2010-29021

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

[Proposed Rules]

[Page 70881-70888]

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

[DOCID:fr19no10-17]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 3

RIN 3038-AC96

 

Designation of a Chief Compliance Officer; Required Compliance

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

Dealer, or Major Swap Participant

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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

is proposing rules to implement new statutory provisions enacted by

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

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

registrants. The proposed rules require each futures commission

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

compliance officer. The proposed rules also prescribe qualifications

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

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

to the Commission an annual report containing an assessment of the

registrant's compliance activities.

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

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

Designation, by any of the following methods:

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

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

through the Web site.

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

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

Street, NW., Washington, DC 20581.

Hand Delivery/Courier: Same as mail above.

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

Follow the instructions for submitting comments.

Please submit your comments using only one method.

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

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

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

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

information that you believe is exempt from disclosure under the

Freedom of Information Act, a petition for confidential treatment of

the exempt information may be submitted according to the procedures

established in CFTC Regulation 145.9, 17 CFR 145.9.

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

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

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

inappropriate for publication, such as obscene language. All

submissions that have been redacted or removed that contain comments on

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

file and will be considered as required under the Administrative

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

the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Associate

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

5684, [email protected]; or Claire Noakes, Attorney Advisor, Division

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

[email protected]; Commodity Futures Trading Commission, Three Lafayette

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

SUPPLEMENTARY INFORMATION:

I. Introduction

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

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

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

reduce risk, increase transparency, and promote market integrity within

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

registration and comprehensive regulation of swap dealers and major

swap participants; (2) imposing clearing and trade execution

requirements on standardized derivative products; (3) creating rigorous

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

Commission's rulemaking and enforcement authorities with respect to all

registered entities and intermediaries subject to the Commission's

oversight.

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

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

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

enrolledbill.pdf.

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

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The Dodd-Frank Act addresses the compliance activities of certain

registrants in detail by requiring each futures commission merchant,

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

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

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

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

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

furnished to the Commission discussing the registrant's compliance

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

to prescribe rules regarding the annual report prepared by the chief

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

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

forth specific duties for the chief compliance officer or establish

specific procedures for the preparation and submission of an annual

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

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

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

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

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

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

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

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

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The Commission has determined to apply the same duties and

responsibilities to a chief compliance officer of a futures commission

merchant as are required for a chief

[[Page 70882]]

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

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

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

annual report discussing the registrant's compliance policies and

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

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

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

specified recordkeeping and inspection requirements for the compliance

documents discussed in the proposed rule be satisfied. The proposed

rules also would require that each futures commission merchant, swap

dealer, and major swap participant provide the chief compliance officer

with the responsibility and authority, in consultation with the board

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

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

The Commission specifically requests comment on its decision to apply

the duties and responsibilities for chief compliance officers set forth

for swap dealers and major swap participants to futures commission

merchants.

The proposed rules reflect consultation with staff of the following

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

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

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

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

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

proposed rules incorporate elements of the comments provided.

The Commission requests comment on all aspects of the proposed

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

highlighted in the discussion below.

II. Proposed Regulations

A. Chief Compliance Officers

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

swap dealer, and major swap participant designate an individual to

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

requirement, and prescribe certain qualifications of the position. The

individual serving as chief compliance officer must have the

appropriate background and skills to perform the compliance duties of

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

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

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

with the Commission, as the primary individual with responsibility for

ensuring the registrant's legal compliance, the chief compliance

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

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

disqualifications. Furthermore, the proposed rules amend the definition

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

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

considered to be similar in status and responsibility to the enumerated

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

officer. Like other principals of registrants, the chief compliance

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

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

background check.

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

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

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

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

reporting structure to which the chief compliance officer would be

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

officer of the registrant would be permitted to take action to

designate the chief compliance officer or determine the compensation of

the chief compliance officer. The rule text substitutes the term

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

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

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

business associations (for example, partnerships and limited liability

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

directors. The proposed rules also extend the reporting structure

requirement to futures commission merchants.

The Commission specifically seeks comment on the degree of

flexibility in the reporting structure for chief compliance officers

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

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

appropriate for a chief compliance officer to report to the senior

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

board of directors generally is a stronger advocate of compliance

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

for sufficient flexibility with regard to a registrant's business

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

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

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

directors to remove the chief compliance officer.

The Commission also is seeking comment on whether additional

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

chief compliance officer. For example, should the Commission restrict

the chief compliance officer position from being held by an attorney

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

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

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

in tension with the duties of the chief compliance officer.

The Commission specifically seeks comment on whether there is a

need to insulate the chief compliance officer of registrants from undue

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

potential conflict between and among compliance interests, commercial

interests, and ownership interests of a futures commission merchant,

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

provision, how would such possible conflicts be addressed?

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

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

and requires the Commission to promulgate rules concerning the duties

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

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

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

participants. The Commission believes the statutory duties are largely

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

discussed briefly below.

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

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

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

is combined with the duty to ensure compliance under section

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

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

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

[[Page 70883]]

the rules. The duty to identify noncompliance issues and establish

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

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

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

two fundamental acknowledgements: The chief compliance officer can only

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

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

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

contradict basic and well-established tenets of law regarding the

allocation of responsibility within a business association.

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

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

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

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

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

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

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

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The Commission would also require the chief compliance officer to

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

discuss the effectiveness of the compliance policies adopted by the

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

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

chief compliance officer and the directors or the senior officer to

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

including any reservations about the cooperativeness or compliance

practices of the registrant's employees.

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

written policies and procedures that are required to be adopted or

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

Commission. Specifically, the Commission intends for chief compliance

officers to administer compliance policies that include, but are not

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

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

well as all the policies currently required to be established or

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

management policies, trading rules, customer record protection

procedures, and safeguards for electronic signatures. Finally, the

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

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

discussed below.

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

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

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B. Annual Report

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

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

certify a report containing a description of the registrant's

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

a description of each policy and procedure of the chief compliance

officer, including the code of ethics and conflicts of interest

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

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

report to the Commission simultaneously with each appropriate financial

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

would include a certification by the chief compliance officer that,

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

discussed below, the Commission is proposing to apply these

requirements to futures commission merchants as well.

More specifically, the Commission would require the annual report

to be furnished simultaneously with the futures commission merchant's

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

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

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

The proposed rules elaborate on the certification of the annual report

by specifying that the chief compliance officer must sign a statement

that to the best knowledge and reasonable belief of the chief

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

in the annual report is accurate and complete.

The proposed rules would also permit a registrant to request an

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

error or omission within a previously furnished annual report be

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

sections from recently furnished annual reports by the same entity,

even in a different registration capacity.

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

submitted an annual report in the previous reporting period with a

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

could incorporate by reference that description in an annual report

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

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

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

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

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

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

content requirements of the other report.

Importantly, the Commission would extend to chief compliance

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

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

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

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

compliance behavior by requiring a registrant to conduct a periodic

self-evaluation and to inform the Commission of possible compliance

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

beneficial to receive self-evaluation and compliance information from

futures commission merchants as well as from swap dealers and major

swap participants. Furthermore, the Commission believes this comports

with Congressional intent in requiring that futures commission

merchants designate a chief compliance officer under the Dodd-Frank

Act.

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

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

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

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

ethics and conflict of interest policies. The proposed rules codify

these requirements by reference to the defined term ``compliance

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

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

Additionally, the proposed rules would require that the annual

report include a certification of compliance under the provisions of

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

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

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

in proprietary trading or acquiring or retaining any equity,

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

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

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

Commission requests comment on this proposed rule, including the scope

of its application.

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

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

conflicts of interest and to identify and resolve noncompliance issues.

Additionally, the annual report would be required to contain a

description of the financial, managerial, operational, and staffing

resources set aside for compliance with

[[Page 70884]]

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

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

roles and responsibilities of various registrant personnel in

addressing any conflicts, including any necessary coordination with, or

notification of regulators, self-regulatory organizations, and others

who may be involved in addressing the conflict.

Finally, the Commission would require that both the annual report

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

provisions of regulation 1.31. The requirement with respect to records

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

ability to reconstruct why certain information was included or excluded

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

The Commission specifically seeks comment regarding: (i) The

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

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

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

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

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

that individual directors or employees have an adequate opportunity to

register their concerns or objections to the contents of the annual

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

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

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

reasonable belief, the annual report is accurate and complete.

Liability for false, incomplete, or misleading statements or

representations made in the annual report could rest with the

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

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

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

failure to supervise or false statements to the Commission. The

Commission could seek an injunction against future violations, civil

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

Criminal penalties could be sought by appropriate criminal authorities.

III. Transition Period

Futures commission merchants are currently required to be

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

Commission to promulgate rules providing for the registration of swap

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

order to provide for sufficient time for existing and new registrants

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

proposing to establish a delayed compliance date. The Commission

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

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

registrant to implement the required policies and procedures under

these proposed rules.

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

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IV. Related Matters

A. Regulatory Flexibility Act

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

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

businesses. The Commission previously has established certain

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

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

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

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

required to be registered with the Commission. The Commission

previously has determined that registered futures commission merchants

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

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

commission merchants to meet minimum financial requirements established

by the Commission to enhance the protection of customers' segregated

funds and protect the financial condition of futures commission

merchants generally.\21\

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

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

\21\ Id. at 18619, 18620.

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Swap dealers and major swap participants are new categories of

registrant. Accordingly, the Commission has not previously addressed

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

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

swap dealers will be subject to minimum capital and margin

requirements. Swap dealers are expected to comprise the largest global

financial firms, and the Commission is required to exempt from

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

in connection with transactions with or on behalf of customers.

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

Commission is hereby proposing that swap dealers not be considered

small entities for essentially the same reasons that futures commission

merchants previously have been determined not to be small entities and

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

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

anticipates that this exemption would tend to exclude small entities

from registration.

The Commission also has previously determined that large traders

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

Commission considered that a large trading position was indicative of

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

definition, maintain substantial positions in swaps or maintain

outstanding swap positions that create substantial counterparty

exposure that could have serious adverse effects on the financial

stability of the United States banking system or financial markets.

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

Commission is hereby proposing that major swap participants not be

considered small entities for the same reasons that large traders have

previously been determined not to be small entities.

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\22\ Id. at 18620.

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The Commission is carrying out Congressional mandates by proposing

this regulation. Specifically, the Commission is proposing these rules

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

systemic risks presented by swap dealers and major swap participants

through comprehensive regulation. The Commission does not believe that

there are regulatory alternatives to those being proposed that would be

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

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

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

impact on a substantial number of small entities.

B. Paperwork Reduction Act

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

requirements on Federal agencies in connection with their conducting or

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

provisions of this proposed rule would result in new collection of

information requirements within the meaning of the PRA. The Commission

therefore is submitting this proposal to the Office of Management and

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

1320.11. The title for this

[[Page 70885]]

collection of information is ``Annual Report for Chief Compliance

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

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

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

displays a currently valid control number.

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

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The collection of information under these proposed rules is

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

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

dealers, and major swap participants maintain comprehensive policies

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

collected when conducting examination and oversight of futures

commission merchants, swap dealers, or major swap participants for

compliance with the CEA and Commission regulations.

If adopted, responses to this new collection of information would

be mandatory. The Commission will protect proprietary information

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

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

the CEA strictly prohibits the Commission, unless specifically

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

would separately disclose the business transactions or market positions

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

also is required to protect certain information contained in a

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

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

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1. Information Provided by Reporting Entities/Persons

The burden associated with the proposed regulation is estimated to

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

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

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

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

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

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

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

furnish to the Commission an annual report that describes the

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

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

previously furnished annual report when material errors or omissions

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

compliance policies and annual reports.

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

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

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

would spend 80 hours annually in connection with the proposed

requirement that respondent's chief compliance officer establish

various compliance policies and procedures. This estimate includes the

time needed to review applicable laws and regulations; develop

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

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

is estimated that each respondent will spend an additional 40 hours

drafting and submitting its annual report. This estimate includes the

time needed to collect and analyze the information that underlies the

contents of the annual report, to formulate recommendations to existing

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

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

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

respondent to incorporate by reference sections of an annual report

that has been furnished within the current or immediately preceding

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

one capacity with the Commission, to incorporate by reference sections

in the annual report that the registrant has furnished within the

current or immediately preceding reporting period as another type of

registrant. The Commission additionally estimates that a respondent may

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

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

spend 10 hours annually satisfying the record retention requirements of

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

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

records relevant to the annual report; and maintaining reports and

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

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

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

connection with this proposed regulation as it anticipates that

respondents already maintain compliance personnel and systems for

regulatory reporting and recordkeeping.

There are 159 futures commission merchants currently registered

with the Commission and it is anticipated that there will be

approximately 250 swap dealers and 50 major swap participants that will

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

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

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

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

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

Commodity Contracts Intermediation and Brokerage'' industry is

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

major swap participants include large financial institutions whose

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

the more conservative approach of estimating the cost burden of these

proposed regulations based upon an average compliance officer salary of

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

follows:

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

Preparation and Filing of Form 8-R

Number of respondents: 459

Estimated number of responses: 459

Estimated total burden on respondents: 1 hour

Frequency of collection: One initial collection and on occasion

thereafter

Aggregate reporting burden: 459 respondents x 1.0 hours = 459

burden hours

Drafting and Updating Compliance Policies and Procedures

Number of respondents: 459

Estimated number of responses: 459

Estimated total annual burden on respondents: 80 hours

Frequency of collection: Annually

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

burden hours

Preparation and Furnishing Annual Report

Number of respondents: 459

Estimated number of responses: 459

Estimated total annual burden on respondents: 40 hours

Frequency of collection: Annually

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

burden hours

Preparation and Furnishing Amended Annual Report

Number of respondents: 459

Estimated number of responses: 459

Estimated total annual burden on respondents: 5 hours

Frequency of collection: Annually

Aggregate reporting burden: 459

[[Page 70886]]

respondents x 5 hours = 2,295 burden hours

Recordkeeping Related to Compliance Policies and Annual Report

Number of respondents: 459

Estimated number of responses: 459

Estimated total annual burden on respondents: 10 hours

Frequency of collection: Annually

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

hours

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

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

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

2. Information Collection Comments

The Commission invites the public and other federal agencies to

comment on any aspect of the reporting and recordkeeping burdens

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

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

collection of information is necessary for the proper performance of

the functions of the Commission, including whether the information will

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

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

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

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

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

including through the use of automated collection techniques or other

forms of information technology.

Comments may be submitted directly to the Office of Information and

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

[email protected]. Please provide the Commission with a copy

of submitted comments so that all comments can be summarized and

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

this notice of proposed rulemaking for comment submission instructions

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

collections of information discussed above may be obtained by visiting

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

collection of information between 30 and 60 days after publication of

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

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

Commission) within 30 days after publication.

C. Cost-Benefit Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

of the CEA.

The proposed rules would improve compliance by registrants with

applicable laws and rules by requiring designation of a chief

compliance officer, prescribing the duties of that position, and

requiring preparation of a report on compliance activities of the

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

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

futures commission merchants, swap dealers, and major swap participants

include the costs associated with the designation of a chief compliance

officer, maintaining compliance policies, preparing the annual report,

and satisfying applicable recordkeeping requirements. As noted above,

the Commission has estimated these costs of preparing the annual report

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

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

dealers, and major swap participants already expend resources on

compliance activities and compliance personnel. For these entities, the

proposed rule would not substantially increase costs.

With respect to benefits, the Commission has determined that there

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

as a whole if registrants undertake regular and comprehensive self-

evaluations regarding their level of compliance with laws and

regulations. Also, the decision to devote sufficient resources to

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

management practices. Providing periodic notification to the Commission

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

and what resources are allocated for compliance activities would enable

the Commission to better exercise its oversight authority and further

the goal of avoiding market disruptions and financial losses to market

participants and the general public.

The Commission invites public comment on its cost-benefit

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

information that they may have quantifying or qualifying the costs and

benefits of these proposed rules with their comment letters.

List of Subjects in 17 CFR Part 3

Administrative practice and procedure, Brokers, Commodity futures,

Major swap participants, Reporting and recordkeeping requirements, Swap

dealers.

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

amend 17 CFR part 3 as follows:

PART 3--REGISTRATION

Authority and Issuance

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

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

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

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

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

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

Sec. 3.1 Definitions.

(a) * * *

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

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

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

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

principal business unit, division or function subject to regulation by

the Commission; if a limited liability company or limited liability

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

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

member or those members vested with the management authority for the

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

or function subject to

[[Page 70887]]

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

similar status or performing similar functions, such as the chief

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

agreement or otherwise, to exercise a controlling influence over the

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

* * * * *

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

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

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

Act and Commission regulations, including a code of ethics.

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

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

registrant.

3. Add Sec. 3.3 to read as follows:

Sec. 3.3 Chief compliance officer.

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

major swap participant shall designate an individual to serve as its

chief compliance officer, and provide the chief compliance officer with

the full responsibility and authority to develop and enforce, in

consultation with the board of directors or the senior officer,

appropriate policies and procedures to fulfill the duties set forth in

the Act and Commission regulations.

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

directors or the senior officer of the futures commission merchant,

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

senior officer shall approve the compensation of the chief compliance

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

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

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

chief compliance officer.

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

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

delegate its authority over the chief compliance officer, including

authority to remove the chief compliance officer.

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

compliance officer shall have the background and skills appropriate for

fulfilling the responsibilities of the position. No individual

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

serve as a chief compliance officer.

(c) Submission with registration. Each application for registration

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

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

include a designation of a chief compliance officer by submitting a

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

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

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

duties shall include, but are not limited to:

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

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

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

officer, resolving any conflicts of interest that may arise;

(3) Reviewing and ensuring compliance by the futures commission

merchant, swap dealer, or major swap participant with compliance

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

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

forth in the Act and Commission regulations;

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

directors or the senior officer, for the remediation of noncompliance

issues identified by the chief compliance officer through a compliance

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

reported error, or validated complaint;

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

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

remediation, retesting, and closing of noncompliance issues; and

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

under paragraph (d) of this section.

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

prepare a written report that covers the most recently completed fiscal

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

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

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

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

commission merchant, swap dealer, or major swap participant with

respect to the Act and Commission regulations and each of the

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

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

regulations, and with respect to each:

(i) Identify the policies and procedures that ensure compliance

with the requirement under the Act and Commission regulations;

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

policies and procedures; and

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

prospective changes or improvements to its compliance program and

resources devoted to compliance;

(3) Provide a statement of certification of compliance with

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

Protection Act, and any rules adopted pursuant thereto;

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

coverage period for the report;

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

resources set aside for compliance with respect to the Act and

Commission regulations, including any deficiencies in such resources;

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

corresponding action taken; and

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

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

addressing any conflicts of interest, including any necessary

coordination with, or notification of, other entities, including

regulators.

(e) Furnishing the annual report to the Commission.

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

chief compliance officer shall provide the annual report to the board

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

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

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

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

with this requirement.

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

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

the futures commission merchant, swap dealer, or major swap

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

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

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

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

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

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

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

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

in the annual report is accurate and complete.

[[Page 70888]]

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

participant shall promptly furnish an amended annual report if material

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

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

section.

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

participant may request from the Commission an extension of time to

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

furnish the report could not be eliminated by the registrant without

unreasonable effort or expense. Extensions of the deadline will be

granted at the discretion of the Commission.

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

participant may incorporate by reference sections of an annual report

that has been furnished within the current or immediately preceding

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

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

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

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

reference sections in the annual report furnished within the current or

immediately preceding reporting period as the other registrant.

(f) Recordkeeping.

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

participant shall maintain:

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

and all other policies and procedures adopted in furtherance of

compliance with the Act and Commission regulations;

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

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

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

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

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

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

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

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

to the annual report.

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

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

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

shall be made available promptly upon request to representatives of the

Commission and to representatives of the applicable prudential

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

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

Commission.

David A. Stawick,

Secretary of the Commission.

Statement of Chairman Gary Gensler

Designation of a Chief Compliance Officer; Required Compliance

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

Dealer, or Major Swap Participant

I support the proposed rulemaking establishing requirements for

the designation, qualifications and duties of a chief compliance

officer of swap dealers, major swap participants and futures

commission merchants. These rules are intended to ensure that

sufficient resources are devoted to compliance with laws and

regulations, which is a core component of sound risk management

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

requirements that intermediaries have chief compliance officers and

establish and administer compliance policies, as well as resolve

certain conflicts of interest.

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

BILLING CODE 6351-01-P

 

Last Updated: November 19, 2010