The Commodity Futures Trading Commission proposed amendments to the enumerated duties for chief compliance officers of futures commission merchants and swap dealers, as well as to the required content of compliance reports that CCOs must annually prepare and submit to the Commission.
Most notably, the proposed rule amendments, if adopted, would eliminate the current requirement that annual reports identify each specific law provision and CFTC rule that pertains to an FCM and SD and specifically tie each such provision to the precise firm policies and procedures that are reasonably designed to ensure compliance. Instead, FCMs and SDs would solely be mandated to generally describe the firm’s policies and procedures that are reasonably designed to help ensure the firm’s compliance with applicable law and CFTC rules without providing provision-by-provision tie-outs.
The CFTC acknowledged that, as a result of its proposed changes, “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, says the Commission, “many of the requirements are inter-related and are better addressed collectively.” Eliminating the current tie-in 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.”
In addition, the CFTC’s proposed amendments would:
- clarify that, in consultation with the firm’s board of directors or senior officer, CCOs are obligated solely to take “reasonable steps” to resolve conflicts of interest that might arise at the firm (as opposed to a CCO’s current obligation to resolve such conflicts);
- obligate CCOs to establish, maintain and review written policies and procedures “reasonably designed” to correct non-compliance issues identified by a CCO “through any means” (as opposed to a CCO’s current obligation to establish procedures for the “remediation” of non-compliance issues in consultation with the Board or senior officer identified through five enumerated means only); and
- clarify that a CCO’s current obligation to take reasonable steps to ensure a swap dealer’s or FCM’s compliance with applicable law and CFTC rules encompasses “ensuring that the registrant establishes, maintains and reviews written policies and procedures reasonably designed to achieve compliance.”
The CFTC also proposed adding a specific definition for the term “senior officer.” This term would formally mean “the chief executive officer or other equivalent officer of a registrant” consistent with the Commission’s current interpretation. In addition, the CFTC proposed requiring a CCO to provide a copy of the annual report to the registrant’s Board, senior officer and audit committee (or equivalent committee) for review prior to submitting the report to the CFTC. Currently, only the Board and senior officer must receive the annual report before CFTC submission.
The CFTC says adoption of its proposed modifications would better align its requirements for CCOs and annual reports to those of the Securities and Exchange Commission. The CFTC’s proposed changes also apply to CCOs and annual reports of major swap participants.
Comments on the CFTC’s proposal will be accepted for 60 days after the notice of proposed rulemaking is published in the Federal Register.
Memory Lane: Following passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFTC adopted a rule that required each FCM, swap dealer and major swap participant to designate an individual to serve as its chief compliance officer. This rule also enumerated duties of the CCO, including preparing and executing an annual compliance report that included certain required content. The CCO or the firm’s chief executive officer must certify a registrant’s annual compliance report as accurate and complete “to the best of his or her knowledge and reasonable belief.” (Click here to access CFTC Rule 3.3.) Subsequently, the CFTC’s Division of Swap Dealer and Intermediary Oversight adopted an advisory related to best practices regarding the content of such reports. (Click here for background regarding these best practices in the article “In Time for Christmas, CFTC Staff Gives FCMs, SDs and MSPs Gift of Time Extension to File CCO Annual Report; Adds Requirements As the Price” in the January 2, 2015 edition of Between Bridges.)
My View: The CFTC’s proposed revision to its rule related to obligations of CCOs and the content of the CCO annual report contains many welcome amendments to CCO obligations by subjecting them to a reasonableness standard. In addition, the elimination of the current requirement to tie each applicable law and CFTC regulation to specific policies and procedures would be good news, if adopted, and would permit CCOs to escape check the box assessments and more carefully consider a firm’s compliance holistically instead. However, the proposed augmentation of a CCO’s current general obligation to take reasonable steps to “ensure” a registrant’s compliance with applicable law and CFTC rules by expressly “ensuring that the registrant establishes, maintains, and reviews written policies and procedures reasonably designed to achieve compliance” seems to undercut the requirement’s reasonableness standard by placing ongoing express new responsibilities on CCOs that don’t exist currently. Accordingly, this new proposed clause should be eliminated in any revised rule. Moreover, unlike the relevant law related to swap dealers and major swap participants, the law related to FCMs expressly permits CCO functions and obligations to be prescribed by a registered futures association (i.e., the National Futures Association) as well as by the CFTC (click here to access Commodity Exchange Act Section 4d(d), 7 U.S.C. §6d(d)). Perhaps as part of its Project KISS, the CFTC could consider delegating all matters related to FCM CCOs, including preparation of the annual report, to NFA. This would conform futures/cleared swaps industry practice related to FCMs to securities industry practice related to broker-dealers and allocate some oversight functions related to FCMs from the CFTC to NFA where they may more efficiently belong. (Click here for access to Rule 3130 of the Financial Industry Regulatory Authority entitled “Annual Certification of Compliance and Supervisory Processes.”)