On May 3, 2017, the Commodity Futures Trading Commission (the CFTC) voted to propose changes1(the Proposed Amendment) to certain CFTC regulations2 (the Existing CCO Rules) related to the duties and annual reporting requirements of chief compliance officers (CCOs) of swap dealers (SDs), major swap participants (MSPs) and futures commission merchants (FCMs) registered with the CFTC (Covered Entities). The Proposed Amendment is not intended to change substantively the CCO’s role and responsibilities. Instead, the proposal is generally designed to clarify existing requirements under the Existing CCO Rules, incorporate industry feedback the CFTC has received since the adoption of the Existing CCO Rules and harmonize the Existing CCO Rules with the U.S. Securities and Exchange Commission’s (SEC) recently adopted counterpart chief compliance officer rules (the SEC CCO Rules),3which apply to CCOs of security-based SDs and major security-based swap participants. Comments on the Proposed Amendment must be received on or before July 7, 2017.4 

Definition of Senior Officer

In order to ensure CCO independence,5 the Existing CCO Rules require the CCO to report to the board of directors or the “senior officer” of the Covered Entity, either of whom may appoint the CCO, determine the compensation of the CCO, meet with the CCO at least annually and remove the CCO.6The Existing CCO Rules, however, do not define which officers of a Covered Entity qualify as “senior officers.” To reduce uncertainty and maintain consistency with the SEC CCO Rules, the Proposed Amendment would define “senior officer” as “the chief executive officer or other equivalent officer” of a Covered Entity.7

CCO Duties

The Existing CCO Rules establish certain CCO duties that generally require the CCO to:

  1. Establish and administer policies and procedures designed to comply with CFTC regulations and remediate noncompliance issues;
  2. Resolve conflicts of interest; and
  3. Prepare and submit an annual report (the CCO Annual Report) to the CFTC, the board of directors and the senior officer of the Covered Entity.8

The Proposed Amendment seeks to clarify several of the CCO’s responsibilities and reduce regulatory burdens that the Existing CCO Rules impose upon CCOs.

Scope of Compliance Policies and Procedures

Existing CCO Rule 3.3(d)(1) requires the CCO to administer “the [Covered Entity’s] policies and procedures reasonably designed to ensure compliance with the” Commodity Exchange Act, as amended (the CEA) and CFTC regulations.9 A strict reading of Existing CCO Rule 3.3(d)(1) suggests that the scope of the required policies and procedures extends to all CFTC regulations and provisions of the CEA that relate to the Covered Entity’s entire business. This interpretation, however, is inconsistent with the CFTC’s stated purpose for Existing CCO Rule 3.3(d)(1).10 As a result, the Proposed Amendment would revise Existing CCO Rule 3.3(d)(1) to state clearly that it requires the CCO only to administer the Covered Entity’s “policies and procedures relating to its business as an [FCM], [SD], or [MSP]” (emphasis added).11 In the Proposing Release, the CFTC states that this modification is designed to clarify that the CCO is only responsible for administering policies and procedures “specifically related to the [Covered Entity’s] business as a [SD], [MSP] or [FCM], as applicable, not all of the [Covered Entity’s] business that may otherwise be subject to CFTC regulation.”12

Duty to Resolve Conflicts of Interest

Under Existing CCO Rule 3.3(d)(2), the CCO’s duties include, in consultation with the board of directors or senior officer, “resolving any conflicts of interest that may arise.”13 The CFTC acknowledges in the Proposing Release that a strict reading of Existing CCO Rule 3.3(d)(2) would “require the CCO to personally resolve every potential conflict of interest.”14 To clarify that “routinely encountered conflicts could be resolved in the normal course of business,” the Proposed Amendment would specify that the CCO need only take “reasonable steps” to resolve conflicts of interest.15

Duty to Ensure Compliance With CFTC Regulations

Existing CCO Rule 3.3(d)(3) requires CCOs to take “reasonable steps to ensure compliance with the [CEA] and [CFTC] regulations relating to” the Covered Entity.16 Since the adoption of the Existing CCO Rules, Covered Entities have expressed concern that Existing CCO Rule 3.3(d) appears to place an inappropriate level of responsibility upon the CCO and confuses whether the regulatory responsibility for ensuring compliance with the CEA and CFTC regulations is ultimately borne by the Covered Entity, the CCO, or both.17 To address these concerns and clarify that the burden of compliance rests upon the Covered Entity, the Proposed Amendment would modify Rule 3.3(d)(3) to only require the CCO to “take reasonable steps” to ensure compliance with the CEA and CFTC regulations.18

Remediation of Noncompliance Issues

Existing CCO Rules 3.3(d)(4) and (d)(5) generally require CCOs of Covered Entities to establish policies and procedures, “in consultation with the board of directors or the senior officer,” which remediate noncompliance issues.19  The Proposed Amendment would remove the requirement that CCOs must consult with the board of directors or senior officer of the Covered Entity when developing such policies and procedures and clarify that the policies and procedures be “reasonably designed” to remediate noncompliance.20

Additionally, Existing CCO Rule 3.3(d)(4) requires such policies and procedures to respond to noncompliance issues specifically “through compliance office review, look-back, internal or external audit finding, self-reported error, or validated complaint.”21 The Proposed Amendment would provide CCOs more flexibility by allowing them to remediate noncompliance issues through “any means,” in addition to the methods already listed in Existing CCO Rule 3.3(d)(4).22 The CFTC indicated in the preamble to the Proposed Amendment that this added flexibility is in part motivated by advances in automated compliance monitoring technology.23

CCO Annual Reporting

Scope of Annual Report

Existing CCO Rule 3.3(e) requires CCOs to include in their Annual Reports summaries of the policies, procedures and resources relating to the Covered Entity’s compliance with the CEA and CFTC regulations.24 Similar to the Proposed Amendment’s revision to the scope of the CCO’s required policies and procedures discussed above, the Proposed Amendment would only require the CCO to report such policies, procedures and resources that relate to the Covered Entity’s business as an FCM, SD or MSP.25

Furnishing the Annual Report

Existing CCO Rule 3.3(f) requires the CCO to furnish the Annual Report to the CFTC, the board of directors and the senior officer of the Covered Entity.26 The Proposed Amendment would impose an additional requirement on CCOs to furnish the Annual Report to the Covered Entity’s audit committee, or equivalent body, so that “all groups with overall responsibility for governance and internal controls remain informed” of the Covered Entity’s compliance program.27

Conclusion

While the Proposed Amendments are not substantial, they would significantly alter certain CCO responsibilities and ease some troublesome interpretative issues. Affected parties will want to consider commenting on the Proposed Amendments, either to support their implementation or suggest further changes that would address existing concerns. With the CFTC’s commissioner membership in flux, there may be a greater-than-usual opportunity to impact any final rule. As noted above, comments on the Proposed Amendment must be submitted to the CFTC on or before July 7, 2017.28