer'' to address
Registrants who may have a different title for the highest executive
officer.\28\ This approach is also consistent with the SEC's definition
of ``senior officer'' in SEC rule 15Fk-1(e)(2), and is intended to
ensure the CCO's independence from influence, interference, or
retaliation.\29\ The Commission is also declining to broaden its
definition of ``senior officer'' or expand its interpretation of
``other equivalent officer.'' The Commission notes that the definition
of ``senior officer,'' as adopted, does not preclude additional CCO
reporting lines that Registrants may wish to implement for practical
day-to-day oversight.\30\
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\28\ Proposal, 82 FR at 21331. For example, some firms do not
have a chief executive officer, but instead give the highest level
executive the title of ``president,'' ``member,'' or ``general
partner.''
\29\ Id. See also CCO Rules Adopting Release, 77 FR at 20188.
\30\ See CFTC Staff Advisory No. 16-62 (Jul. 25, 2016),
available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/16-62.pdf.
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In response to ISDA's comment, the Commission believes that the
definition and guidance provide sufficient flexibility. Registrants
should be able to ensure that regardless of a firm's chosen
nomenclature, the CCO has a direct reporting line to the highest
executive-level individual at the Registrant.
2. Other Definitions
In response to the Commission's request for comment regarding
whether other definitions should be added to Sec. 3.1, FIA/SIFMA
requested that the Commission define ``material noncompliance issue''
as it relates to the requirement in Sec. 3.3(e)(5) to describe in the
CCO Annual Report ``any material noncompliance issues identified and
the corresponding action taken.'' The Commission is declining to define
``material noncompliance issue'' at this time. Since the adoption of
the CCO Rules, Registrants have defined and implemented their own
materiality standards when categorizing non-compliance issues. Given
the variation in size and nature of businesses among Registrants
required to submit CCO Annual Reports, it is the Commission's view that
materiality is dependent upon many factors that impact Registrants to
varying degrees. While some factors ought to be considered by all
Registrants, e.g., whether the issue may involve a violation of the CEA
or a Commission regulation, there is no ``one size fits all'' approach.
Indeed, setting forth a standard of materiality could result in an
overly prescriptive model for many Registrants. Based on experience in
overseeing the implementation of Sec. 3.3(e), Commission staff
believes that Registrants have generally developed and applied adequate
internal materiality standards for purposes of the CCO Annual Report.
B. Regulation 3.3(d)--Chief Compliance Officer Duties
1. Regulation 3.3(d)(1)--Duty To Administer Compliance Policies and
Procedures
The Commission proposed to amend Sec. 3.3(d)(1) to require that a
CCO's duties include 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.
ISDA and FIA/SIFMA generally supported the Commission's proposed
changes \31\ and recommended that the Commission further harmonize
Sec. 3.3(d)(1) with the SEC's CCO rules. Specifically, ISDA and FIA/
SIFMA recommended that the Commission should clarify in guidance that
the duty to administer policies and procedures means reviewing,
evaluating, and advising the Registrant on its compliance policies and
procedures.\32\ Alternatively, ISDA proposed that the Commission strike
the term ``administering each'' from Sec. 3.3(d)(1), and replace it
with ``reviewing, evaluating, and advising the registrant on the
development, implementation, and monitoring'' of the Registrant's
compliance policies and procedures. ISDA asserted that the current
proposed language creates an undue burden on CCOs who do not
necessarily ``administer'' or execute each policy and/or procedure
relating to an applicable CFTC rule. Rather, ISDA explained, various
business units and control functions within a firm establish policies
and procedures for their respective areas, with the ultimate
supervisory authority residing with the CEO or other senior officer.
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\31\ NFA also endorsed the proposed amendment to Sec.
3.3(d)(1). See NFA comment letter.
\32\ See SEC Adopting Release, 81 FR at 30057.
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After considering the comments received, the Commission is adopting
Sec. 3.3(d)(1) as proposed. As the Commission has previously stated,
and as discussed below, the role of the CCO, under the Dodd-Frank Act,
goes beyond the customary and traditional advisory role of a CCO and
requires more active engagement.\33\ The Commission expects the CCO to
be actively engaged in administering a firm's compliance policies and
procedures, as described further below.
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\33\ See CCO Rules Adopting Release, 77 FR at 20162. (``In
response to comments advocating a purely advisory role for the CCO,
the Commission observes that the role of the CCO required under the
CEA, as amended by the Dodd-Frank Act, goes beyond what has been
represented by commenters as the customary and traditional role of a
compliance officer.'')
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The language of Sec. 3.3(d)(1), however, is not intended to
diminish the role and direct involvement of other senior officers,
supervisors and other employees with more direct knowledge, expertise,
and responsibilities for various regulated activities within their
business lines. Thus, while the CCO plays a central role in
administering a firm's policies and procedures, other personnel may
implement the procedures on a day-to-day basis when undertaking related
activities in the normal course of business.
Furthermore, the Commission reiterates that the Registrant is
ultimately responsible for the effective implementation of the policies
and procedures.\34\ In response to ISDA and FIA/SIFMA's request for
clarification on the CCO's duty to administer policies and procedures,
it is the Commission's view that a CCO may, in many circumstances, be
able to fulfill his or her role through actively engaging in processes
involving ``reviewing, evaluating, and advising'' on policies and
procedures and compliance matters, while others in the organization are
[[Page 43513]]
responsible for the daily implementation thereof. However, if, in the
normal course, the CCO becomes aware (or reasonably should have been
aware) of significant issues that are not being addressed in a
reasonably satisfactory manner, the CCO is expected to take further
action to address those issues. Importantly, for such circumstances,
CEA section 4s(k)(2)(A) provides the CCO with a reporting line directly
to the board or the senior officer. Accordingly, it may be appropriate
for the CCO, depending on the facts and circumstances, to use that
reporting line to elevate any such significant issues that have not
been otherwise addressed satisfactorily. Through this active engagement
and, if appropriate, utilizing the available escalation measures
described above, the CCO may be able to demonstrate that he or she has
fulfilled the role assigned to him or her under the regulation.
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\34\ See 75 FR 70881, 70883 (proposed Nov. 19, 2010). The CCO's
duty to administer policies and procedures does not ``otherwise
contradict well-established tenets of law regarding the allocation
of responsibility within a business association.''
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2. Regulation 3.3(d)(2)--Duty To Resolve Conflicts of Interest
Proposed Sec. 3.3(d)(2) would require the CCO, in consultation
with the board of directors or the senior officer, to take reasonable
steps to resolve any conflicts of interest that may arise. ISDA and
FIA/SIFMA supported the proposed revisions to Sec. 3.3(d)(2) and
provided additional recommendations. Both commenters recommended that
the CCO's duty to resolve conflicts of interest should be limited to
``material'' conflicts of interest and should apply only to issues that
arise in connection with the Registrant's business as an FCM, SD, or
MSP. ISDA suggested that, consistent with the SEC's view, the
Commission should explicitly state that the primary responsibility to
resolve conflicts of interest falls on the Registrant and that the
CCO's role would include identifying, advising, and escalating, as
appropriate, to senior officers matters involving conflicts of
interest. ISDA further suggested that the Commission replace
``resolve'' with ``minimize'' in the rule text. Similarly, FIA/SIFMA
recommended that the Commission clarify that ``resolution'' involves
either negation or mitigation of the conflict of interest.
Better Markets generally did not support the Commission's proposed
changes to Sec. 3.3(d)(2). Among other reasons, Better Markets is of
the view that the proposed changes are not consistent with applicable
statutory language to ``resolve any conflicts'' and will dilute the
CCO's duty to address conflicts of interest.
Having considered these comments, the Commission is adopting Sec.
3.3(d)(2) as proposed but with further modifications to provide that
CCOs have a duty to take reasonable steps to resolve ``material''
conflicts of interest ``relating to the registrant's business as a
futures commission merchant, swap dealer, or major swap participant.''
The additional language refines the Commission's view that CCOs cannot
reasonably be expected to personally resolve every potential conflict
of interest that may arise, and the Commission affirms 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.\35\ Requiring the CCO to resolve every conflict of
interest, including non-material conflicts, in consultation with the
board of directors or the senior officer would potentially take too
much of the CCO's and senior management's time away from other
necessary activities when non-material conflicts can usually be
resolved effectively by other staff in the normal course of business.
The Commission believes that this is consistent with the underlying
objective of this provision, which imposes a duty on CCOs to resolve
matters under the Act and Commission regulations within the practical
limits of their position at the Registrant. The Commission believes
that the additional language does not dilute the CCO's duty to address
conflicts of interest, and that the rule as amended fulfills the
purposes of CEA section 4s(k).\36\ Rather than spreading time and
resources over many conflict issues--both material and non-material--
the changes will allow the CCO to focus his or her time and resources
on the material conflict issues, and more broadly, the other important
compliance duties required by regulation. The Commission is also of the
view that amending Sec. 3.3(d)(2) to limit the scope of the CCO's
responsibility to conflicts relating to the Registrant's business as an
FCM, SD, or MSP clarifies that CCOs have a duty to resolve matters
under the Act and Commission regulations, rather than any conflict that
``may arise.''
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\35\ See Proposal, 82 FR at 21332. The addition of a materiality
qualifier also further harmonizes Sec. 3.3(d)(2) with the SEC's
parallel CCO rule. See 17 CFR 240.15Fk-1(b)(3).
\36\ See 77 FR at 21332 (``If strictly interpreted, the current
rule text creates an undue burden on CCOs, likely taking them away
from more important compliance activities.'')
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The Commission declines to implement comments suggesting that CCOs
have a duty to simply minimize, rather than ``resolve'' conflicts of
interest. CEA section 4s(k)(2)(C) explicitly requires conflict
resolution.\37\ While resolution can include the mitigation of
conflicts to the point where they are no longer material, resolution
also encompasses the elimination of conflicts if reasonably
practicable.\38\
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\37\ See 7 U.S.C. 6s(k)(2)(C).
\38\ See CCO Rules Adopting Release, 77 FR at 20161.
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In response to ISDA's request that the Commission state that a
CCO's role in resolving conflicts would involve identifying, advising
on, and escalating to management conflicts of interest, the Commission
is declining to incorporate that language into the regulatory text.
However, the Commission believes that such an approach provides a
reasonable framework for CCOs to use in fulfilling their duty to take
reasonable steps to resolve material conflicts of interest. As the
Commission has previously acknowledged, active engagement ``may involve
actions other than making the final decision.'' \39\
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\39\ Id.
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Should CCOs choose to incorporate the ``identify, advise and
escalate'' framework into their conflict resolution procedures,
however, a passive implementation of that framework should not be
viewed as fulfilling the CCO's duties for conflict resolution. The
requirement to ``take reasonable steps'' requires an active role in the
conflict resolution process, including, for example: (1) Direct
involvement of the CCO in developing and implementing active processes
for conflict identification, evaluation, and resolution; (2) advising
on the effectiveness of alternatives to mitigate or eliminate
conflicts; and (3) escalating conflict issues if the conflicts are not
otherwise resolved or mitigated as required by Sec. 3.3(d)(2),
including through the CCO's direct reporting line to the board of
directors or the senior officer if necessary or appropriate.
The Commission believes that the determination of what is a
``material'' conflict for a particular Registrant should be assessed
based on the facts and circumstances relevant to that Registrant and
the conflict. Although the Commission notes that there are some
conflicts that are typically treated as material,\40\ the Commission
declines
[[Page 43514]]
at this time to define materiality in this context to avoid creating an
unintentionally prescriptive model. The Commission expects each
Registrant to develop its own appropriate standard or procedure for
determining if a conflict is ``material'' for purposes of the rule.
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\40\ For example, similar to the SEC's approach, conflicts
between the business interests of a Registrant and its regulatory
requirements, and conflicts between or with associated persons of a
Registrant are often material. See SEC Adopting Release, 81 FR 29960
at 30056-30057 (``Such conflicts of interest could include conflicts
between the commercial interests of an SBS Entity and its statutory
and regulatory responsibilities, and conflicts between, among, or
with associated persons of the SBS Entity.'').
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3. Regulation 3.3(d)(3)--Duty To Ensure Compliance
The Proposal would make a wording change to Sec. 3.3(d)(3) to
simplify the text \41\ and to add that a CCO's duty in Sec. 3.3(d)(3)
to ensure compliance with the Act and the Commission's regulations
includes ``ensuring the registrant establishes, maintains, and reviews
WPPs reasonably designed to achieve compliance.''
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\41\ The Proposal would change the words ``. . . relating to the
swap dealer's or major swap participant's activities, or to the
future commission merchant's business as a futures commission
merchant'' to ``. . . relating to the registrant's business as a
futures commission merchant, swap dealer or major swap
participant.''
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ISDA and FIA/SIFMA recommended that the Commission further
harmonize paragraph (d)(3) with the SEC's corresponding rule by
removing the existing general duty for the CCO to take reasonable steps
to ensure compliance and only require the CCO to ensure that the
Registrant establishes, maintains, and reviews policies and procedures
as the CCO's duty.\42\ ISDA and FIA/SIFMA also asserted that the change
would address uncertainty regarding the breadth of a CCO's supervisory
authority and concerns that ensuring compliance is an impracticable
requirement for CCOs.
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\42\ See FIA/SIFMA and ISDA comment letters (emphasis added).
See also 17 CFR 240.15Fk-1(b)(2).
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TD Ameritrade commented that the Commission should align paragraph
(d)(3) with FINRA Rule 3130 by clarifying that the CCO is required to
``have processes in place'' for the Registrant to establish, maintain,
and review WPPs reasonably designed to achieve compliance. TD
Ameritrade contended that the proposed language in paragraph (d)(3),
which requires CCOs to ensure compliance, rather than simply have
processes in place, is cumbersome and perhaps places a higher burden on
CCOs than intended by the Commission.
Better Markets commented that the proposed amendment to paragraph
(d)(3) could be viewed as defining the full scope of the CCO's duty to
ensure compliance, rather than merely clarifying the extent of the
duty. Better Markets noted that the duty to ensure compliance is broad
and cannot be equated with a CCO's obligation to administer policies
and procedures. To eliminate uncertainty, Better Markets recommended
further clarifying that the additional language is ``without
limitation.'' \43\
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\43\ Better Markets comment letter.
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Having considered the totality of the responses received, the
Commission believes that the proposed amendment to Sec. 3.3(d)(3)
adding that the duty includes ``ensuring the registrant establishes,
maintains, and reviews WPPs reasonably designed to achieve compliance''
creates ambiguity, rather than clarity, with respect to the scope of a
CCO's duty to ensure compliance. Therefore, the Commission is declining
to adopt that proposed amendment to Sec. 3.3(d)(3).\44\ A CCO's duty
in Sec. 3.3(d)(3) to ensure compliance with the Act and Commission
regulations therefore remains the same as adopted in the CCO Rules
Adopting Release.
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\44\ The proposed non-substantive change that simplifies the
wording of Sec. 3.3(d)(3) is being adopted for the reasons stated
in the Proposal.
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Current Sec. 3.3(d)(3) implements CEA section 4s(k)(2)(E). CEA
section 4s(k)(2)(E) requires that the CCO shall ensure compliance with
the Act (including regulations) relating to swaps, including each rule
prescribed by the Commission under that section. Thus, the Commission
believes Sec. 3.3(d)(3) requires more than, as suggested by some
commenters, simply taking reasonable steps to ensure the Registrant
establishes, maintains, and reviews written compliance policies and
procedures.\45\ The Commission, however, acknowledges commenters'
concerns regarding the uncertainty as to the breadth of a CCO's
responsibility and the practicality of broad expectations for the CCO
in this regard given the wide variety of swap dealing and other
activities undertaken by different Registrants. When finalizing Sec.
3.3(d)(3), the Commission recognized that requiring a CCO to ``ensure
compliance'' could be an impracticable standard and limited the CCO's
duty to ``taking reasonable steps to ensure compliance.'' \46\ At the
time, however, the Commission did not provide guidance on what ``taking
reasonable steps to ensure compliance'' means. Accordingly, the
Commission is taking this opportunity, with the benefit of several
years of experience implementing the CCO Rules, to provide further
guidance as to the breadth of the CCO obligations under Sec. 3.3(d)(3)
and the practical expectations for fulfilling those obligations.
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\45\ See 7 U.S.C. 6s(k)(2)(E) (requiring the CCO to ensure
compliance with the Act (including regulations) relating to swaps,
including each rule prescribed by the Commission under that
section).
\46\ See CCO Rules Adopting Release, 77 FR at 20162.
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As stated by the Commission previously, the CCO's duty to take
reasonable steps to ensure compliance includes active engagement in the
day-to-day implementation of compliance policies and procedures.\47\
This engagement would likely include a reasonable level of involvement
in compliance monitoring, identifying non-compliance or potential non-
compliance events, advising on the mitigation and correction of
compliance activities, and, where necessary, escalating significant
matters that require senior management attention.\48\ Whether the CCO's
activities constitute ``reasonable steps'' depends on the facts and
circumstances of the Registrant's related business activities, such as
the size of the business, the diversity and complexity of the swaps or
FCM activities, and the overlap with other compliance activities in the
firm (e.g., where swap dealing activities may be contained within
business lines that are subject to additional regulation outside the
CEA).
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\47\ See supra at note 33.
\48\ For example, escalation could be to the board or the senior
officer to whom the CCO reports either through the CCO Annual
Report, annual or more frequent meetings, or other mechanisms.
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In taking reasonable steps to ensure compliance, the Commission
believes that a CCO cannot reasonably be expected to have sole and
complete responsibility for ensuring compliance with the Act and the
relevant regulations.\49\ As such, Sec. 3.3(d)(3) does not require the
CCO to guarantee compliance or be granted final supervisory
authority.\50\ The regulation does not diminish the role and direct
involvement of other senior officers, supervisors, and employees with
more direct knowledge, expertise, and responsibilities for the
regulated business activities to effect compliance. As such, the
Commission is of the view that a CCO may reasonably rely on these
personnel to implement many of the policies and procedures needed to
ensure compliance as part of their regular business activities (in this
regard, such personnel are sometimes referred to as the ``first line''
of compliance).\51\ The Commission also
[[Page 43515]]
notes that, pursuant to Sec. 3.3(a)(1), the CCO has a direct reporting
line to the board or the senior officer of the Registrant. To the
extent the CCO determines that he or she cannot fulfill the duty
established in Sec. 3.3(d)(3) because of the actions or inaction of
others, a lack of resources, or otherwise, the CCO has an avenue for
escalating these issues to the highest level of management within the
Registrant. In doing so, the CCO may be able to demonstrate that he or
she has taken reasonable steps to fulfill the duty created in Sec.
3.3(d)(3).
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\49\ See 75 FR at 70883 (``The chief compliance officer can only
ensure the registrant's compliance to the full capacity of an
individual person . . .'').
\50\ See CCO Rules Adopting Release, 77 FR at 20162 (``[T]he
Commission does not believe . . . that the CCO's duties under the
CEA or Sec. 3.3 requires that the CCO be granted ultimate
supervisory authority by a registrant.'').
\51\ For example, in working with other personnel at the
Registrant, it would be reasonable to expect that a CCO would
participate in (though not necessarily have sole or principal
responsibility for implementing) the development and implementation
of compliance training, monitoring and spot checking of first line
compliance activities, the identification of possible compliance
weaknesses, and the escalation to supervisors and senior management
of the remediation or mitigation of weaknesses identified, as
appropriate.
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4. Regulation 3.3(d)(4) and (5)--Duty To Remediate Noncompliance Issues
The Commission proposed to amend Sec. 3.3(d)(4) by adding language
that the duty to remediate noncompliance issues identified by the CCO
encompasses maintaining and reviewing, in addition to establishing,
written policies and procedures. The Commission also proposed to amend
Sec. 3.3(d)(4) and (5) by removing the requirement that the CCO
consult with the board of directors or senior officer in establishing:
(1) Policies and procedures for the remediation of noncompliance issues
identified by the CCO; and (2) procedures for the handling, management
response, remediation, retesting, and closing of noncompliance issues.
The Proposal would also clarify that the policies and procedures should
be ``reasonably designed'' to remediate noncompliance issues. Lastly,
the Commission proposed to amend paragraph (d)(4) to include the
remediation of matters identified ``through any means'' by the CCO,
including the specific discovery methods already listed in Sec.
3.3(d)(4). FIA/SIFMA generally supported the Commission's proposed
amendments to paragraphs (d)(4) and (5), and requested that the
Commission further add to paragraphs (d)(4) and (5) that the CCO's duty
is to take ``reasonable steps to ensure that the registrant''
establishes the required policies and procedures for the remediation of
noncompliance issues, rather than to be directly responsible for
establishing the policies and procedures. FIA/SIFMA noted that this
change, consistent with the SEC's CCO rules, reflects the fact that it
is the responsibility of the Registrant, not the CCO in his or her
personal capacity, to establish the specified policies and procedures.
Better Markets disagreed with the Commission's proposed changes.
Better Markets contended that the removal of the board of directors and
senior officer consultation requirement could marginalize the board of
directors' role and send the message that the board of directors needs
to be only occasionally involved in the remediation of noncompliance
issues. Better Markets further asserted that the proposed change that
policies and procedures be ``reasonably designed'' makes it easier for
Registrants to meet their legal obligations without actually realizing
the underlying regulatory goal of remediating noncompliance issues.
With respect to the specific noncompliance discovery methods listed
in paragraph (d)(4), ISDA recommended that the Commission provide legal
certainty to Registrants by clarifying that the term ``complaint that
can be validated'' means ``a written complaint that can be supported
upon a reasonable investigation.'' \52\ ISDA noted that this
clarification would further harmonize the Commission's CCO Rules with
the SEC's, and would provide legal certainty with respect to which
kinds of noncompliance issues need to be escalated to the CCO.
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\52\ ISDA comment letter.
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In light of the comments received, the Commission is adopting
proposed paragraphs (d)(4) and (5) with additional modifications to
clarify the Commission's position that the CCO's duty with respect to
establishing the Registrant's noncompliance remediation policies and
procedures is to take reasonable steps to ensure that the registrant
fulfills that responsibility. Accordingly, Sec. 3.3(d)(4) and (5), as
adopted, require a CCO to take ``reasonable steps to ensure the
registrant'' establishes, maintains and reviews the applicable policies
and procedures. With respect to the other proposed amendments to
paragraphs (d)(4) and (5), the Commission is adopting those amendments
for the reasons discussed in the Proposal.
In response to the concern raised by Better Markets that removing
the consultation clause will diminish the board of directors and senior
officer role, the Commission believes that there are two reasons to
maintain the proposed changes to Sec. 3.3(d)(4) and (5). As discussed
in the Proposal, the CCO should manage and remediate noncompliance
issues in consultation, as appropriate, with personnel that are experts
in these matters, including, if appropriate, senior management and the
board of directors. Requiring further consultation with the board of
directors or the senior officer on these procedures in the ordinary
course would be an unnecessary burden on the Registrants. Furthermore,
the Commission notes that, under Sec. 3.3(a)(1), the CCO must report
to the board of directors or the senior officer. Accordingly, to the
extent the CCO is of the view that the policies and procedures being
established do not meet the requirements of the Commission's
regulations and is unable to effect the necessary changes through other
means, it would be appropriate for the CCO, as a reasonable step for
ensuring that the appropriate policies and procedures are established,
to elevate the issue to the board of directors or the senior officer to
whom the CCO reports. Thus, an appropriate avenue for consultation with
the board of directors or the senior officer is already part of the
regulatory requirements in the CCO Rules.
With respect to ISDA's recommendation that the Commission clarify
the ``complaint that can be validated'' standard, the Commission
declines to clarify the standard in the manner requested. The
Commission believes that noncompliance should be a focus for CCOs, and
accordingly, all noncompliance complaints, whether written or verbal,
should be investigated using reasonable means. The Commission further
notes that the CCO may identify noncompliance issues ``through any
means'' and ``a complaint that can be validated'' is one of many ways
in which a CCO may identify such issues.
C. Regulation 3.3(e)--CCO Annual Report
Below is a subsection-by-subsection review of the comments received
on the proposed changes to the CCO Annual Report requirements and a
description of the changes being adopted.\53\ On December 22, 2014,
CFTC staff issued Advisory No. 14-153 providing guidance to Registrants
on the form and content requirements of the CCO Annual Reports (``CCO
Annual Report Advisory''). In their comment letter, FIA/SIFMA requested
that the Commission address the effect of the rule amendments on the
guidance in the CCO Annual Report Advisory.
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\53\ In connection with the proposed amendments, the Proposal
also would renumber the paragraphs within Sec. 3.3(e) and make
other non-substantive changes related to the renumbering. Those
changes are being adopted for the reasons stated in the Proposal.
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The Commission believes that providing updated guidance in concert
[[Page 43516]]
with adopting the amendments to Sec. 3.3(e) will help to increase the
final rule's efficiency and clarity. Accordingly, the Commission is
providing guidance regarding the CCO Annual Report in new Appendix C to
Part 3, ``Guidance on the Application of Rule 3.3(e), Chief Compliance
Officer Annual Report Form and Content.'' The CCO Annual Report
Advisory is hereby superseded by this final release including the new
Appendix C to Part 3. The Commission or its staff may issue updated
guidance regarding the CCO Annual Report in the future based on
experience gained as Registrants implement the amended content
requirements.
1. Regulation 3.3(e)(1)--Description of the Registrant's WPPs
Section 3.3(e)(1) requires a CCO to describe the Registrant's WPPs,
including its code of ethics and conflicts of interest (``COI'')
policies. Proposed Sec. 3.3(e)(1) sought to clarify that only the WPPs
that relate to a Registrant's business as an FCM, SD, or MSP must be
described in the CCO Annual Report by adding text referring to the
policies and procedures described in Sec. 3.3(d). The Commission did
not receive any comments specific to proposed Sec. 3.3(e)(1),\54\ and
is adopting amended Sec. 3.3(e)(1) as proposed.\55\
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\54\ Three commenters expressed general support of the proposed
amendments to Sec. 3.3(e). See TD Ameritrade, FIA/SIFMA, and ISDA
comment letters.
\55\ The Commission notes that Sec. 3.3(e)(1) retains the
statutory requirement in CEA section 4s(k)(3)(A)(ii), 7 U.S.C.
6s(k)(3)(A)(ii), to describe the Registrant's Conflict of Interest
and Code of Ethics policies (if the Registrant had previously
adopted a Code of Ethics).
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2. Regulation 3.3(e)(2)--Assessment of the Effectiveness of the
Policies and Procedures
Proposed Sec. 3.3(e)(2) would eliminate the express mandate to
identify and assess the effectiveness of each WPP for each regulatory
requirement under the CEA and Commission regulations in the CCO Annual
Report. The Commission received six comments regarding this proposed
amendment. FIA/SIFMA, ISDA, NFA, and TD Ameritrade generally supported
the change. Specifically, ISDA noted that the proposed revisions
``would strike a proper balance between providing the Commission with
meaningful analyses of firms' compliance programs and conserving the
time and resources of both the Commission and firms.'' \56\ Similarly,
NFA stated, ``NFA believes it will improve the quality of the report by
allowing firms to focus on providing meaningful summaries of their
WPPs, together with a detailed discussion of the annual assessment and
recommended improvements.'' \57\
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\56\ See ISDA comment letter.
\57\ See NFA comment letter.
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Better Markets opposed the proposed amendment and expressed its
belief that the ``detailed assessment of the policies and procedures,
relative to each specific regulatory requirement, is a valuable
exercise that brings rigor to the process.'' \58\ ACM explained that
Registrants, using ACM's product, often obtain sub-certifications from
subject matter experts within the firm for each applicable requirement.
ACM sought clarification regarding whether the proposed amendment is
intended to eliminate the requirement-by-requirement review.
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\58\ See Better Markets comment letter.
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The Commission has considered the comments and is adopting amended
Sec. 3.3(e)(2) as proposed. As adopted, the rule requires the CCO
Annual Report to contain, among other things, a description of the
CCO's assessment of the effectiveness of the Registrant's WPPs relating
to its business as an FCM, SD, or MSP. In response to Better Markets
and ACM, the Commission affirms that the rule, as amended, does not
require the CCO Annual Report to contain an assessment of the WPPs'
effectiveness with respect to each applicable requirement under the Act
and regulations. However, the CCO must still conduct an underlying
assessment of the policies and procedures to meet the requirements of
the rule. The Commission affirms that Registrants may still rely on the
use of sub-certifications or any other methodology they have previously
employed to conduct the assessment of their compliance programs
pursuant to Sec. 3.3(d) and (e).
In further response to Better Markets' concern that removing the
requirement-by-requirement assessment from the CCO Annual Report would
weaken the self-assessment process, the Commission notes that the final
rule does not remove a CCO's duty to undertake the review. The
Commission believes that a robust and meaningful self-assessment
process is maintained through the affirmative CCO duties to ensure
review of the WPPs and to describe the CCO's assessment in the CCO
Annual Report. Furthermore, as described in the Proposal, the
Commission believes that reducing the burden associated with preparing
the CCO Annual Report will permit CCOs and Registrants to both improve
their compliance assessment processes and allocate more time and
resources to more critical areas within the firm.
3. Regulation 3.3(e)(4)--Resources Set Aside for Compliance
Proposed Sec. 3.3(e)(4) would clarify that the discussion of
resources only need address those resources set aside for compliance
activities that relate to the Registrant's business as an FCM, SD, or
MSP. The Commission received comments from FIA/SIFMA, NFA, and ISDA
generally supporting the proposed amendment. ISDA suggested that the
Commission rescind related guidance in the CCO Annual Report Advisory
regarding quantification of resources and allow Registrants to provide
a narrative assessment of the sufficiency of compliance resources.\59\
Similarly, FIA/SIFMA requested that the Commission state that Rule
3.3(e)(4) does not require specific numerical estimates.\60\
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\59\ See ISDA comment letter.
\60\ See FIA/SIFMA comment letter.
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The Commission is adopting amended Sec. 3.3(e)(4) as proposed.
Regarding the description of compliance resources, the Commission
previously addressed the issues raised by ISDA, FIA, and SIFMA in the
CCO Rules Adopting Release. At the outset, the Commission has
recognized that a primary purpose of the CCO Annual Report is to
provide ``an efficient means to focus the registrant's board and senior
management on areas requiring additional compliance resources.'' \61\ A
detailed discussion of the current state of compliance resources,
including as appropriate, quantitative information, forms an integral
part of a CCO Annual Report that, as the Commission stated, ``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.'' \62\ In requiring a
description of the compliance resources in the CCO Annual Report, but
not prescribing the description's form or manner (which is left to the
Registrant's reasonable discretion) the Commission is balancing the
need for context and critical information, and the potential burdens on
the CCO in performing the underlying resources identification and
analysis.\63\
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\61\ See CCO Rules Adopting Release, 77 FR at 20190.
\62\ Id. at 20193.
\63\ Id. at 20164.
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The description of resources required by Sec. 3.3(e)(4) is
intended to inform the Registrant and the Commission as to the
sufficiency of resources dedicated to
[[Page 43517]]
compliance. Moreover, by requiring inclusion in the CCO Annual Report,
the Commission recognizes that the usefulness of this information may
lie in the trends and impacts of isolated events that can be observed
over time regarding staffing levels, financial resources devoted to
compliance, or the addition or subtraction of operational or
technological resources. Some of the categories of resources CCOs are
required to describe under Sec. 3.3(e)(4) are, by their nature,
quantitative (e.g., number of compliance personnel and budgetary
information). However, the Commission also recognizes that, depending
on a Registrant's structure and the nature of its business, a
quantitative description may include approximations and estimates. It
is the Commission's view that, in complying with Sec. 3.3(e)(4), each
Registrant should focus on whether its CCO Annual Report is effectively
providing its senior leadership and the Commission with the ability to
reasonably assess the state of the Registrant's compliance resources,
irrespective of how it expresses the quantitative information.
D. Regulation 3.3(f)--Furnishing the CCO Annual Report and Related
Matters
In view of the comments received on proposed Sec. 3.3(f) and
related matters, the Commission is making a number of changes described
below. As a general matter, to provide the reader greater clarity, the
Commission is adding descriptive paragraph headings to Sec. 3.3(f)(1)
through (6) for the final rule.
1. Regulation 3.3(f)(1)--Furnishing the CCO Annual Report
Proposed Sec. 3.3(f)(1) would harmonize the requirements under the
SEC and CFTC CCO Rules to require that the CCO Annual Report be
furnished to all members of the board of directors, senior officer, and
audit committee (or equivalent body) prior to being furnished to the
Commission.
The Commission received three comments addressing the proposed
amendment. Better Markets supported the proposed amendment as a means
to strengthen the CCO framework. ISDA and FIA/SIFMA opposed the
amendment and asserted that it is burdensome and unnecessary in light
of the variability among Registrants. Specifically, ISDA and FIA/SIFMA
commented that the proposed amendment would add burdens and costs given
that the audit committees and boards of directors do not necessarily
meet prior to the deadline to file the CCO Annual Report with the
Commission.\64\ FIA/SIFMA also contended that harmonization with the
SEC is not appropriate for this rule because there is greater variety
of corporate forms and organizational structures among FCMs, SDs, and
MSPs than SEC-regulated entities and the change may raise questions for
those Registrants that do not have a board of directors or audit
committee. Additionally, FIA/SIFMA asserted the board of directors of
an SD that is part of a large, diversified commercial bank may already
have full meeting agendas that do not warrant the addition of another
board obligation. Alternatively, ISDA and FIA/SIFMA commented that if
the Commission decided to adopt the proposed amendment, it should make
appropriate modifications to accommodate existing board and audit
committee meeting schedules. FIA/SIFMA also sought further
clarification that the rule would not require a Registrant to establish
a board of directors or audit committee, and that it could be satisfied
through submission to certain other equivalent personnel.
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\64\ See ISDA and FIA/SIFMA comment letters.
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After considering commenters' concerns, the Commission has
determined to retain the current approach in Sec. 3.3(f)(1) to require
the CCO to provide the annual report to the board of directors or the
senior officer prior to furnishing it to the Commission.\65\ The
Commission, however, is also adopting a modified version of proposed
Sec. 3.3(f)(1) with respect to furnishing the CCO Annual Report to the
audit committee (or equivalent body). In response to comments, Sec.
3.3(f)(1)(ii), as adopted, requires that the CCO Annual Report must be
furnished to the audit committee (or equivalent body), if the
Registrant has such a committee. In addition, if the Registrant has an
audit committee (or equivalent body), then the CCO Annual Report must
be furnished to that committee not later than its next scheduled
meeting after the date on which the CCO Annual Report is furnished to
the Commission, but in no event more than 90 days after the
Registrant's CCO Annual Report is furnished to the Commission. The
Commission is adding the 90 day time frame to ensure that the audit
committee receives the report in a timely manner in furtherance of this
provision, but without causing unnecessary disruption to its operation.
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\65\ A conforming change was made to Sec. 3.3(f)(1)(iii)
regarding making and maintaining a record of furnishing the report
to the board of directors or the senior officer, and the audit
committee.
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The Commission believes that a flexible approach to the timing of
furnishing the CCO Annual Report to the audit committee (or equivalent
body) addresses commenters' concerns about meeting schedules and the
CCO Annual Report submission deadline and better serves the underlying
purpose of furnishing the report to the appropriate representatives of
senior management at a time that allows for appropriate review by them.
The Commission further believes that although the rule as adopted is
not identical to the SEC's approach, the two approaches both preserve
the goal of ensuring that management with overall responsibility for
governance and internal controls is informed of the Registrant's state
of compliance in a timely manner while recognizing the inherent
differences between CFTC and SEC Registrants. The SEC's CCO rules apply
to security-based swap dealers and major security-based swap
participants, which are likely to consist of a smaller number of large
financial entities or affiliates thereof, most of which are likely
required by regulation to have audit committees.\66\ By contrast, the
CFTC's CCO Rules apply to SDs that range from large financial
enterprises to regional banks to commodity dealers to limited purpose
affiliates, as well as FCMs. In light of this greater variety of firms
subject to the CFTC CCO Rules, the Commission believes a more flexible
approach is appropriate.
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\66\ See SEC Adopting Release, 81 FR at 30105 (estimating that
approximately 55 entities might register as security-based swap
dealers or major security-based swap participants).
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Similarly, in response to FIA/SIFMA's comment that some Registrants
may not have a board of directors or audit committee, the Commission
acknowledges that some types of entities that are Registrants are not
required to have such bodies, particularly audit committees, and
therefor may not have established such a body. The Commission affirms
that the rule was not intended to require Registrants to establish
either type of body. Accordingly, the final rule text provides that
furnishment to the audit committee or equivalent body is required only
if such a committee or body has been established. If not, compliance
with Sec. 3.3(f)(1) may be met by furnishing the CCO Annual Report to
the senior officer or board members only, as applicable.
2. Regulation 3.3(f)(3)--Certification
In response to the Commission's request for comment on additional
changes to further harmonize with the
[[Page 43518]]
SEC regulations that correspond to Sec. 3.3(f), the Commission
received four comments regarding the CCO Annual Report certification
language in Sec. 3.3(f)(3). Citing the Commission's stated goal of
harmonizing Sec. 3.3 with SEC rule 15Fk-1(c)(2)(ii)(D) and concerns
regarding potential excess CCO liability, NFA, FIA/SIFMA, and ISDA
urged the Commission to include a materiality qualifier. FIA/SIFMA and
ISDA recommended that the phrase ``in all material respects'' be added.
TD Ameritrade requested that the Commission assess whether the ``under
the penalty of law'' standard is the correct standard for CCOs.
The Commission is adopting Sec. 3.3(f) as proposed with one
change. The Commission is adding qualifying language, ``in all material
respects'' to the requirement to certify that the information contained
in the CCO Annual Report is accurate and complete. Consistent with the
SEC's approach, this modification provides a reasonable standard and
additional clarity regarding the obligations and potential liability of
the certifying official. When the Commission adopted the CCO Rules in
2012, it was of the view that limiting the certification language with
the qualification ``to the best of his or her knowledge and reasonable
belief'' would address concerns of overbroad liability.\67\ The rule,
the Commission reasoned, ``would not impose liability for compliance
matters that are beyond the certifying officer's knowledge and
reasonable belief at the time of the certification.'' \68\ This
language, however, as noted by FIA/SIFMA, ISDA, and TD Ameritrade, may
not completely address concerns regarding immaterial inaccuracies or
omissions in the CCO Annual Report, notwithstanding the certifying
official's good faith efforts to exercise appropriate due diligence.
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\67\ CCO Rules Adopting Release, 77 FR at 20163.
\68\ Id.
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As noted in the CCO Rules Adopting Release, the Commission
appreciates that, for many Registrants, the breadth and complexity of
the information contained in the CCO Annual Report inherently requires
reliance on many individuals to gather the information for, and
prepare, the report.\69\ The Commission understands that immaterial
inaccuracies or omissions rarely undermine the compliance information
contained in the CCO Annual Report. Accordingly, it is reasonable and
appropriate to expect that the CCO or chief executive officer would,
``to the best of his or her knowledge and reasonable belief'' certify
that ``the information in in the annual report is accurate and complete
in all material respects'' (emphasis added).\70\
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\69\ Id. at 20162-3.
\70\ The Commission also notes that adding ``in all material
respects'' to Sec. 3.3(f)(3) is consistent with the related duty
under Sec. 3.3(f)(4) to promptly amend and recertify the CCO Annual
Report if ``material errors or omissions'' in the report are
identified (emphasis added).
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3. Regulation 3.3(f)(6)--Incorporation by Reference and Treatment of
Affiliated Registrants
FIA/SIFMA commented that, because affiliated SDs often share a
common SD compliance program, much of the information in the CCO Annual
Reports is the same. FIA/SIFMA therefore requested that the Commission
permit flexibility in how reports from affiliated registrants address
common matters.
The Commission believes that, as a procedural matter within the
scope of this rulemaking, it is appropriate to provide the requested
flexibility. Permitting the consolidation of all relevant information
concerning Registrants that control, are controlled by, or are under
common control with, other Registrants (``Affiliated Registrants'')
into one cohesive report could lead to greater efficiency for those
Registrants and improved regulatory oversight. In addition, the request
is consistent with provisions in Sec. 3.3(f)(6) permitting individual
Registrants and Registrants that are registered in more than one
capacity, e.g., as an SD and FCM (``Dual Registrants''), to incorporate
by reference sections of a CCO Annual Report furnished to the
Commission within the current or immediately preceding reporting
period. Accordingly, the Commission is amending Sec. 3.3(f)(6) to
permit Affiliated Registrants to incorporate within their CCO Annual
Reports information shared across related Registrants.
More broadly, the Commission believes that the annual compliance
reporting requirement should not be subject to restrictive formatting
requirements that do not serve the purpose of the reports. To the
extent that the same information can be presented once for multiple
reporting requirements (e.g., for a Dual Registrant or Affiliated
Registrants) thereby creating efficiencies without undermining the
purpose and utility of the CCO Annual Report, the Commission believes
it is appropriate to permit the practice. In view of the foregoing, the
Commission is reorganizing Sec. 3.3(f)(6) into three subparagraphs to
more clearly set forth the different scenarios in which Affiliated
Registrants or Dual Registrants can present the same information used
in multiple reports or file one combined report addressing multiple
reporting requirements.
New subparagraph (i) incorporates without modification the current
language in Sec. 3.3(f)(6). Subparagraph (i) permits an individual
Registrant to incorporate by reference sections in a CCO Annual Report
that it furnished to the Commission within the current or immediately
preceding reporting period.
Like Sec. 3.3(f)(6) as originally adopted, new subparagraph (ii)
permits Dual Registrants to cross-reference sections in CCO Annual
Reports submitted on behalf of either of its registrations within the
current or immediately preceding reporting period. To address ambiguity
regarding whether incorporation by reference can be achieved through
the annual preparation and submission of a single CCO Annual Report by
a Dual Registrant, the Commission is adding clarifying language to
Sec. 3.3(f)(6)(ii). Under new Sec. 3.3(f)(6)(ii), a Dual Registrant
may submit a single CCO Annual Report covering the annual reporting
requirements relevant to each registration category, provided that: (1)
The requirements of Sec. 3.3(e) are clearly addressed and identifiable
as they apply to the Dual Registrant in each of its registration
capacities; (2) to the extent a section of the CCO Annual Report
addresses shared compliance programs, resources, or other elements
related to compliance, there is a clear description of the commonality
and delineation of any differences; and (3) the Registrant complies
with the requirements of Sec. 3.3(f)(1) and (3) to certify and furnish
the CCO Annual Report for each of its registrations. Regarding this
last requirement, the Commission would expect the Dual Registrant to
separately certify the CCO Annual Report with respect to each
registration category, even if the same CCO or CEO serves as the
certifying officer for each registration.
Subparagraph 3.3(f)(6)(iii) permits Affiliated Registrants to use
incorporation by reference within their individually required CCO
Annual Reports to address matters shared across related registered
legal entities. The Commission believes that providing greater
flexibility to Affiliated Registrants may provide a more efficient
process in achieving the goals of the CCO Annual Report by leveraging
current structures and expertise. Regarding the extent of incorporation
by reference, consistent with the Commission's view that a flexible
approach as to form is warranted, the
[[Page 43519]]
Commission is not prescribing a strict requirement. For example,
Affiliated Registrants could submit two separate reports, one of which
incorporates by reference listed sections of the other. As another
example, Affiliated Registrants could create a master report covering
multiple affiliates in a manner similar to that described above for
Dual Registrants in which information common to the affiliates is
provided once in the report and identified as such and then other
sections or appendices provide information specific to each affiliate
separately. To the extent Affiliated Registrants choose to combine the
contents of their individual CCO Annual Reports, the Commission would
require the CCO or CEO for each Registrant to certify the applicable
contents of the report consistent with Sec. 3.3(f)(3).
The Commission expects that CCOs of Affiliated Registrants who
share common compliance program elements be actively engaged in
evaluating, assessing, and advising senior management with regard to
those elements within their respective duties to a particular
Registrant. Accordingly, how a CCO determines to address such common
compliance program elements should not undermine the content or
representations made in the CCO Annual Report so long as the references
are clear and the information is fully accessible to senior management
and the Commission.
E. Other Comments
1. Volcker Rule
The Commission received two comments regarding the compliance
requirements of subpart D of part 75 of the Commission's regulations
and their relation to Sec. 3.3. Specifically, FIA/SIFMA requested that
the Commission revisit the footnote in the part 75 adopting release
that includes the compliance requirements under subpart D of part 75
among the regulations covered by Sec. 3.3(d) and (e).\71\ Similarly,
ISDA requested that the Commission remove the requirement for an
applicable FCM or SD to address Volcker compliance program requirements
in its CCO Annual Report.
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\71\ See Prohibitions and Restrictions on Proprietary Trading
and Certain Interests in, and Relationships with, Hedge Funds and
Private Equity Funds, 79 FR 5808, 6020 n. 2521 (Jan. 31, 2014).
---------------------------------------------------------------------------
At this time, the Commission is declining to address the Volcker
Rule compliance program requirements issue, as it was not considered in
the Proposal. However, the Commission notes that the issue that
commenters are raising requires serious consideration, and it may
address the issue in future guidance or rulemakings.
2. Substituted Compliance
The Commission received three comments regarding the applicability
of the Proposal to its outstanding comparability determinations for
non-U.S. SDs and MSPs. ISDA, the JBA, and Allen & Overy requested
clarification from the Commission that the proposed amendments will not
have any impact on the current substituted compliance determinations
that pertain to Sec. 3.3. The Commission confirms that any existing
substituted compliance determinations with respect to Sec. 3.3 are not
affected by this rulemaking.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \72\ 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. As noted in
the Proposal, the regulations adopted herein would affect FCMs, SDs,
and MSPs that are required to be registered with the Commission. The
Commission has previously determined that FCMs, SDs, and MSPs are not
small entities for purposes of the RFA. The Commission received no
comments on the Proposal's RFA discussion. Accordingly, the Chairman,
on behalf of the Commission, certifies, pursuant to 5 U.S.C. 605(b),
that these regulations will not have a significant economic impact on a
substantial number of small entities.
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\72\ 5 U.S.C. 601 et seq.
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \73\ 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''). As discussed in the Proposal, the final rules contain
a collection of information for which the Commission has previously
received a control number from OMB. The title for this collection of
information is OMB control number 3038-0080--Annual Report for Chief
Compliance Officer of Registrants. As a general matter, the rules, as
adopted: (1) Define the term ``senior officer''; (2) clarify the scope
of the CCO duties and the content requirements of the CCO Annual
Report; (3) add the Registrant's audit committee as a party that must
receive the CCO Annual Report; (4) add a materiality qualifier to the
CCO Annual Report certification language; and (5) provide procedural
instruction for Dual and Affiliated Registrants in the preparation and
submission of CCO Annual Reports that address common information across
the same or related legal entities. As discussed in the Proposal and
herein, the Commission believes that these regulations, as adopted,
will not impose any new information collection requirements that
require approval of OMB under the PRA. As such, the final rules 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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\73\ 44 U.S.C. 3501 et seq.
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C. Cost-Benefit Considerations
1. General Considerations
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. 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 relative to the status quo baseline--that is
existing Sec. 3.3--and how various regulated entities comply with
existing Sec. 3.3 today.
The Commission notes that the consideration of costs and benefits
below is based on the understanding that the markets function
internationally, with many transactions involving U.S. firms taking
place across international boundaries; with some Commission registrants
being organized outside of the United States; with leading industry
members typically conducting operations both within and outside the
United States; and with industry members commonly following
substantially similar business practices wherever located. While the
Commission does not specifically refer to matters of location, the
below discussion of costs and benefits refers to
[[Page 43520]]
the effects of the final rule on all activity subject to the final
regulation, whether by virtue of the activity's physical location in
the United States or by virtue of the activity's connection with or
effect on U.S. commerce under CEA section 2(i).\74\ In particular, the
Commission notes that some registrants subject to Sec. 3.3 are located
outside of the United States.
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\74\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------
The Commission is adopting amendments to the CCO Rules that: (1)
Define the term ``senior officer''; (2) clarify the scope of the CCO
duties and the content requirements of the CCO Annual Report; (3) add
the Registrant's audit committee as a party that must receive the CCO
Annual Report; (4) add a materiality qualifier to the CCO Annual Report
certification language; and (5) clarify and permit additional
procedural methods for Dual and Affiliated Registrants in the
preparation and submission of CCO Annual Reports that address common
information across the same or related legal entities.
The Proposal requested public comment on the costs and benefits of
the proposed regulations, and specifically invited comments on: (1) The
extent to which the proposed amendments reduce burdens and costs for
Registrants, if at all; (2) whether any of the proposed amendments
create any additional burdens or costs for Registrants; (3) whether 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, including monetary estimates; (4) what, if
any, transition or ongoing costs or savings would result from the
adoption of the proposed amendments; (5) whether the proposed
amendments to the CCO Annual Report's submission requirements in Sec.
3.3(f)(1) would cause undue burden; and (6) the Commission's
preliminary consideration of the costs and benefits associated with the
proposed amendments.
Several commenters indirectly addressed the qualitative costs and
benefits of the Proposal; however, none included quantitative data or
other information in support of a measurable analysis. As such, the
Commission is unable to quantify reliably the costs and benefits of
this rulemaking. Instead, the Commission gives a qualitative
discussion.
As described in the sections above, in support of their comments,
several commenters proposed alternative rule text and suggested the
Commission provide additional clarification or guidance. In response to
certain comments, the Commission adopted alternatives--particularly
with respect to the furnishing and certification requirements of the
CCO Annual Report--that the Commission believes will further reduce
costs and burdens to Registrants while still providing the Commission
with the information it needs to monitor the state of compliance by
Registrants.
Informed by commenters, the discussion below considers the rule's
costs and benefits generally and in light of the five factors specified
in section 15(a) of the CEA.\75\
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\75\ The final rules add a definition of ``senior officer'' to
Sec. 3.1. As stated in the Proposal, the Commission believes this
addition in and of itself had no impact for purposes of determining
the costs and benefits of the proposal. Nevertheless, the Commission
sought public comment on whether the definition of ``senior
officer'' has any cost and benefit considerations. The Commission
received no comments on any cost and benefit considerations of the
proposed definition, and, therefore, the analysis of the costs and
benefits of the final rules is restricted to the amendments to Sec.
3.3.
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2. Regulation 3.3(d)--Chief Compliance Officer Duties
As discussed above, the Commission amended Sec. 3.3(d) to clarify
certain CCO duties. Specifically, the Commission added language to
Sec. 3.3(d)(1) to clarify that the CCO's duty with respect to
administering policies and procedures is specific to the Registrant's
business as an FCM, SD, or MSP, as applicable. As amended, Sec.
3.3(d)(2) incorporates an implied reasonableness standard regarding the
duty to resolve conflicts of interest and limits the duty to material
conflicts that relate to the Registrant's business as an FCM, SD, or
MSP. The Commission amended Sec. 3.3(d)(4) to include the remediation
of matters identified ``through any means'' by the CCO, including the
specific discovery methods listed in Sec. 3.3(d)(4). Lastly, the
Commission amended Sec. 3.3(d)(4) and (5) to remove the requirement in
each provision that the CCO consult with the board of directors or
senior officer in connection with resolving noncompliance issues and to
clarify that the CCO's duty is to take ``reasonable steps to ensure
that the registrant'' establishes policies and procedures for the
remediation and resolution by management of noncompliance issues.
The Commission did not receive any specific comments regarding
whether any costs associated with CCO duties would change as a result
of the amendments to Sec. 3.3(d). Better Markets opposed several of
the proposed amendments to Sec. 3.3(d) that it viewed as ``likely to
weaken the CCO regime.'' \76\ The Commission considered Better Markets
views and does not believe that the final rules will reduce CCO
accountability or marginalize the CCO role. Because the amendments to
Sec. 3.3(d) provide greater specificity regarding the role of the CCO
and the scope of the CCO's duties while further harmonizing with
parallel SEC rules, the Commission believes that the final rule does
not impose any additional costs to Registrants, market participants,
the markets, or the general public.
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\76\ Better Markets comment letter.
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The Commission expects the greater clarity provided in the amended
rule will reduce burdens on CCOs and improve overall compliance by
applying a reasonableness standard to CCO responsibilities rather than
deterring effective CCO activities due to concerns of uncertain
liability. This greater clarity should also encourage a greater
willingness of potential CCOs to vie for and take positions with
Registrants. As noted by one commenter, clarifying the CCO's role
within a Registrant's overall organization fosters accountability for
senior business management and supervisors, and reduces obstacles in
attracting and retaining highly qualified professionals to serve as
CCOs.\77\ Additionally, by further harmonizing the CFTC's and SEC's CCO
duties, CCOs of dual SEC-CFTC registrants should be able to fulfill
their duties more efficiently and cost effectively.
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\77\ See FIA/SIFMA comment letter.
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3. Regulation 3.3(e)--Annual Report
In adopting amendments to Sec. 3.3(e), the Commission eliminated
the requirement to address ``each'' applicable CFTC regulatory
requirement to which a Registrant is subject in the assessment of the
WPPs, since the CCO must still conduct an underlying assessment of the
effectiveness of the policies and procedures to meet the requirements
of the rule. The Commission further removed the requirement to identify
each WPP with respect to each applicable requirement, given that the
WPPs are already required to be described in Sec. 3.3(e)(1). Lastly,
the Commission clarified that the scope of the resources devoted to
compliance that need to be described under Sec. 3.3(e)(4) should be
limited to a discussion of resources for the specific activities for
which the Registrant is registered.
The comments received for these proposed amendments were generally
supportive. For example, one commenter stated that ``this Proposal will
increase efficiencies by
[[Page 43521]]
streamlining the obligations for market participants that are regulated
by both the CFTC and SEC and eliminate unnecessary duplicative policies
related to the CCO Annual Report.'' \78\ One commenter stated that the
removal of the requirement-by-requirement assessment from the rule will
``allow for more effective conversations to occur between its business
partners and the Compliance Department, creating for a more holistic
assessment of the Firm's compliance.'' \79\ Similarly, another
commenter highlighted the benefit to overall compliance of focusing the
CCO and compliance personnel on WPPs holistically.\80\ Only one
commenter expressed a concern that the proposed changes equated to a
weakening of the process.\81\
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\78\ See NGSA comment letter.
\79\ See TD Ameritrade comment letter. See also NFA comment
letter.
\80\ See FIA/SIFMA comment letter.
\81\ See Better Markets comment letter.
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As discussed in the Proposal, in implementing Sec. 3.3(e), 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 in time
and resources. Eliminating the requirement-by-requirement assessment is
intended to reduce the burdens on Registrants of producing the CCO
Annual Report while maintaining its primary purpose. It is the
Commission's view, supported by commenters, that 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. As discussed in section II.C.2, the final rule does not
remove or lessen the CCO's duties to, among other things, ensure the
Registrant is reviewing and assessing the continued soundness of its
WPPs. In addition, the amendments 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 final rule also provides relief for
Registrants from resource and time pressures in preparing their CCO
Annual Reports.
4. Regulation 3.3(f)--Furnishing the Annual Report and Related Matters
The Commission amended Sec. 3.3(f)(1) to require the CCO to
provide the CCO Annual Report to the audit committee or a functionally
equivalent body not later than the committee's next scheduled meeting,
but in no event more than 90 days following the furnishing of the
report to the Commission. The Commission also amended the CCO Annual
Report's certification requirement by adding a materiality qualifier to
the certification language in Sec. 3.3(f)(3). Lastly, the Commission
amended Sec. 3.3(f)(6) to provide procedures for Dual and Affiliated
Registrants in the preparation and submission of CCO Annual Reports
that address common information across the same or related legal
entities.
As discussed above, the Commission received comments from ISDA and
FIA/SIFMA asserting that the proposal requiring the senior officer,
board of directors, and audit committee to receive the CCO Annual
Report would increase operational and regulatory burdens. FIA/SIFMA
noted that requiring the boards of directors of SDs that are large,
diversified commercial banks to receive the CCO Annual Report would
exacerbate current problems associated with the volume of review they
must already undertake, further reducing the amount of time they should
be allocating to overseeing enterprise risk and strategy. Both
commenters believed that the Proposal would add costs, complexities,
and possibly, conflicts for Registrants because the deadline to submit
the CCO Annual Report to the Commission may not align with board of
directors and audit committee meetings, impeding their ability to
ensure proper review.
Advocates of adding a materiality qualifier to the CCO Annual
Report certification language identified several benefits, including
reducing burdens by further harmonizing the Commission's rule with the
SEC's parallel rule, providing a measure of clarity to CCOs and
potential CCOs regarding their own personal liability, and reducing
deterrence of highly qualified people from taking or staying in the CCO
role.\82\ In support of its request for greater flexibility in the
preparation of CCO Annual Reports by Affiliated Registrants, FIA/SIFMA
noted the benefits of streamlining the overall process.
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\82\ See FIA/SIFMA, ISDA, and NFA comment letters.
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In response to concerns regarding the proposed CCO Annual Report
submission requirements, the Commission has modified Sec. 3.3(f)(1) to
accommodate the practicality of audit committee and board meeting
schedules. Because the final rule maintains the requirement that either
the senior officer or the board of directors receive the CCO Annual
Report prior to its submission to the Commission, Registrants should
not have to change existing internal document submission processes for
board meetings to comply. As adopted, the final rule adds the audit
committee (or equivalent body) as a recipient of the report, but allows
for the report to be furnished to the audit committee not later than
the next scheduled meeting, but in no event more than 90 days after
submission of the report to the Commission is required. Since the rule
does not set a timeline for the review of the CCO Annual Report by any
of its internal recipients--leaving such matters to the discretion of
each Registrant, the Commission believes that any additional costs
arising out of the requirement to submit the report to the audit
committee should be minimal. The Commission does not believe the final
amendments to Sec. 3.3(f)(1), (3) and (6) impose any new costs or
burdens since they do not require Registrants to affirmatively
undertake new duties or requirements.
As described above and in the Proposal, the Commission believes
that the amendments to Sec. 3.3(f) will ensure that the CCO's findings
and recommendations will be distributed to the groups within each
Registrant with responsibility for governance and internal controls.
Further, the Commission believes the amendments provide greater
flexibility and opportunity for Dual and Affiliated Registrants to
streamline their CCO Annual Report preparation processes, which may
result in a less costly CCO Annual Report.
D. Section 15(a) Factors
As noted above, section 15(a) of the CEA 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.
1. Protection of Market Participants and the Public
The final rules 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 extent of reporting detail, the Commission believes that change
will allow the CCO to focus more directly on identifying and describing
in the CCO Annual Report material compliance
[[Page 43522]]
issues and other related matters deserving of greater attention.
Accordingly, the Commission believes that the reduction in content
requirements will not affect the protection of market participants and
the public.
2. Efficiency, Competitiveness, and Financial Integrity of Markets
The Commission believes that the amended CCO Rules will not
negatively impact market efficiency, competitiveness, or integrity
because each CCO Annual Report addresses internal compliance programs
of each Registrant and are not publicly available. The amendments
affecting CCO duties only clarify those duties and do not affect the
performance of derivatives markets.
3. Price Discovery
The Commission did not identify a specific effect on price
discovery as a result of the Proposal because the Proposal did not
address any pricing issues. The Commission did not receive any comments
on this issue. Thus, the Commission continues to believe that this
rulemaking will not have an impact on price discovery.
4. Sound Risk Management Practices
The Commission believes that the final amendments to the CCO duties
and CCO Annual Report requirements will not have a meaningful effect on
Registrants' risk management practices. The final rules 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.\83\
Furthermore, the final amendments to the CCO Annual Report 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. The Commission believes that including the
audit committee and either the board of directors or the senior officer
as recipients of the CCO Annual Report may benefit Registrants' overall
risk management practices by ensuring that those with overall
responsibility for governance and internal controls are informed of the
report contents. Finally, the Commission does not believe that the
addition of the materiality qualifier to the CCO Annual Report
certification language, or the additional procedural mechanisms for
addressing common matter across Dual and Affiliated Registrants impacts
Registrants' risk management practices, as they do not impact the CCO
Annual Report's content and underlying assessment.
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\83\ See, e.g., 17 CFR 23.600.
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5. Other Public Interest Considerations
The Commission has not identified any other public interest
considerations for this rulemaking.
E. Antitrust Considerations
Section 15(b) of the Act requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the Act, in issuing any order or adopting any Commission
rule or regulation (including any exemption under section 4(c) or
4c(b)), or in requiring or approving any bylaw, rule, or regulation of
a contract market or registered futures association established
pursuant to section 17 of the Act.\84\ The Commission believes that the
public interest to be protected by the antitrust laws is generally to
protect competition.
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\84\ 7 U.S.C. 19(b).
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The Commission has reflected on the final rule to determine whether
it is anticompetitive and has identified no anticompetitive effects.
Because the Commission has determined that the final rulemaking has no
anticompetitive effects, the Commission has not identified any less
anticompetitive means of achieving the purposes of the Act.
List of Subjects in 17 CFR Part 3
Administrative practice and procedure, Chief compliance officer,
Commodity futures, Futures commission merchants, Major swap
participants, Registration, Swap dealers, Reporting and recordkeeping
requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR chapter I as follows:
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.
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) 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 material conflicts of
interest relating to the registrant's business as a futures commission
merchant, swap dealer, or major swap participant 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;
(4) Taking reasonable steps to ensure the registrant establishes,
maintains, and reviews 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) Taking reasonable steps to ensure the registrant establishes
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 43523]]
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 and related matters--(1)
Furnishing the annual report. (i) Prior to furnishing the annual report
to the Commission, the chief compliance officer shall provide the
annual report to the board of directors or senior officer of the
futures commission merchant, swap dealer, or major swap participant for
its review.
(ii) If the futures commission merchant, swap dealer, or major swap
participant has established an audit committee (or an equivalent body),
then the chief compliance officer shall furnish the annual report to
the audit committee (or equivalent body) not later than its next
scheduled meeting after the annual report is furnished to the
Commission, but in no event more than 90 days after the applicable date
specified in paragraph (f)(2) of this section for furnishing the annual
report to the Commission.
(iii) A written record of transmittal of the annual report to the
board of directors or the senior officer, and audit committee, if
applicable, shall be made and maintained in accordance with Sec. 1.31
of this chapter.
(2) Furnishing the annual report to the Commission. (i) Except as
provided in paragraph (f)(2)(ii) of this section, the annual report
shall be furnished electronically to the Commission not more than 90
days after the end of the fiscal year of the futures commission
merchant, swap dealer, or major swap participant.
(ii) The annual report of a swap dealer or major swap participant
that is eligible to comply with a substituted compliance regime for
paragraph (e) of this section pursuant to a comparability determination
of the Commission may be furnished to the Commission electronically up
to 15 days after the date on which the comparable annual report must be
completed under the requirements of the applicable substituted
compliance regime. If the substituted compliance regime does not
specify a date by which the comparable annual report must be completed,
then the annual report shall be furnished to the Commission by the date
specified in paragraph (f)(2)(i) of this section.
(3) Certification. The report shall include a certification by the
chief compliance officer or chief executive officer of the registrant
that, to the best of his or her knowledge and reasonable belief, and
under penalty of law, the information contained in the annual report is
accurate and complete in all material respects.
(4) Amending the annual report. The futures commission merchant,
swap dealer, or major swap participant shall promptly furnish an
amended annual report if material errors or omissions in the report are
identified. An amendment must contain the certification required under
paragraph (f)(3) of this section.
(5) Extensions. A futures commission merchant, swap dealer, or
major swap participant may request from the Commission an extension of
time to furnish its annual report, provided the registrant's failure to
timely furnish the report could not be eliminated by the registrant
without unreasonable effort or expense. Extensions of the deadline will
be granted at the discretion of the Commission.
(6) Incorporation by reference and related registrants--(i) Prior
reports. A futures commission merchant, swap dealer, or major swap
participant may incorporate by reference sections of an annual report
that has been furnished within the current or immediately preceding
reporting period to the Commission.
(ii) Dual registrants. If a futures commission merchant, swap
dealer, or major swap participant is registered in more than one
capacity with the Commission, an annual report submitted as one
registrant may incorporate by reference sections in the annual report
furnished within the current or immediately preceding reporting period
as the other registrant. A dual registrant may submit one annual report
that addresses the requirements set forth in paragraphs (e), (f)(1) and
(f)(3) of this section with respect to each registration capacity.
(iii) Affiliated registrants. If a futures commission merchant,
swap dealer, or major swap participant controls, is controlled by, or
is under common control with, one or more other futures commission
merchants, swap dealers, or major swap participants, and each of the
affiliated registrants must submit an annual report, an affiliated
registrant may incorporate by reference in its annual report sections
from an annual report prepared by any of its affiliated registrants
furnished within the current or immediately preceding reporting period.
Affiliated registrants may submit one annual report that addresses the
requirements set forth in paragraphs (e), (f)(1) and (f)(3) of this
section with respect to each affiliated registrant.
* * * * *
0
4. Add appendix C to part 3 to read as follows:
Appendix C to Part 3--Guidance on the Application of Sec. 3.3(e),
Chief Compliance Officer Annual Report Form and Content
A. Description of the Registrant's WPPs (Sec. 3.3(e)(1))
In acknowledgment of the large number of WPPs that a Registrant
implements to comply with CFTC regulations, the Commission
understands that for purposes of the CCO Annual Report, specific WPP
descriptions may be appropriately brief while still identifying the
basic purpose of the policy or procedure and how the policy or
procedure operates to achieve that purpose. The CCO Annual Report
should include a summary overview that describes the general forms
and types of WPPs the Registrant has, such as a compliance manual
specific to the Registrant, global corporate manuals or policies,
and/or business-unit-specific WPPs that support the applicable
regulatory requirements. This summary overview would provide a
narrative of the Registrant's system or program of WPPs, how they
work as a whole, and how the Registrant generally puts the WPPs into
practice as part of its compliance activities. With respect to the
COI policy, it is the Commission's view that the CCO should describe
the COI policy specific to the Registrant, addressing the specific
requirements of Sec. 1.71 or Sec. 23.605 of this chapter, as
applicable.
B. Assessment of the Effectiveness of the Policies and Procedures
(Sec. 3.3(e)(2))
The Commission expects a CCO Annual Report to contain a
comprehensive discussion of: the assessment process; and the results
of the effectiveness assessment. The regulation does not dictate the
form or manner for the effectiveness assessment. Rather, the
Commission would expect each Registrant to follow a process and
present the resulting assessment in a form and manner that is
appropriate for the size and complexity of the Registrant's
applicable business activities and structure. While Sec. 3.3(e)(2)
no longer has a ``requirement-by-requirement'' standard, the CCO
Annual Report should address all of the general areas of regulation
applicable to the Registrant.
C. Areas for Improvement and Recommended Changes (Sec. 3.3(e)(3))
1. Section 3.3(e)(3) requires two components in the CCO Annual
Report: an
[[Page 43524]]
identification and discussion of each area that needs improvement;
and a discussion of what changes are recommended to address each
area needing improvement. In addressing these two elements, the CCO
Annual Report should include, as applicable: A discussion of why the
particular area needs improvement; a discussion of the proposed
improvements and the time frame for their implementation; and a
cross-reference to the regulation that a recommended change would
address.
2. In general, identifying areas in need of improvement and
recommending steps to effect those improvements should be a core
function of compliance. Accordingly, a CCO Annual Report that makes
no recommendations for changes or improvements to the compliance
program may raise concerns about the adequacy of the compliance
program review intended by the CCO Annual Report process. Moreover,
there should be continuity from one reporting cycle to the next,
such that where a previous CCO Annual Report discussed future
changes or improvements that were being considered or planned,
subsequent CCO Annual Reports should discuss the outcomes of the
changes that were implemented during the most recent scope period,
any monitoring or testing of those changes, whether any compliance
issues arose from the changes and, if there were any issues, how
those issues were handled. While this section may address
improvements to the compliance program that have already been
completed, the Commission believes that this section primarily
should discuss recommended improvements in process and/or future
plans to improve the Registrant's compliance program or resources
devoted to compliance.
D. Resources Set Aside for Compliance (Sec. 3.3(e)(4))
1. The resources description required by Sec. 3.3(e)(4) should
be appropriate for assisting the Registrant's senior management and
the CFTC in assessing whether sufficient resources are dedicated to
compliance. Accordingly, the description should include the
following types of information: the budget allocated to the
compliance department of the Registrant for compliance with the CEA
and Commission regulations; full-time compliance staffing levels for
such compliance activities; partially allocated staff counts (if
applicable), with information on how much of such employees' time is
devoted to the Registrant's compliance matters that are subject to
CFTC oversight; an explanation of managerial resources (the
explanation should clearly identify the division between staffing
resources and management resources devoted to compliance); general
infrastructure information (e.g., computers, compliance-oriented
software, technology infrastructure, etc.); and if applicable, a
description of the use of third party vendors or outsourcing for
compliance activities. In most cases, to effectively inform the
board of directors or senior officer and the Commission, the
description should include quantifiable information for the
financial, managerial, operational, and staffing resources allocated
to compliance with the CEA and Commission regulations.
2. The Commission understands that a discussion of specific
compliance budget allocations may not be as straightforward as
described above depending on the size and complexity of the
Registrant's compliance program and the extent to which the
Registrant's compliance resources may be shared for other non-CFTC
regulated business activities. The purpose of the CCO Annual Report
requirement is to convey to senior management and the CFTC a clear
understanding of the resources the Registrant has set aside for
compliance with the CEA and Commission regulations. While some of
the compliance resources used in a Registrant's CFTC compliance-
related program may be used for compliance activities in other parts
of a larger corporate enterprise, this sharing of resources does not
negate the Registrant's obligation to discuss how the Registrant's
compliance program is being resourced. For those instances where
compliance resources are shared, it is recognized that the
description of the shared resources may reasonably be more general
in nature, providing approximations and estimates based on expected
needs. However, the Commission expects that the CCO Annual Report
will still address shared resources in as much detail as is
necessary to convey the information needed to assess the overall
compliance activities of the Registrant.
3. Section 3.3(e)(4) also requires that the CCO Annual Report
include a discussion of any material deficiencies in compliance
resources. If there have been reductions in the compliance program
of the Registrant since the prior reporting period, for example, if
there has been a reduction in compliance staff, a significant
compliance budget decrease, or the Registrant initiated significant
new business activities without a corresponding increase in
compliance resources, the CCO Annual Report should include an
explanation of why the compliance resources are not deficient in
light of the changes. If there are no material deficiencies in the
resources devoted to compliance, the Commission recommends that the
CCO Annual Report contain an express statement to that effect so
that the recipients of the report can see that the requirement was
assessed.
E. Material Noncompliance Issues (Sec. 3.3(e)(5))
The CCO Annual Report should include an explanation of the
standard the Registrant used to determine a non-compliance event's
materiality. In addition, this section of the CCO Annual Report
should contain a description of each material non-compliance issue
identified either through self-assessment procedures conducted
within the Registrant, or noted by any external entities which
conducted a review of the Registrant (such as a designated self-
regulatory organization). The description should also include the
corresponding actions taken, described in reasonable detail, as well
as specific references to the Commission regulation or regulations
that are implicated by the non-compliance event. Specifically, the
Commission recommends that the CCO Annual Report include a
discussion of the Registrant's deliberations on a course of
remediation, how the implementation of the remediation is being or
was executed, any follow-up testing of the remediation, and any
noteworthy results from such testing. Additionally, the Commission
recommends that CCOs consider including an overview of how the CCO
or compliance department handles and tracks non-compliance events in
general.
F. Material Changes to WPPs (Sec. 3.3(e)(6))
When describing any material changes to the WPPs, a description
of the standard of materiality used should be provided. This
description will provide meaningful context for any reported changes
to the WPPs.
Issued in Washington, DC, on August 21, 2018, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Chief Compliance Officer Duties and Annual Report
Requirements for Futures Commission Merchants, Swap Dealers, and Major
Swap Participants; Amendments--Commission Voting Summary and Chairman's
Statement
Appendix 1--Commission Voting Summary
On this matter, Chairman Giancarlo and Commissioners Quintenz
and Behnam voted in the affirmative. No Commissioner voted in the
negative.
Appendix 2--Statement of Chairman J. Christopher Giancarlo
As part of the CFTC's Project KISS efforts, this final rule will
streamline and clarify a Chief Compliance Officer's (CCO)
obligations, as well as harmonize certain provisions with the
Securities and Exchange Commission's (SEC) rules. Clarifying the
role and responsibilities of the CCO should enable greater
accountability and improve overall compliance, as well as reduce
burdens on CCOs and uncertainty for registrants. The rule continues
to impose a duty on CCOs to resolve matters but within the practical
limits of their position at the CFTC-registered entity. The rule
also continues to impose a duty for the CCO to undertake an annual
review but reduces the burdens associated with the review, which
will allow the CCO to devote more time and resources to compliance
activities at the registrant. In addition, further harmonizing
definitions and CCO duties of dual CFTC-SEC registrants should
improve efficiency and further reduce the burdens on CCOs.
I would like to thank CFTC staff for their efforts. I would also
like to thank Commissioners Quintenz and Behnam for their support.
[FR Doc. 2018-18432 Filed 8-24-18; 8:45 am]
BILLING CODE 6351-01-P