2010-29021
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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, sjosephson@cftc.gov; or Claire Noakes, Attorney Advisor, Division
of Clearing and Intermediary Oversight, (202) 418-5444,
cnoakes@cftc.gov; 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
OIRAsubmissions@omb.eop.gov. 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
See Also:
