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

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

[Proposed Rules]

[Pages 21330-21337]

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

[FR Doc No: 2017-09229]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 3

RIN 3038-AE56

Chief Compliance Officer Duties and Annual Report Requirements

for Futures Commission Merchants, Swap Dealers, and Major Swap

Participants; Amendments

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (“Commission” or

“CFTC”) is proposing to amend its regulations regarding certain

duties of chief compliance officers (“CCOs”) of swap dealers

(“SDs”), major swap participants (“MSPs”), and futures commission

merchants (“FCMs”) (collectively, “Registrants”); and certain

requirements for preparing and furnishing to the Commission an annual

report containing an assessment of the Registrant’s compliance

activities.

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

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

of the following methods:

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

instructions for submitting comments through the Comments Online

process on the Web site.

Mail: Christopher Kirkpatrick, Secretary of the

Commission, Commodity Futures Trading Commission, Three Lafayette

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

Hand Delivery/Courier: Same as Mail, above.

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

Follow the instructions for submitting comments.

Please submit your comments using only one method.

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

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

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

available publicly. If you wish the Commission to consider information

that is exempt from disclosure under the Freedom of Information Act

(“FOIA”),1 a petition for confidential treatment of the exempt

information may be submitted according to the procedures set forth in

Sec. 145.9 of the Commission’s regulations.2

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1 5 U.S.C. 552.

2 17 CFR 145.9. Commission regulations referred to herein are

found at 17 CFR chapter I.

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

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

submission from www.cftc.gov that it may deem to be inappropriate for

publication, such as obscene language. All submissions that have been

redacted or removed that contain comments on the merits of the

rulemaking will be retained in the public comment file and will be

considered as required under the Administrative Procedure Act and other

applicable laws, and may be accessible under the FOIA.

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

5326, [email protected]; Erik Remmler, Deputy Director, 202-418-7630,

[email protected]; Laura Gardy, Associate Director, 202-418-7645,

[email protected]; Pamela M. Geraghty, Special Counsel, 202-418-5634,

[email protected]; or Fern B.

[[Page 21331]]

Simmons, Special Counsel, 202-418-5901, [email protected], Division of

Swap Dealer and Intermediary Oversight, Commodity Futures Trading

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

DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

A. Statutory and Regulatory Background

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

Protection Act (“Dodd-Frank Act”),3 sections 4d(d) and 4s(k) of the

Commodity Exchange Act (“CEA” or “Act”) require each Registrant to

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

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

including the requirement to prepare and sign an annual compliance

report (“CCO Annual Report”).5 CEA section 4d(d) requires CCOs of

FCMs to “perform such duties and responsibilities” as are established

by Commission regulation or the rules of a registered futures

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

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

4s(k).7

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

(2010).

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

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

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

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

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

(Apr. 3, 2012) (“CCO Rules Adopting Release”). For purposes of

this release, these rules will be referred to as the “CCO Rules.”

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B. Consistency With SEC Rules

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

amended the Securities Exchange Act of 1934 (“Exchange Act”) by

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

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

(collectively, “SEC Registrants”).8 In compliance with sections

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

consulted and coordinated together and with prudential regulators in

developing the respective CCO rules for purposes of regulatory

consistency and comparability.9

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

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

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

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

requirements and duties for SEC Registrants in July 2011.10 In May

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

comment period for its outstanding Dodd-Frank Act Title VII

rulemakings, including rule 15Fk-1.11 In its reopening release, the

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

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

extent to which the SEC should emphasize consistency with the CFTC

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

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

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

because the industry had already implemented the CFTC’s

regulations.13 Specifically, with respect to supervision and CCO

obligations, commenters urged that the SEC’s final rules “be informed

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

conduct standards” among others.14 A number of comments also

suggested specific conforming modifications to the SEC’s proposed

rules.15

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10 See Business Conduct Standards for Security-Based Swap

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

(proposed Jul. 18, 2011).

11 See Reopening of Comment Periods for Certain Rulemaking

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

FR 30800 (May 23, 2013).

12 Id. at 30802.

13 Business Conduct Standards for Security-Based Swap Dealers

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

13, 2016) (“SEC Adopting Release”).

14 Id. at 29964 n.31.

15 Id.

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SEC staff continued to consult with CFTC staff leading up to

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

effective July 12, 2016.16 As explained in the SEC Adopting Release,

the SEC modified the proposed rules “to harmonize with CFTC

requirements to create efficiencies for entities that have already

established infrastructure for compliance with analogous CFTC

requirements” where such modifications “will continue to provide the

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

the rules were intended to accomplish.” 17

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

29960.

17 SEC Adopting Release, 81 FR at 29964.

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C. Further Harmonization

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

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

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

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

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

adopted by the SEC are beneficial for market participants and

regulatory oversight.

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

actively engaged in compliance activities with the appropriate

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

officer to administer the firm’s compliance activities.18 As

described below, the proposed amendments to the CCO Rules preserve

these objectives and should increase efficiencies, reduce regulatory

burden, particularly for dual registrants, and further clarify the

scope of CCO duties.

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

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II. The Proposal

A. Regulation 3.1–Definitions

The Commission proposes to add a definition of “senior officer”

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

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

Commission’s regulations.19 The Commission has not previously

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

Commission staff has generally interpreted this term to refer to a

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

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

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

the Commission is proposing to define “senior officer” in new

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

equivalent officer of a registrant.”

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

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This definition is in keeping with the Commission’s continued

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

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

executive officer ensures CCO independence.20 The “chief executive

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

includes the phrase “other equivalent officer” to acknowledge that a

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

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

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

company would be appropriate only when that division is registered

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

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

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Request for comment: The Commission requests comment regarding the

proposed definition in Sec. 3.1. The Commission specifically requests

comment on the following questions:

[[Page 21332]]

Should the proposed definition for “senior officer” be

revised? If yes, please provide alternative suggestions.

Should other definitions be added?

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

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

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

Establish and administer policies and procedures, including those

related to ensuring compliance and remediating noncompliance issues;

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

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

implementation, the Commission has determined that certain CCO Rules

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

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

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

amendments are intended to maintain and clarify the underlying goal of

the CCO’s active engagement in compliance monitoring while reducing

regulatory burdens that provide limited corresponding benefit.21

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

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

Procedures

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

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

and procedure that is required to be established pursuant to this

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

CCO’s duties include “administering the registrant’s policies and

procedures reasonably designed to ensure compliance with the Act and

Commission regulations.” 23 The Commission is proposing to amend

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

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

futures commission merchant, swap dealer, or major swap participant

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

regulations.”

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

23 17 CFR 3.3(d)(1).

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The proposed change clarifies that the CCO is responsible for

administering the policies and procedures specifically related to the

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

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

regulation. Further, the proposed change more closely tracks the

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

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

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

parallel rule 25 and should alleviate concerns regarding consistency

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

applies to dual CFTC Registrants and SEC Registrants.

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

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

extend only to the activities of the registrant that are regulated

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

derivatives activities included in the definition of FCM under

section 1(a)(28) of the CEA.”).

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

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

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

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

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

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

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

implied reasonableness standard and recognizes that resolution of non-

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

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

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26 The CEA and Exchange Act require CCO’s to “in consultation

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

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

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

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

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

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

personally resolve every potential conflict of interest that may arise

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

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

on CCOs, likely taking them away from more important compliance

activities. The proposed changes are intended to clarify that routinely

encountered conflicts could be resolved in the normal course of

business consistent with the CCO’s general administration of internal

policies and procedures, which must include conflicts of interest

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

more effectively engage in working to resolve conflicts practically and

within normal business operations procedures.

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

procedures to include conflicts of interest policies).

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

role in resolving conflicts of interest would likely include the

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

escalation and reporting of issues related to resolution, but not

executing the business decisions to ultimately resolve the

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

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

conflicts of interests. The Commission believes it is appropriate to

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

reflect its interpretation of the statutory requirement.

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

“the primary responsibility for the resolution of conflicts

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

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

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

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

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

29 by requiring CCOs to take “reasonable steps to ensure compliance

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

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

commission merchant’s business as a futures commission merchant.” 30

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

CCO’s duty in this subsection includes “ensuring the registrant

establishes, maintains and reviews written policies and procedures

reasonably designed to achieve compliance” with the Act and Commission

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

rule.31

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

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

swaps, including each rule prescribed by the Commission under this

section.”

30 17 CFR 3.3(d)(3).

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

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

commenter concerns that fully “ensuring compliance” with the CEA

could be an impracticable standard for CCOs and that the regulatory

responsibility for ensuring compliance is ultimately borne by the

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

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

compliance” rather than simply “ensure compliance.” 33

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

33 In making this modification, the Commission considered the

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

proposed rule effectuating identical statutory language. See id.

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[[Page 21333]]

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

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

representatives have expressed concern about the uncertainty as to the

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

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

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

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

procedures.34 The amended language also will further harmonize with

the SEC’s final interpretation of the role of the CCO.35

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34 See Designation of a Chief Compliance Officer; Required

Compliance Policies; and Annual Report of a Futures Commission

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

(proposed Nov. 19, 2010) (“Underlying all of these duties are two

fundamental acknowledgements: The chief compliance officer can only

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

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

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

contradict basic and well-established tenets of law regarding the

allocation of responsibility within a business association.”).

35 In finalizing its rules for SEC Registrants, the SEC

departed from its proposed language and similarly concluded that,

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

her personal capacity, to establish and enforce required policies

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

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

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

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

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

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

retesting, and closing of noncompliance issues.36 The Commission

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

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

“reasonably designed” to achieve the stated purpose. In removing the

consultation requirement, the Commission acknowledges that in carrying

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

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

the board of directors, and independent review groups.

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

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

to include remediating matters identified “through any means” by the

chief compliance officer in addition to the specific detection methods

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

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

current regulatory text could be viewed as a limit on noncompliance

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

particularly meaningful given advances in automated compliance

monitoring technology.

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37 See SEC Adopting Release, 81 FR at 30056.

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Request for comment: The Commission requests comment regarding the

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

specifically requests comment on the following questions:

Are the proposed revisions to the CCO duties appropriate?

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

Do the proposed amendments create added efficiencies for

dual CFTC and SEC Registrants?

To what extent do the proposed amendments reduce burdens

and costs for Registrants?

Do any of the proposed amendments create any additional

burdens or costs for Registrants?

Should the Commission revise any other requirements under

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

Should the Commission seek to further harmonize the

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

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

Reporting

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

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

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

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

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

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

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

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

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

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

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

Commission in determining whether the Registrant remains in compliance

with the CEA and Commission regulations.40 The Commission is

reaffirming these stated purposes and believes that the proposed

revisions will more effectively further these goals.

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

39 75 FR at 70883.

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

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

Commission to assess whether the registrant has mechanisms in place

to address adequately compliance problems that could lead to a

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

determining whether the registrant remains in compliance with the

CEA and the Commission’s regulations . . . . ”).

—————————————————————————

1. Regulation 3.3(e)–Annual Report

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

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

description of the Registrant’s written policies and procedures

(“WPPs”), including the code of ethics and conflicts of interest

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

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

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

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

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

designed to reasonably comply with the CEA and Commission regulations,

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

improvement and recommended changes or improvements to the Registrant’s

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

these three requirements to each applicable CFTC regulatory requirement

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

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

WPP, and discuss related areas of improvement.

—————————————————————————

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

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After adoption of the rule, Commission staff received industry

feedback indicating that the amount of time and resources needed for

the review described above makes the process burdensome when compared

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

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

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

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

substantive discussion regarding areas of improvement and recommended

changes to the compliance program, especially where such modifications

may relate to the remediation of

[[Page 21334]]

material noncompliance issues.43 This observation raises concerns as

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

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

“check-the-box” appraisal.

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42 To alleviate some of this burden, Commission staff

indicated in guidance that a chart may provide an appropriate

mechanism for efficiently addressing the requirements of Sec.

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

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

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

streamline the presentation of information, it does not

fundamentally change the burden of the underlying review and

assessment.

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

—————————————————————————

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

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

requirement under the Act and Commission regulations” and make other

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

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

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

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

Registrants provide summaries of their WPPs coupled with a detailed

discussion of their annual assessment and recommended improvements.45

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44 Although the requirement to identify WPPs that are

reasonably designed to ensure compliance is being deleted, the

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

policies and procedures through the Commission’s authority to

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

1.31.

45 Consistent with the CCO Annual Report Advisory, Registrants

may continue to use a chart to present assessment and review

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

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

provide meaningful, substantive discussion where required. CCO

Annual Report Advisory at 9-11.

—————————————————————————

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

requirements regarding delivery of the CCO Annual Report. To eliminate

confusion and unnecessary duplication, the Commission proposes to amend

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

furnish the CCO Annual Report.

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

requires that the Registrant describe in the CCO Annual Report its

financial, managerial, operational, and staffing resources set aside

for compliance with the Act and Commission regulations. Commission

staff has received a number of questions regarding whether the

description need only cover resources for the activities for which the

Registrant is registered or must also address other activities covered

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

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

resources allocated to the specific activities for which the Registrant

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

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

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

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

the Registrant’s business.

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

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

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

structure and content requirements for both CCO Annual Reports is

consistent.

—————————————————————————

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

1(c)(2)(A).

—————————————————————————

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

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

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

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

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

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

other things, be furnished to the Commission and include a

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

of Sec. 3.3 implements this requirement.

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

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

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

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

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

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

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

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

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

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

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

overall responsibility for governance and internal controls remain

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

agrees with this policy goal and also believes that further aligning

our rules provides for greater efficiency.

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47 Per its longstanding position, the Commission is

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

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

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

equivalent body or group performing the auditing function.

48 SEC Adopting Release, 81 FR at 30059.

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Request for comment: The Commission requests comment regarding the

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

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

background information, actual market examples, best practice

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

the proposed CCO Annual Report amendments, the Commission specifically

requests comment on the following questions:

Are the proposed amendments to the CCO Annual Report’s

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

modifications to the content requirements should be made?

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

result from such changes? Please provide details and estimates

regarding any asserted costs or savings.

Would the proposed amendments to the CCO Annual Report’s

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

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

Should the Commission make any other changes to Sec.

3.3(f) to further harmonize with the SEC?

III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (“RFA”) 49 requires that

agencies consider whether a proposed rule will have a significant

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

provide a regulatory flexibility analysis of the impact. The proposed

amendments define the term “senior officer;” clarify the scope of a

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

modify the CCO Annual Report delivery requirement. The proposed

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

registered with the Commission. The Commission has previously

established certain definitions of “small entities” to be used in

evaluating the impact of its regulations on small entities in

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

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

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

have a significant economic impact on a substantial number of small

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

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

proposed amendments will not have a significant economic impact on a

substantial number of small entities.

—————————————————————————

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

50 See Policy Statement and Establishment of Definitions of

“Small Entities” for Purposes of the Regulatory Flexibility Act,

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

“Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap

Participant,” “Major Security-Based Swap Participant” and

“Eligible Contract Participant,” 77 FR 30596, 30701 (May 23, 2012)

(SDs and MSPs).

—————————————————————————

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (“PRA”) 51 provides that a

federal agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless it displays a

currently valid control number issued by the Office of Management and

Budget (“OMB”). The collection of information related to this

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

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

amendments to the CCO Rules: (1) Define the term “senior officer”;

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

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

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

believes that the proposed amendments will not impose any new

information collection requirements that require approval of OMB under

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

or any new information collection requirements in addition to those

that already exist in connection with the preparation and delivery of

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

—————————————————————————

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

—————————————————————————

C. Cost-Benefit Considerations

As discussed above, the Commission is proposing amendments to the

CCO Rules that would: (1) Define the term “senior officer”; (2)

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

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

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

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

baseline for this cost and benefit consideration is existing Sec.

3.3.52

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52 The Commission notes that adding a definition of “senior

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

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

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

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

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

is seeking public comment on whether the definition of “senior

officer” has any cost and benefit considerations.

—————————————————————————

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

duties, but rather provide greater specificity regarding the scope of

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

swap dealer CCO duties. The Commission expects that greater clarity

concerning CCO responsibilities will reduce the potential burdens on

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

focus on the fundamental compliance aspects of their responsibilities.

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

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

cost effectively.

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

CCO duties, the Commission preliminarily believes that the proposal

would not impose any additional costs to Registrants, market

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

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

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

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

extent they can be quantified, monetary and other numerical estimates

thereof.

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

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

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

requirement basis was creating a significant economic burden with

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

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

to Registrants of producing the CCO Annual Report while maintaining its

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

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

focused on other compliance functions. In addition, the amendments

would harmonize certain CFTC and SEC CCO Annual Report content

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

complying with two regulatory regimes. The Commission believes that the

foregoing amendments would also provide relief for Registrants from

resource and time pressures in preparing their CCO Annual Reports.

The Commission recognizes that the CCO Annual Reports may contain

less content if the proposed amendments are adopted because of the

removal of the process of documenting a review for hundreds of

individual regulatory requirements. However, many of the requirements

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

addition, eliminating this process should allow Registrants to focus

more fully on completing their internal review processes and encourage

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

While the proposed amendments may require less description and

classification, the Commission believes that a more focused,

substantive discussion of the Registrant’s assessment and material

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

effective tool for informing both the Registrant’s senior management

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

—————————————————————————

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

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

through 23.451, governing business conduct standards for swap

dealers and major swap participants with counterparties would

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

subsection as a separate “requirement.” However, because these

regulations all address external business conduct standards, it may

be appropriate to address these rules together.

—————————————————————————

1. Section 15(a) Factors

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

costs and benefits of its actions before promulgating a regulation

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

specifies that the costs and benefits shall be evaluated in light of

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

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

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

risk management practices; and (5) other public interest

considerations. The Commission considers the costs and benefits

resulting from its discretionary determinations with respect to the

section 15(a) factors.

—————————————————————————

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

—————————————————————————

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

protections for swap markets participants, futures market participants,

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

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

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

Commission believes that the proposal will provide the CCO with greater

flexibility in accomplishing their duties and focusing compliance

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

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

senior management,

[[Page 21336]]

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

areas requiring change or improvement.

—————————————————————————

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

—————————————————————————

a. Protection of Market Participants and the Public

The proposed amendments will continue to protect market

participants and the public because they do not fundamentally alter the

CCO duties or the annual compliance reporting requirements of Sec.

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

reporting may reduce the reporting detail, the Commission believes that

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

CCO Annual Report material compliance matters that deserve greater

attention. Accordingly, the Commission preliminarily believes that the

reduction in content requirements will not affect the protection of

market participants and the public.

b. Efficiency, Competitiveness, and Financial Integrity of Markets

The Commission preliminarily believes that the proposed amendments

to the CCO Rules could improve resource allocational efficiency for

Registrants by reducing the burden to produce the CCO Annual Reports

thereby allowing Registrants to allocate compliance resources used for

report preparation more efficiently. Furthermore, entities that are

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

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

the two agencies’ parallel regulations are consistent. The Commission

preliminarily believes that the proposed amendments to the CCO Rules

will not have any negative impacts on market efficiency,

competitiveness, or integrity because each CCO Annual Report addresses

internal compliance programs of each Registrant and are not publicly

available, and the amendments affecting CCO duties only clarify those

duties and do not affect markets.

c. Price Discovery

The Commission has not identified a specific effect on price

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

address any pricing issues. Nevertheless, the Commission seeks public

comment on this issue.

d. Sound Risk Management Practices

The Commission preliminarily believes that the proposed amendments

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

meaningful effect on the risk management practices of Registrants. The

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

not directly impact a Registrant’s risk management practices because

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

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

program.56 Furthermore, the proposed amendments to the content

requirements do not affect the Registrant’s obligation to address

material noncompliance issues relating to its risk management program

in the CCO Annual Report. Finally, the Commission preliminarily

believes that including the audit committee and both the board of

directors and the senior officer as recipients of the CCO Annual

Reports may benefit Registrants’ overall risk management practices by

ensuring that all groups with overall responsibility for governance and

internal controls are informed of the report contents.

—————————————————————————

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

—————————————————————————

e. Other Public Interest Considerations

The Commission has not identified any other public interest

considerations for this rulemaking.

Request for Comment: The Commission invites comment on its

preliminary consideration of the costs and benefits associated with the

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

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

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

considerations, the Commission encourages commenters to submit any data

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

costs and benefits of the proposal.

List of Subjects in 17 CFR Part 3

Registration.

For the reasons stated in the preamble, the Commodity Futures

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

PART 3–REGISTRATION

0

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

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

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

13b, 13c, 16a, 18, 19, 21, and 23, as amended by Title VII of Pub.

L. 111-203, 124 Stat. 1376.

0

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

Sec. 3.1 Definitions.

* * * * *

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

officer or other equivalent officer of a registrant.

0

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

follows:

Sec. 3.3 Chief compliance officer.

* * * * *

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

duties shall include, but are not limited to:

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

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

or major swap participant that are required to be established pursuant

to the Act and Commission regulations;

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

officer, taking reasonable steps to resolve any conflicts of interest

that may arise;

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

Commission regulations relating to the registrant’s business as a

futures commission merchant, swap dealer or major swap participant,

including through ensuring that the registrant establishes, maintains,

and reviews written policies and procedures reasonably designed to

achieve compliance;

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

procedures reasonably designed to remediate noncompliance issues

identified by the chief compliance officer through any means, including

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

finding, self-reporting to the Commission and other appropriate

authorities, or complaint that can be validated;

(5) Establishing written procedures reasonably designed for the

handling, management response, remediation, retesting, and resolution

of noncompliance issues; and

(6) Preparing and signing the annual report required under

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

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

prepare a written report that covers the most recently completed fiscal

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

participant. The annual report shall, at a minimum, contain a

description of:

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

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

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

interest policies;

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

participant’s assessment of the

[[Page 21337]]

effectiveness of its policies and procedures relating to its business

as a futures commission merchant, swap dealer or major swap

participant;

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

changes or improvements to its compliance program and resources devoted

to compliance;

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

set aside for compliance with respect to the Act and Commission

regulations relating to its business as a futures commission merchant,

swap dealer or major swap participant, including any material

deficiencies in such resources;

(5) Any material noncompliance issues identified and the

corresponding action taken; and

(6) Any material changes to compliance policies and procedures

during the coverage period for the report.

(f) Furnishing the annual report to the Commission. (1) Prior to

furnishing the annual report to the Commission, the chief compliance

officer shall provide the annual report to the board of directors, the

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

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

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

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

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

with this requirement.

* * * * *

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

Christopher J. Kirkpatrick,

Secretary of the Commission.

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

Federal Regulations.

Appendix to Chief Compliance Officer Duties and Annual Report

Requirements for Futures Commission Merchants, Swap Dealers, and Major

Swap Participants; Amendments–Commission Voting Summary

On this matter, Acting Chairman Giancarlo and Commissioner Bowen

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

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

BILLING CODE 6351-01-P

Last Updated: May 8, 2017