Designation of a Chief Compliance Officer; Required Compliance Policies; and Annual Report of a Futures Commission Merchant, Swap Dealer, or Major Swap Participant, 70881-70888 [2010-29021]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 75, Number 223 (Friday, November 19, 2010)]
[Proposed Rules]
[Pages 70881-70888]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-29021]


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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 https://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: https://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 
https://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 https://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: https://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\ https://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