Financial Surveillance Examination Program Requirements for Self-Regulatory Organizations, 31078-31086 [2018-14272]
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31078
Proposed Rules
Federal Register
Vol. 83, No. 128
Tuesday, July 3, 2018
This section of the FEDERAL REGISTER
contains notices to the public of the proposed
issuance of rules and regulations. The
purpose of these notices is to give interested
persons an opportunity to participate in the
rule making prior to the adoption of the final
rules.
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 1
RIN 3038–AE73
Financial Surveillance Examination
Program Requirements for SelfRegulatory Organizations
Commodity Futures Trading
Commission.
ACTION: Proposed rule.
AGENCY:
The Commodity Futures
Trading Commission (‘‘Commission’’ or
‘‘CFTC’’) is proposing to amend its
regulations governing the minimum
standards for a self-regulatory
organization’s (‘‘SRO’’) financial
surveillance examination program of
futures commission merchants
(‘‘FCMs’’). The proposed amendments
would revise the scope of a third-party
expert’s evaluation of the SRO’s
financial surveillance program to cover
only the examination standards used by
SRO staff in conducting FCM
examinations. The proposed
amendments also would revise the
minimum timeframes between when an
SRO must engage a third-party expert to
evaluate its FCM examination
standards.
SUMMARY:
Comments must be received on
or before September 4, 2018.
ADDRESSES: You may submit comments,
identified by RIN 3038–AE73, by any of
the following methods:
• CFTC Comments Portal: https://
comments.cftc.gov. Select the ‘‘Submit
Comments’’ link for this rulemaking and
follow the instructions on the Public
Comment Form.
• Mail: Send to Christopher
Kirkpatrick, Secretary of the
Commission, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW,
Washington, DC 20581.
• Hand Delivery/Courier: Follow the
same instructions as for Mail, above.
Please submit your comments using
only one of these methods. To avoid
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possible delays with mail or in-person
deliveries, submissions through the
CFTC Comments Portal are encouraged.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to https://
comments.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 (‘‘FOIA’’), a petition for
confidential treatment of the exempt
information may be submitted according
to the procedures established in § 145.9
of the Commission’s regulations.1
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://comments.cftc.gov that it
may deem to be inappropriate for
publication, such as obscene language.
All submissions that have been redacted
or removed that contain comments on
the merits of the rulemaking will be
retained in the public comment file and
will be considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under the FOIA.
FOR FURTHER INFORMATION CONTACT:
Matthew B. Kulkin, Director, 202–418–
5213, mkulkin@cftc.gov; Thomas Smith,
Deputy Director, 202–418–5495,
tsmith@cftc.gov; Jennifer Bauer, Special
Counsel, 202–418–5472, jbauer@
cftc.gov; or Joshua Beale, Special
Counsel, 202–418–5446, jbeale@
cftc.gov, Division of Swap Dealer and
Intermediary Oversight, Commodity
Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street NW,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. Commission Initiative to Simplify
and Modernize Regulations
In March of 2017, Commission staff
initiated an agency-wide internal review
of CFTC regulations and practices to
identify those areas that could be
simplified to make them less
burdensome and costly.2 The
1 Regulation 145.9. Commission regulations
referred to herein are found at 17 CFR chapter I.
2 See Remarks of Acting Chairman J. Christopher
Giancarlo before the 42nd Annual International
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Commission subsequently published in
the Federal Register on May 9, 2017 a
Request for Information soliciting
suggestions from the public regarding
how the Commission’s existing rules,
regulations, or practices could be
applied in a simpler, less burdensome,
and costly manner.3
The CME Group (‘‘CME’’) submitted
suggestions on a variety of rules,
regulations, and practices in responses
to the Commission’s Request for
Information.4 One area identified by
CME for simplification and the
reduction of regulatory burden was
Regulation 1.52, which imposes an
obligation on SROs 5 to conduct
periodic examinations of member
FCMs 6 for compliance with both SRO
and Commission minimum capital and
other financial and related reporting
requirements. Specifically, the CME
suggested that Regulation 1.52 should
be amended to eliminate a requirement
that a third-party public accounting firm
perform periodic evaluations and
assessments of the CME’s surveillance
program to oversee its member FCMs
compliance with Commission and CME
financial and related reporting
requirements.7
Futures Industry Conference in Boca Raton, FL,
dated March 15, 2017. The remarks are available at
the Commission’s website: https://www.cftc.gov/
PressRoom/SpeechesTestimony/opagiancarlo-20.
3 Project KISS, 82 FR 21494 (May 9, 2017);
amended on May 24, 2017, 82 FR 23765 (May 24,
2017). The Federal Register Request for
Information, and the suggestion letters filed by the
public are available at the Commission’s website:
https://comments.cftc.gov/KISS/KissInitiative.aspx.
4 See Letter from Kathleen Cronin, Senior
Managing Director, General Counsel and Corporate
Secretary, CME Group, dated September 29, 2017.
The CME’s letter is available at the Commission’s
website: https://comments.cftc.gov/Public
Comments/ViewComment.aspx?id=61395&Search
Text=.
5 The term ‘‘self-regulatory organization’’ is
defined in Regulation 1.52 to include a contract
market (as defined in Regulation 1.3) or an RFA
under section 17 of the Commodity Exchange Act
(‘‘Act’’) (7 U.S.C. 1 et seq.), but the term as defined
in Regulation 1.52 does not include a swap
execution facility (as defined in Regulation 1.3). See
Regulation 1.52(a)(2).
6 The term ‘‘futures commission merchant’’ is
generally defined in Regulation 1.3 as (1) an entity
that is engaged in soliciting or accepting orders for
the purchase or sale of any commodity for future
delivery or a swap and, in connection with the
solicitation and acceptance of such orders, accepts
money, securities or property (or extends credit in
lieu thereof) to margin, guarantee or secure futures
or swaps transactions, or (2) an entity registered as
an FCM.
7 CME Letter, pp. 13–14.
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B. Statutory and Regulatory Background
FCMs perform critical functions to
facilitate the efficient operation of
Commission-regulated exchange-traded
derivatives markets. In addition to
trading for their own accounts and
carrying the accounts of their affiliates,
FCMs are market intermediaries,
standing between customers trading
futures and swaps transactions on one
side and designated contract markets
(‘‘DCMs’’) and derivatives clearing
organizations (‘‘DCOs’’) on the other
side. As part of their role as market
intermediaries, FCMs carry customer
accounts and hold customer funds to
margin futures and cleared swap
transactions. FCMs also fulfill daily
settlement obligations on behalf of
customers by posting sufficient funds to
DCOs to support their customers’
futures and swap positions, including
paying mark-to-market losses associated
with such positions. FCMs also are
essential to the efficient operation of
Commission-regulated markets in that
they guarantee each customer’s financial
performance for futures and swap
positions to DCOs by agreeing to use
their own financial resources to cover
any shortfall resulting from a customer
default.8
The Act acknowledges the critical role
performed by FCMs. Section 4f(b) of the
Act authorizes the Commission to adopt
regulations imposing minimum capital
and financial reporting requirements on
FCMs to help ensure that they maintain
adequate financial resources to meet
their obligations.9 Under this statutory
authorization, the Commission adopted
regulations requiring FCMs, among
other requirements, to maintain a
minimum level of regulatory capital,10
to segregate customer funds from their
own funds in specially designated
customer accounts,11 and to maintain
appropriate risk management programs
to monitor and manage the risks
8 See
Regulation 39.16.
4f(b) of the Act authorizes the
Commission to adopt FCM minimum financial and
related reporting requirements. Section 4f(b)
provides, in relevant part, that no person shall be
registered as an FCM unless such person meets the
minimum financial requirements that the
Commission may prescribe by regulation as
necessary to insure such person meets its
obligations as a registrant, and each person
registered as an FCM shall at all times continue to
meet such prescribed minimum financial
requirements.
10 See Regulation 1.17 for FCM minimum capital
requirements.
11 See Regulations 1.20, 22.2, and 30.7 for FCM
segregation requirements for customer accounts
containing futures positions, swap positions, and
foreign futures positions, respectively.
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associated with their activities as
FCMs.12
The Commission also has adopted,
under the authority granted by section
4f(b), regulations imposing periodic
financial reporting requirements on
FCMs that are intended to provide the
Commission with information regarding
their financial condition. The financial
reporting requirements include daily
statements demonstrating compliance
with the segregation of customer funds
requirements,13 monthly unaudited and
annual audited financial statements,14
and regulatory notices upon the
occurrence of specified events including
failing to meet minimum capital
requirements, failing to comply with
segregation requirements, and failing to
maintain current books and records.15
In addition to authorizing the
Commission to adopt regulations
imposing direct financial and related
reporting requirements, the Act further
establishes a regulatory oversight
structure that imposes an obligation on
DCMs and registered futures
associations (‘‘RFAs’’),16 as SROs, to
perform frontline regulatory oversight of
market intermediaries, including
FCMs.17 In 2000, Congress affirmed this
regulatory structure of industry selfregulation by amending section 3 of the
Act to state, in pertinent part, that it is
the purpose of the Act to serve the
public interests through a system of
effective self-regulation of trading
facilities, clearing systems, market
participants and market professionals
under the oversight of the
Commission.18
To achieve the objective of a selfregulatory structure, the Act and
Commission regulations require RFAs
and DCMs to adopt financial and related
reporting requirements for member
FCMs, and to periodically examine
FCMs for compliance with such
requirements. Section 17(p) of the Act
requires an RFA to establish and submit
for Commission approval rules
imposing minimum capital, segregation
12 See Regulation 1.11 for FCM risk management
requirements.
13 See Regulations 1.32, 22.2 and 30.7 for FCM
requirements to prepare and to submit to the
Commission daily segregation computations and
schedules for customer futures, cleared swaps and
foreign futures accounts, respectively.
14 See Regulation 1.10 for FCM requirements to
file unaudited monthly financial statements and
annual audited financial statements.
15 See Regulation 1.12.
16 The National Futures Association (‘‘NFA’’) is
the only registered RFA. NFA’s financial
requirements for FCMs are available at its website,
www.nfa.futures.org.
17 Section 3(b) of the Act.
18 Section 108 of the Commodity Futures
Modernization Act of 2000, Public Law 106–554,
114 Stat. 2763 (Dec. 21, 2000).
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31079
and other financial requirements
applicable to its members for which
such requirements are imposed by the
Commission. The RFA’s financial
requirements for its members must be at
least as stringent as those set by the Act
or Commission regulations.19 Section
17(p) further provides that the RFA
must implement a program to audit and
enforce compliance by its members with
the RFA’s minimum financial
requirements.20
With respect to DCMs, section
5(d)(11)(B) of the Act and Regulation
38.600 require, in relevant part, each
DCM to implement rules to ensure the
financial integrity of any member FCM
and the protection of customer funds.21
DCMs also are required to monitor an
FCM member’s compliance with the
DCM’s minimum financial requirements
by reviewing financial information filed
with the DCM and by conducting
periodic examinations of the FCM.22
The Commission’s and SRO’s
minimum financial requirements for
member FCMs are intended to help
ensure that FCMs can continue to meet
their financial and operational
obligations to both customers and DCOs,
which is necessary in order for the
Commission-regulated markets to
operate efficiently and effectively.
C. Current Commission Regulation 1.52
As noted in section I.B., above, the
Act and Commission regulations
establish SROs (i.e., DCMs and NFA) as
frontline regulators for FCMs.
Commission Regulation 1.52 establishes
the minimum standards that the
Commission requires of an SRO
oversight program, and includes an
explicit requirement that each SRO
must adopt rules prescribing minimum
financial and related reporting
requirements for member FCMs that are
the same as, or more stringent than, the
requirements imposed by the
Commission.23 Consistent with the
requirements of Regulation 1.52, SROs
have adopted rules imposing FCM
capital and financial reporting
requirements that are at least as
stringent as the FCM capital and
financial reporting requirements set
19 See
section 17(p)(2) of the Act.
20 Id.
21 See also, Regulation 38.602 which provides
that a DCM must provide for the financial integrity
of its transactions by establishing and maintaining
appropriate minimum financial standards for its
members and non-intermediated market
participants, and Regulation 38.603 which requires
a DCM to have rules concerning the protection of
customer funds.
22 See Regulations 38.600 through 38.605.
23 See Regulation 1.52(b)(1).
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forth in applicable Commission
regulations.24
In 2013, the Commission adopted new
rules and rule amendments to
comprehensively enhance customer
protections.25 As part of the 2013
Customer Protection Rulemaking, the
Commission amended Regulation 1.52
to impose several additional obligations
on SROs with respect to the oversight of
FCMs. Amended Regulation 1.52
requires each SRO to establish and
operate a supervisory program that
includes written policies and
procedures concerning the application
of the supervisory program in the
examination of its member registrants
(including FCMs) for the purpose of
assessing whether each member
registrant is in compliance with
applicable SRO and Commission
regulations governing net capital and
related financial requirements, the
obligations to segregate customer funds,
risk management requirements,
financial reporting requirements,
recordkeeping requirements, and sales
practices and other compliance
requirements. The supervisory program
also must adequately address the
following elements: (1) The level,
training, and independence of SRO
examination staff; (2) The SRO’s
ongoing surveillance of member FCMs,
including the review and analysis of
financial reports and regulatory notices
received; (3) The SRO’s procedures for
identifying and monitoring FCMs that
are deemed to pose a high degree of
financial risk; (4) The SRO’s conduct of
on-site examination of FCMs by SRO
staff at least once every 18 months; and
(5) The documentation of all aspects of
the SRO’s operation of its supervisory
program.
The supervisory program also must, at
a minimum, incorporate FCM
examination standards addressing: (1)
The ethics of an SRO examiner; (2) The
independence of an SRO examiner; (3)
The supervision, review, and quality
control of an SRO examiner’s work
product; (4) The evidence and
documentation to be reviewed and
24 For example, CME Rule 970 imposes capital
and financial reporting requirements on member
FCMs that are at least as stringent as the
Commission’s capital and financial reporting
requirements. CME rules may be accessed via the
CME’s website: https://www.cmegroup.com/
rulebook/CME/I/9/9.pdf.
NFA FCM capital and financial reporting
requirements are set forth in Section 1 of the NFA’s
Financial Requirements section of its rulebook and
may be accessed at NFA’s website: https://
www.nfa.futures.org/rulebook/index.aspx.
25 Enhancing Protections Afforded Customers and
Customer Funds Held by Futures Commission
Merchants and Derivatives Clearing Organizations,
78 FR 68506 (Nov. 14, 2013) (the ‘‘2013 Customer
Protection Rulemaking’’).
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retained in connection with an
examination; (5) The examination
planning process; (6) Materiality
assessment; (7) Quality control
procedures to ensure that the SRO
examinations maintain the level of
quality expected; (8) Communications
between an SRO examiner and the
regulatory oversight committee, or the
functional equivalent of the regulatory
oversight committee, of the SRO of
which the FCM is a member; (9)
Communications between an SRO
examiner and an FCM’s audit committee
of the board of directors or similar
governing body; (10) Analytical review
procedures; (11) Record retention; and
(12) Required items for inclusion in the
SRO’s examination report, such as
repeat violations, material items, and
high risk issues.26 Regulation 1.52
further provides that all aspects of an
SRO’s supervisory program, including
the FCM examination standards, must
conform to auditing standards issued by
the Public Company Accounting
Oversight Board (‘‘PCAOB’’) as such
PCAOB standards would apply to a nonfinancial statement audit.27
Regulation 1.52 also requires each
SRO to engage an ‘‘examinations
expert’’ to evaluate its supervisory
program prior to its initial use, and to
evaluate the SRO’s application of the
supervisory program at least once every
three years after its initial use.28 For
each evaluation, the SRO is required to
obtain from the examinations expert a
written report on findings and
recommendations issued under the
consulting services standards of the
American Institute of Certified Public
Accountants (‘‘AICPA’’) that includes:
(1) A statement that the examinations
expert has evaluated the supervisory
program (including its design to detect
material weaknesses in an FCM’s system
of internal controls), including any
comments and recommendations
regarding such evaluation; (2) A
statement that the examinations expert
has evaluated the application of the
supervisory program by the SRO,
including any comments and
recommendations in connection with
1.52(c) and (d).
PCAOB is a nonprofit corporation
established by Congress to oversee the audits of
public companies in order to protect investors and
the public interest by promoting informative,
accurate, and independent audit reports. The
PCAOB also oversees the audits of brokers and
dealers registered with the Securities and Exchange
Commission. The PCAOB was not, however, vested
with the authority to oversee the audits of FCMs.
28 An ‘‘examinations expert’’ is defined in
Regulation 1.52(a) as an accounting and auditing
firm with substantial expertise in the audits of
FCMs, risk assessment, and internal control
reviews, and is an accounting and auditing firm that
is acceptable to the Commission.
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26 Regulation
27 The
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such evaluation; and, (3) A discussion
and recommendations of any new or
best practices as prescribed by industry
sources, including the AICPA and
PCAOB.
II. Proposed Amendments to Regulation
1.52
A. Response To Request for Information
The CME stated in its response to the
Commission’s Request for Information
that it fully supported the Commission’s
objective of strengthening and
enhancing SRO oversight programs for
FCMs as set forth in the 2013 Customer
Protection Rulemaking. CME further
stated that it expended significant
resources revising the FCM supervisory
program to address the enhanced
requirements of Regulation 1.52 that
were imposed by the 2013 Customer
Protection Rulemaking. In this regard,
CME stated that it and NFA jointly
engaged a public accounting firm as a
consultant during the development of
the FCM examination standards, and
that the public accounting firm’s
expertise was extremely beneficial in
drafting the initial FCM examination
standards and revising its supervisory
program to address such standards.
The CME, however, also suggested
that the Commission should eliminate
the requirement for an SRO to engage an
examinations expert once every three
years to evaluate the SRO’s supervisory
program. The CME expressed its view
that the engagement of an examinations
expert at least once every three years
does not provide any meaningful
regulatory benefit. The CME noted that
under the current regulatory framework,
staff of the Commission’s Division of
Swap Dealer and Intermediary
Oversight (‘‘DSIO’’) provides effective
oversight of the SRO FCM examination
programs through the conduct of its
SRO rule enforcement reviews. The
CME noted that it revises the FCM
examinations programs to incorporate
any regulatory changes adopted by the
Commission or SROs, and provides the
actual FCM examination programs, with
the revisions, to DSIO staff for review at
least once each year.
Based upon the CME’s response to the
Commission’s Request for Information,
and Commission staff’s firsthand
experience in the CME’s and NFA’s
implementation of their initial
supervisory program,29 the Commission
29 Since adoption of the amendments to
Regulation 1.52 resulting from the 2013 Customer
Protection Rulemaking, Commission staff has
participated in several meetings with the CME,
NFA, and their examinations expert to address
issues and questions arising during the drafting of
the initial examination standards and programs. In
2015, Commission staff, through delegated
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is proposing several amendments to
Regulation 1.52 to revise the time
interval between mandatory
examinations expert evaluations of the
SRO supervisory program, and to amend
the scope of the examinations expert’s
evaluation to focus on changes to
auditing standards adopted by the
PCAOB since the last examinations
expert’s evaluation. The Commission
also is proposing several technical
amendments to eliminate redundancies
in the rule text.
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B. Scope of the Examinations Expert’s
Evaluation
The examinations expert is currently
required to evaluate, at least once every
three years, (1) the supervisory program
of an SRO or a Joint Audit Committee
(‘‘JAC’’),30 and (2) the SRO’s or JAC’s
application of its supervisory
program.31 The SRO or JAC also is
required to obtain from the
examinations expert a written report on
finding and recommendations issued
under the consulting services standards
of the AICPA that includes statements
that the examinations expert has
evaluated the supervisory program and
the SRO’s or JAC’s application of the
supervisory program, and an analysis of
the supervisory program’s design to
detect material weaknesses in internal
controls.
The Commission is proposing to
amend Regulations 1.52(c)(2)(iv) and
(d)(2)(ii)(I) to remove from the scope of
the examinations expert’s evaluation the
SRO’s or JAC’s application of its
supervisory program during periodic
reviews and the analysis of the
supervisory program’s design to detect
material weaknesses in internal controls
authority, approved the initial FCM examination
standards, and in 2017 approved the CME’s and
NFA’s examination programs. The examination
standards and programs are now fully implemented
and are used in each DSRO examination of an FCM.
30 As many FCMs are members of more than one
SRO, Regulation 1.52 provides a permissive system
that allows SROs to enter into agreements allocating
primary, but not exclusive, financial oversight and
examination responsibilities of FCMs that are
members of two or more SROs to one of the SROs,
which is termed the ‘‘designated self-regulatory
organization’’ (‘‘DSRO’’). The term ‘‘designated selfregulatory organization’’ is generally defined in
Regulation 1.3 to mean the SRO delegated the
primary responsibility to monitor and exam
registrants that are subject to oversight by more than
one SRO for compliance with minimum financial
and related reporting requirements, and for
receiving financial reports from such registrants.
SROs that agree to participate in a plan to allocate
common members to a DSRO are referred to as JAC
members under Regulation 1.52. The examination
requirements proposed to be amended are
effectively identical for SROs and JACs, and the
Commission’s proposed amendments would revise
the examination requirements for both the SROs
and JACs.
31 Regulation 1.52(c)(2)(iv).
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during both periodic reviews and the
initial review prior to the programs’
initial use. The Commission initially
adopted in 2013 the requirement that
the examinations expert issue a written
report on its findings and
recommendations of the SRO’s
application of its supervisory program,
including its internal controls, due to
concerns that a third-party assessment
was necessary due to limited
Commission resources and expertise to
perform a comparable periodic
assessment.32 Since 2013, however,
Commission staff has been actively
involved with the NFA, CME, and their
examinations expert in the development
of a revised supervisory program that
meets the requirements of Regulation
1.52, including the development of FCM
examinations standards that are
consistent with PCAOB auditing
standards. Commission staff also has
reviewed the detailed FCM examination
programs, including several programs
designed to assess the adequacy of an
FCM’s internal controls that were
developed by the NFA and CME, for
compliance with Regulation 1.52.
Commission staff also has been
performing scheduled oversight reviews
of NFA’s and CME’s execution of its
revised supervisory program, including
its implementation and execution of
programs designed to assess the FCM’s
internal controls.
Accordingly, following the adoption
of the examination standards, the
Commission believes that the scope of
the examinations expert’s review should
be limited to the area of its expertise—
auditing standards—and that engaging
an independent third-party to review
the entire program involves additional
cost, but results only in a small,
incremental benefit. Having assessed the
implementation of the revised
supervisory program, Commission staff
has determined that it has adequate
resources and expertise in the
application of CFTC regulations to the
operations of FCMs, and is
appropriately situated to assess whether
SRO and JAC staff are accurately and
properly applying Commission
requirements to FCMs in their execution
of the examination programs.
Commission staff’s review of SRO and
JAC supervisory programs includes
detailed assessments of whether SRO or
JAC staff complied with their respective
FCM examination standards, including
internal control testing and assessment,
in the performance of FCM
examinations. In this regard,
Commission staff generally review,
32 Customer Protection Rulemaking, 78 FR 65506,
68562.
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based on a risk-based approach, the
most significant areas of an SRO’s or
JAC’s FCM examination program during
a review, including: (1) The staffing
levels and adequate training and
qualification of SRO or JAC staff
members; (2) The detailed testing
performed by SRO or JAC staff in each
examination area (e.g., segregation of
customer funds, capital compliance, and
recordkeeping); (3) The timeliness and
effectiveness of the SRO’s or JAC’s
review of FCM financial reporting,
including FCM daily segregation
computations, monthly unaudited and
annual audited financial statements,
periodic reporting of customer
investments, and periodic regulatory
notices; and (4) The effectiveness of the
SRO’s or JAC’s disciplinary program.
Accordingly, the Commission believes
that a more efficient balance of oversight
can be achieved by focusing the
examinations expert’s evaluation on the
SRO’s or JAC’s examination standards,
which is an area of the examinations
expert’s particular expertise. While the
Commission still notes that it has
limited resources to perform a holistic
review of the SRO’s or JAC’s
examination program, covering both the
design of the standards and the
effectiveness of the audit program, the
Commission believes, as noted above,
that the proposed amendments strike a
reasoned balance between the
Commission’s expertise and that of the
examinations expert.
The proposed amendments would
continue to require an examinations
expert to provide the SRO or JAC with
a written report on the examinations
expert’s findings and recommendations.
The Commission, however, is not
mandating the form and content of the
written report, other than that the report
must accurately reflect the extent of the
examinations expert’s evaluation, and
include any findings and
recommendations resulting from its
evaluation. The Commission is also
proposing that the written report will be
provided to the Director of the Division
of Swap Dealer and Intermediary
Oversight with the understanding that
the report will be shared with the
Commission.
C. Frequency of the Examinations
Expert’s Evaluation of an SRO’s
Supervisory Program
Regulations 1.52(c)(2)(iv) and
(d)(2)(ii)(I) require an SRO and JAC,
respectively, to engage an examinations
expert to evaluate their FCM
supervisory programs prior to the
initiation of the programs, and at least
once every three years thereafter. The
Commission believes that an
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examinations expert’s evaluation
provides important oversight of the SRO
FCM examination standards by an
independent third-party that is an
expert in the understanding and
application of the auditing standards
issued by the PCAOB. Accordingly, the
Commission is not proposing to
eliminate the requirement in Regulation
1.52 for an SRO or JAC to engage an
examinations expert at the initiation of
the development of its supervisory
program, or at different periods of time
after the initial evaluation.
The Commission, however, further
believes that the frequency of an
examinations expert’s evaluation of an
SRO’s or JAC’s FCM examination
standards should not be based upon a
fixed timeframe of once every three
years and is therefore proposing
amendments that provide for flexibility
dependent upon changes in auditing
standards issued by the PCAOB.
Accordingly, the Commission is
proposing that SROs and JACs must
review and revise their respective FCM
examination standards promptly after
the issuance of new or amended
auditing standards by the PCAOB that
have an impact on the FCM examination
standards. The SRO or JAC also must
engage an examinations expert to
evaluate the consistency of the revised
FCM examination standards with the
PCAOB auditing standards whenever
the SRO or JAC adopts material
amendments to their respective FCM
examination standards.33 The proposal
would further provide the DSIO Director
with the authority to direct an SRO or
JAC to engage an examinations expert.
This will address cases where DSIO staff
believes that new or amended PCAOB
audit standards have a material impact
on FCM examinations standards, when
33 The purpose of the proposal is for an SRO or
JAC to promptly amend their respective FCM
examination standards whenever the PCAOB issues
new or revised auditing standards that are relevant
to the SRO’s or JAC’s examinations of member
FCMs. The SRO or JAC would further be required
to engage an examinations expert to evaluate the
consistency of any material amendments to the
FCM examination standards with the PCAOB new
or revised auditing standards. However, the
Commission would not expect an SRO or JAC to
engage an examinations expert if the amendments
to the FCM examination standards are not material.
The Commission also would not expect an SRO or
JAC to engage an examinations expert more
frequently than once every 12 months.
In the context of the JAC, the annual JAC meeting
required by Regulation 1.52(d) may serve as the
appropriate forum for discussing amendments to
the FCM examination standards, and if necessary,
a vote of JAC members could determine that
engagement of the examinations expert to more
fully assess the supervisory program standards in
the context of a non-financial statement audit is
warranted.
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an SRO of JAC has not otherwise
engaged an examinations expert.34
The proposal would also set a
requirement that an SRO or JAC must
engage an examinations expert at least
once every five years to address
situations where the SRO or JAC have
not considered any new or amended
PCAOB auditing standards issued
during the preceding five years to be
material to the FCM examination
standards. The Commission is
proposing this five-year limit based
upon the importance of the FCM
examination process by SROs and JACs
and its belief that third-party experts
should evaluate the FCM examination
standards at least once every five years
to ensure that they are consistent with
PCAOB auditing standards. The
Commission requests specific comment
on whether the amended timeframe of
five years is appropriate, or whether a
different timeframe would be more
appropriate.
In proposing the amendment to revise
the FCM examination standards, the
Commission is intending to limit the
examinations expert’s evaluation to
those FCM examination standards that
are new or revised since the last
examinations expert’s review or
assessment. The Commission does not
expect the examinations expert to reassess each examination standard each
time an evaluation is performed, but
only those standards that may be
susceptible to change based on the
examinations expert’s opinion, auditing
standards adopted or amended by the
PCAOB, and the examinations expert’s
understanding of the CFTC regulatory
requirements in consultation with SRO
or JAC.
consolidating the FCM examination
standards listed in paragraphs (c)(2)(ii)
and (iii) of Regulation 1.52 governing
SROs into a single revised Regulation
1.52(c)(2)(ii).35 The Commission also is
proposing to amend paragraph
(d)(2)(ii)(F) to reflect the consolidation
of the FCM examination standards in
revised Regulation 1.52(c)(2)(ii).
III. Cost-Benefit Considerations
A. Introduction
Section 15(a) of the Act requires the
CFTC to consider the costs and benefits
of its actions before promulgating a
regulation under the Act or issuing
certain orders.36 Section 15(a) of the Act
further specifies that the costs and
benefits shall be evaluated in light of
five broad areas of market and public
concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. The
CFTC considers the costs and benefits
resulting from its discretionary
determinations with respect to the
section 15(a) factors below.
Where reasonably feasible, the CFTC
endeavors to estimate quantifiable costs
and benefits. Where quantification is
not feasible, the CFTC identifies and
describes costs and benefits
qualitatively.
The CFTC requests comment on the
costs and benefits associated with the
proposed rule amendments. In
particular, the CFTC requests that
commenters provide data and any other
information or statistics that the
commenters relied on to reach any
conclusions regarding the CFTC’s
D. Technical Amendments to Regulation proposed considerations of costs and
1.52
benefits.
The Commission is proposing several B. Economic Baseline
technical amendments to Regulation
The CFTC’s economic baseline for
1.52 which eliminate redundancies and
this proposed rule amendment analysis
simplify the intent of the rule.
is the requirements of Regulation 1.52
Specifically, the Commission is
that exist today. Specifically, current
Regulation 1.52 requires an SRO or a
34 The Commission also notes that proposal does
JAC to engage an examinations expert to
not prescribe a specific timeframe for which the
SRO or JAC should implement any revised
evaluate its supervisory program prior
examination standards, but only that the adoption
to its initial use, and to evaluate the
must occur ‘‘promptly.’’ This is because the time
SRO’s application of the supervisory
needed to comport the newly adopted auditing
standard into a newly adopted examination
standard may vary depending on the complexity of
the standard and whether the examinations expert
has been engaged. For avoidance of any doubt, the
Commission expects ‘‘promptly’’ adoption to occur
within a reasonable amount of time under the
circumstances. In the event that the adoption
should take longer than one year from the time a
PCAOB auditing standard is made effective, the
SRO or JAC may petition the Director of the
Division of Swap Dealer and Intermediary
Oversight for a longer permitted adoption
timeframe.
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35 The Commission notes that current paragraphs
(c)(2)(ii) and (d)(2)(ii)(F) both contain an
explanatory sentence of what topics within PCAOB
auditing standards should be used in order to
conform the examination standards. The
Commission reads paragraph (c)(2)(iii), and by
cross-reference (d)(2)(ii)(G), to already include each
of these topics. Moreover, paragraph (c)(2)(iii) more
appropriately uses in this context the term
‘‘examination,’’ as opposed to ‘‘audit’’ to articulate
this construction.
36 7 U.S.C. 19(a).
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program at least once every three years
after its initial use.
The Commission’s proposal would
not alter the requirement for an SRO or
JAC to engage an examinations expert to
evaluate its supervisory program prior
to the initial use of the supervisory
program. The Commission is proposing,
however, to eliminate the requirement
that the examinations expert must
review the SRO’s or JAC’s ongoing
application of its supervisory program
during periodic reviews and the
analysis of the supervisory program’s
design to detect material weaknesses in
internal controls during both periodic
reviews and the initial review prior to
the program’s initial use. The
Commission also is proposing to revise
the frequency of when an SRO or JAC
must engage an examinations expert, as
discussed below.
The Commission’s proposal to
eliminate the requirement that an
examinations expert evaluate an SRO’s
or JAC’s application of its supervisory
program and the program’s design to
detect material weaknesses in internal
controls will reduce costs to the SROs
and JACs. The proposal, however,
would not substantially reduce the
benefits obtained from an evaluation of
the SROs’ and JACs’ supervisory
program, including internal controls, as
such reviews are performed by
Commission staff on a routine basis.
Commission staff evaluates the SRO’s or
JAC’s execution of its supervisory
program, including performing detailed
reviews of SRO and JAC examination
work papers, to assess the scope of the
work performed by SRO and JAC staff
members and to determine whether the
conclusions reached by SRO and JAC
staff members are supported by the
work performed. Commission staff also
reviews all SRO and JAC examination
programs for conducting examinations
of FCMs to assess the completeness of
such programs and to determine that
such programs properly reflect any
regulatory updates, including rule
amendments, adopted since the
Commission staff’s previous review of
the examination programs. Reviews of
execution and completeness of
supervisory programs for FCMs occur
no less frequently than annually.
Commission staff has a particular
expertise in determining whether
registrants are in compliance with
Commission regulatory requirements
that makes a third-party review
redundant.
The Commission proposes to continue
to require that an examinations expert
review the FCM examination standards
contained in the supervisory program
for consistency with PCAOB auditing
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standards, but is proposing to revise the
timeframe for such reviews. Currently,
Regulation 1.52 requires an SRO or JAC
to engage an examinations expert at
least once every three years to perform
such a review. The Commission is
proposing to amend Regulation 1.52 to
require an SRO or JAC to engage an
examinations expert if the PCAOB
issued new or revised auditing
standards that are material to the SRO’s
or JAC’s examination of member FCMs.
The examinations expert’s review,
however, would be limited to only the
new or revised PCAOB auditing
standards that are applicable to the
SRO’s or JAC’s examination of FCMs.
Accordingly, the examinations expert
would not have to review all of the
SRO’s or JAC’s FCM examination
standards for consistency with PCAOB
audit standards. The proposal would
further require an SRO or JAC to engage
an examinations expert at least once
every five years even if the SRO or JAC
determined that the PCAOB did not
issue new or revised auditing standards
during the previous five-year period that
are material to its examinations of
member FCMs. Based on past
experience, the Commission anticipates
that the adoption of new or revised
auditing standards that are material to
examination standards applicable to
FCMs will be infrequent, and therefore
the triggering of an examinations expert
review will also likely be an infrequent
event.37 Finally, the proposal would
provide that an SRO or JAC must engage
an examinations expert if directed to by
the Director of the Division of Swap
Dealer and Intermediary Oversight.38
The proposed amendments to
Regulation 1.52 are intended to
streamline the process under which
examinations experts conduct their
reviews and the time period between
those reviews. The Commission believes
that these amendments will make
conducting the reviews more efficient
and less costly, while still balancing the
importance of having an independent
third-party examinations expert in
auditing standards evaluating the
examination standards used by SROs
and the JAC.
The Commission does not anticipate
that there will be any significant
increased costs associated with the
2016 PCAOB has adopted approximately
two new standards, neither of which had a
significant impact on the examination standards
applicable to FCMs. See PCAOB website available
at: https://pcaobus.org/Standards/Pages/Current_
Activities_Related_to_Standards.aspx.
38 For example, in circumstances where an SRO
or JAC has not engaged an examination expert yet
DSIO staff believes a material change to PCAOB
auditing standards warrants such engagement.
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37 Since
Frm 00006
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31083
proposed amendments. By narrowing
the intended scope of examination
reviews from an evaluation of the
supervisory program to an assessment of
the examinations standards for
conformity with auditing standards
established by the PCAOB as they apply
to examinations, the Commission is
purposely limiting the scope of the
examinations expert’s review. The
Commission anticipates that this
limitation, coupled with extending the
time period between expert examiner
reviews, will significantly limit the
costs associated with engaging and
hiring an examinations expert.39
Nonetheless, the Commission believes
that these amendments appropriately
balance the integrity of the examination
program with its costs while continuing
to ensure that there is sufficient
oversight over the minimum financial
requirements at FCMs. As noted,
Commission staff reviews no less
frequently than annually all SRO and
JAC examination programs and
anticipates that it will continue to do so.
These Commission staff reviews will
continue to provide the benefits that
have been associated with the
examinations experts’ reviews.
C. CEA Section 15(a) Factors
i. Protection of Market Participants and
the Public
The Commission preliminarily
believes that this proposal maintains the
protection of market participants and
the public provided by the current
regulation. The proposal will continue
to protect market participants and the
public by ensuring that there is
sufficient oversight over the minimum
financial requirements at FCMs. As
noted, the Commission believes that
Commission staff is well-equipped to
provide reviews that, under the
proposal, would no longer be provided
by outside examinations experts and
Commission staff intends to continue to
conduct such reviews.
ii. Efficiency, Competitiveness, and
Financial Integrity of Markets
The Commission preliminarily
believes that Regulation 1.52 as
amended will continue to help ensure
that FCMs can meet their financial and
39 In the 2013 Customer Protection Rulemaking,
the Commission found that it was not feasible to
quantify any costs associated with utilizing an
examinations expert, largely because several
nationally recognized accounting firms expressed
their reluctance to provide such information. While
it is likely not feasible to quantify such costs for the
use of an examinations expert under the proposed
amendments, such costs are likely much less than
the costs under the existing rule. See, 2013
Customer Protection Rulemaking at 68605.
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operational obligations to both
customers and DCOs, which, along with
the Commission’s ongoing reviews, will
continue to foster the efficiency and
financial integrity of markets. The
Commission has not identified any
effect of Regulation 1.52 on the
competitiveness of derivatives markets.
iii. Price Discovery
The Commission has not identified
any material effect of the proposed
amendments on the price discovery
process in futures and swap markets.
IV. Related Matters
A. Regulatory Flexibility Act
iv. Sound Risk Management Practices
The Commission preliminarily
believes that Regulation 1.52 as
amended, along with the Commission’s
ongoing reviews, will continue to help
ensure that FCMs can meet their
financial and operational obligations to
both customers and DCOs, which
should continue to foster sound risk
management practices.
v. Other Public Interest Considerations
The Commission has not identified
any additional public interest
considerations associated with the
proposal.
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D. Consideration of Alternatives
The Commission considered adopting
the CME’s suggestion to fully eliminate
the requirement that a third-party public
accounting firm perform periodic
evaluations and assessments of an
SRO’s program to oversee its member
FCMs’ compliance with financial and
related reporting requirements. The
Commission determined instead to
eliminate the requirement that the
examinations expert must periodically
review the SRO’s or JAC’s ongoing
application of its supervisory program,
while maintaining reviews of an FCM’s
examinations standards at a modified
interval. The Commission preliminarily
believes that there are significant
benefits associated with having an
outside auditor performing evaluations
of examination standards at least every
five years (and also when there are
material and relevant changes in
PCAOB auditing standards) as required
by the proposed amendments. While, as
noted, Commission staff is wellequipped to review the ongoing
application of SRO and JAC supervisory
programs and intends to continue to do
so at least annually, the Commission
believes that third-party public
accounting firms are best equipped to
perform evaluations of examination
standards for conformity with auditing
standards established by the PCAOB as
they apply to examinations.
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The Commission also considered
maintaining the current rule, but the
Commission anticipates that the
proposal will significantly reduce costs
to SROs and JACs without materially
impacting benefits.
The CFTC requests comment on these
alternatives as well as any other
alternatives that commenters believe
would present a superior cost-benefit
profile to the proposal.
The Regulatory Flexibility Act
(‘‘RFA’’) 40 requires Federal agencies, in
promulgating regulations, to consider
the impact of those regulations on small
entities. The Commission has
previously established certain
definitions of ‘‘small entities’’ to be used
by the Commission in evaluating the
impact of its rules on small entities in
accordance with the RFA.41 The
proposed regulations would affect
designated contract markets.
The Commission has previously
determined that designated contract
markets are not small entities for
purposes of the RFA, and, thus, the
requirements of the RFA do not apply
to designated contract markets.42
Accordingly, the Chairman, on behalf of
the Commission, certifies pursuant to 5
U.S.C. 605(b) that the proposed
regulations would not have a significant
economic impact on a substantial
number of small entities.
B. Paperwork Reduction Act
PO 00000
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FR 18618 (Apr. 30, 1982).
42 Id. at 18619.
43 44 U.S.C. 3501 et seq.
41 47
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List of Subjects in 17 CFR Part 1
Brokers, Commodity futures,
Consumer protection, Reporting and
recordkeeping requirements.
For the reasons stated in the
preamble, the Commodity Futures
Trading Commission proposes to amend
17 CFR part 1 as follows:
PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT
1. The authority citation for part 1
continues to read as follows:
■
This proposed rulemaking does not
amend existing information collection
requirements. The Paperwork Reduction
Act (‘‘PRA’’) provides that a federal
agency may not conduct or sponsor, and
a person is not required to respond to,
a collection of information unless it
displays a currently valid control
number issued by the Office of
Management and Budget (‘‘OMB’’).43
The Commission is proposing
amendments to rules that have
previously identified collections of
information under a pre-existing
collection 3038–0052. The proposed
amendments, however, only increase
the respondents permitted time to file
required information and reduce the
requirements of review contained
therein. As such, the previously
identified response hours in collection
3038–0052 remain a reasonable burden
hour estimate.
40 5
The collections contained in this
rulemaking are mandatory collections.
In formulating burden estimates for the
collections in this rulemaking, to avoid
double accounting of information
collections that already have been
assigned control numbers by OMB, or
are covered as burden hours in
collections of information pending
before OMB, the PRA analysis provided
in the proposed rulemaking, along with
the information collection request
(‘‘ICR’’) with burden estimates that were
incorporated into the rulemaking by
reference and submitted to OMB,
accounted only burden estimates for
collections of information that have not
previously been submitted to OMB. The
Commission invites comment on the
collections of information contained in
the proposed rulemaking only to the
extent that the collections in the
proposed rulemaking would increase
the burden hours contained with respect
to each of the related currently valid or
proposed collections.
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p,
6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 12,
12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and
24 (2012).
2. Amend § 1.52 as follows:
a. Revise paragraphs (c)(2)(ii), (iii),
(iv), and (v);
■ b. Remove paragraphs (c)(2)(vi) and
(vii);
■ c. Revise paragraphs (d)(2)(ii)(F), (G),
(H), and (I);
■ d. Remove paragraphs (d)(2)(ii)(J) and
(K); and
■ e. Revise paragraph (d)(2)(iii).
The revisions read as follows:
■
■
§ 1.52 Self-regulatory organization
adoption and surveillance of minimum
financial requirements.
*
*
*
*
*
(c) * * *
(2) * * *
(ii) The supervisory program must, at
a minimum, have examination
standards addressing the following:
(A) The ethics of an examiner;
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(B) The independence of an examiner;
(C) The supervision, review, and
quality control of an examiner’s work
product;
(D) The evidence and documentation
to be reviewed and retained in
connection with an examination;
(E) The sampling size and techniques
used in an examination;
(F) The examination risk assessment
process;
(G) The examination planning
process;
(H) Materiality assessment;
(I) Quality control procedures to
ensure that the examinations maintain
the level of quality expected;
(J) Communications between an
examiner and the regulatory oversight
committee, or the functional equivalent
of the regulatory oversight committee, of
the self-regulatory organization of which
the futures commission merchant is a
member;
(K) Communications between an
examiner and a futures commission
merchant’s audit committee of the board
of directors or other similar governing
body;
(L) Analytical review procedures;
(M) Record retention; and
(N) Required items for inclusion in
the examination report, such as repeat
violations, material items, and high risk
issues. The examination report is
intended solely for the information and
use of the self-regulatory organizations
and the Commission, and is not
intended to be and should not be used
by any other person or entity.
(iii)(A) Prior to the initial
implementation of the supervisory
program, a self-regulatory organization
must engage an examinations expert to
evaluate the examination standards for
consistency with auditing standards
issued by the Public Company
Accounting Oversight Board as such
auditing standards are applicable in the
context of the self-regulatory
organization’s examination of its futures
commission merchant members. At least
once every five years after the initial
implementation of the supervisory
program, a self-regulatory organization
must engage an examinations expert to
evaluate the examination standards for
consistency with any new or amended
auditing standards issued by the Public
Company Accounting Oversight Board
since the previous review performed by
the examinations expert. At the
conclusion of each evaluation, a selfregulatory organization must obtain a
written report from the examinations
expert in accordance with paragraph
(c)(2)(iii)(C) of this section.
(B) Notwithstanding paragraph
(c)(2)(iii)(A) of this section, a self-
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regulatory organization must review any
new or amended auditing standards
issued by the Public Company
Accounting Oversight Board, and must
revise its examination standards
promptly to reflect any changes in such
auditing standards that are applicable in
the context of the self-regulatory
organization’s examination of its futures
commission merchant members. A selfregulatory organization must engage an
examinations expert to evaluate any
material revisions that the selfregulatory organization makes to the
examination standards to conform such
standards with the Public Company
Accounting Oversight Board’s auditing
standards, or if directed to engage an
examinations expert by the Director of
the Division of Swap Dealer and
Intermediary Oversight. At the
conclusion of each review, a selfregulatory organization must obtain a
written report from the examinations
expert in accordance with paragraph
(c)(2)(iii)(C) of this section.
(C) At the conclusion of the
examinations expert’s engagement
pursuant to paragraph (c)(2)(iii)(A) or
(B) of this section, the self-regulatory
organization must obtain from the
examinations expert a written report on
findings and recommendations issued
under the consulting services standards
of the American Institute of Certified
Public Accountants. The self-regulatory
organization must provide the Director
of the Division of Swap Dealer and
Intermediary Oversight with a copy of
the examinations expert’s written
report, and the self-regulatory
organization’s written responses to any
of the examinations expert’s findings
and recommendations, within thirty
days of the receipt thereof. Upon
resolution of any questions or comments
raised by the Division of Swap Dealer
and Intermediary Oversight, and upon
written notice from the Division of
Swap Dealer and Intermediary
Oversight that it has no further
comments or questions on the
examinations standards as amended (by
reason of the examinations expert’s
proposals, consideration of the Division
of Swap Dealer and Intermediary
Oversight’s questions or comments, or
otherwise), the self-regulatory
organization shall commence applying
such examinations standards for
examining its registered futures
commission merchant members for all
examinations conducted with an ‘‘as of’’
date later than the date of the Division
of Swap Dealer and Intermediary’s
written notification.
(iv) The supervisory program must
require the self-regulatory organization
to report to its risk and/or audit
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31085
committee of the board of directors, or
a functional equivalent committee, with
timely reports of the activities and
findings of the supervisory program to
assist the risk and/or audit committee of
the board of directors, or a functional
equivalent committee, to fulfill its
responsibility of overseeing the
examination function.
(v) The examinations expert’s written
report, the self-regulatory organization’s
response, if any, as well as any
information concerning the supervisory
program is confidential.
(d) * * *
(2) * * *
(ii) * * *
(F) The Joint Audit Program must
include examination standards
addressing the items listed in paragraph
(c)(2)(ii) of this section.
(G)(1) Prior to the initial
implementation of the Joint Audit
Program, the Joint Audit Committee
must engage an examinations expert to
evaluate the examination standards for
consistency with auditing standards
issued by the Public Company
Accounting Oversight Board as such
auditing standards are applicable in the
context of the Joint Audit Committee’s
examination of its futures commission
merchant members. At least once every
five years after the initial
implementation of the Joint Audit
Program, the Joint Audit Committee
must engage an examinations expert to
evaluate the examination standards for
consistency with any new or amended
auditing standards issued by the Public
Company Accounting Oversight Board
since the previous review performed by
the examinations expert. At the
conclusion of each review, the Joint
Audit Committee must obtain a written
report from the examinations expert in
accordance with paragraph
(d)(2)(ii)(G)(3) of this section.
(2) Notwithstanding paragraph
(d)(2)(ii)(G)(1) of this section, the Joint
Audit Committee must review any new
or amended auditing standards issued
by the Public Company Accounting
Oversight Board, and must revise its
examination standards promptly to
reflect any changes in such auditing
standards that are applicable in the
context of the Joint Audit Committee’s
examination of its futures commission
merchant members. The Joint Audit
Committee must engage an
examinations expert to evaluate any
material revisions that the Joint Audit
Committee makes to the examination
standards to conform such standards
with the Public Company Accounting
Oversight Board’s auditing standards, or
if directed to engage an examinations
expert by the Director of the Division of
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Federal Register / Vol. 83, No. 128 / Tuesday, July 3, 2018 / Proposed Rules
Swap Dealer and Intermediary
Oversight. The Joint Audit Committee
must obtain a written report from the
examinations expert in accordance with
paragraph (d)(2)(ii)(G)(3) of this section.
(3) At the conclusion of the
examinations expert’s engagement
pursuant to paragraph (d)(2)(ii)(G)(1) or
(2) of this section, the Joint Audit
Committee must obtain from the
examinations expert a written report on
findings and recommendations issued
under the consulting services standards
of the American Institute of Certified
Public Accountants. The Joint Audit
Committee must provide the Director of
the Division of Swap Dealer and
Intermediary Oversight with a copy of
the examinations expert’s written
report, and the Joint Audit Committee’s
written responses to any of the
examinations expert’s findings and
recommendations, within thirty days of
the receipt thereof. Upon resolution of
any questions or comments raised by
the Division of Swap Dealer and
Intermediary Oversight, and upon
written notice from the Division of
Swap Dealer and Intermediary
Oversight that it has no further
comments or questions on the
examinations standards as amended (by
reason of the examinations expert’s
proposals, consideration of the Division
of Swap Dealer and Intermediary
Oversight’s questions or comments, or
otherwise), the Joint Audit Committee
shall commence applying such
examinations standards for examining
its registered futures commission
merchant members for all examinations
conducted with an ‘‘as of’’ date later
than the date of the Division of Swap
Dealer and Intermediary’s written
notification.
(H) The Joint Audit Program must
require the Joint Audit Committee
members to report to their respective
risk and/or audit committee of their
respective board of directors, or a
functional equivalent committee, with
timely reports of the activities and
findings of the Joint Audit Program to
assist the risk and/or audit committee of
the board of directors, or a functional
equivalent committee, to fulfill its
responsibility of overseeing the
examination function.
(I) The examinations expert’s written
report, the Joint Audit Committee’s
response, if any, as well as any
information concerning the supervisory
program is confidential.
(iii) Meetings of the Joint Audit
Committee. (A) The Joint Audit
Committee members must meet at least
once each year. During such meetings,
the Joint Audit Committee members
shall consider revisions to the Joint
VerDate Sep<11>2014
16:24 Jul 02, 2018
Jkt 244001
Audit Program as a result of regulatory
changes, revisions to the examination
standards resulting from new or
amended auditing standards issued by
the Public Company Accounting
Oversight Board, or the results of an
examinations expert’s review.
(B) In addition to the items
considered in paragraph (d)(2)(iii)(A) of
this section, the Joint Audit Committee
members must consider the following
items during the meetings:
(1) Coordinating and sharing
information between the Joint Audit
Committee members, including issues
and industry concerns in connection
with examinations of futures
commission merchants;
(2) Identifying industry regulatory
reporting issues and financial and
operational internal control issues and
modifying the Joint Audit Program
accordingly;
(3) Issuing risk alerts for futures
commission merchants and/or
designated self-regulatory organization
examiners on an as-needed basis;
(4) Responding to industry issues; and
(5) Providing industry feedback to
Commission proposals.
(C) Minutes must be taken of all
meetings and distributed to all members
on a timely basis.
(D) The Director of the Division of
Swap Dealer and Intermediary
Oversight must receive timely prior
notice of each meeting, have the right to
attend and participate in each meeting
and receive written copies of the
minutes required pursuant to paragraph
(d)(2)(iii)(C) of this section, respectively.
*
*
*
*
*
Issued in Washington, DC, on June 28,
2018, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendix will not
appear in the Code of Federal Regulations.
Appendix to Financial Surveillance
Examination Program Requirements for
Self-Regulatory Organizations—
Commission Voting Summary
On this matter, Chairman Giancarlo and
Commissioners Quintenz and Behnam voted
in the affirmative. No Commissioner voted in
the negative.
[FR Doc. 2018–14272 Filed 7–2–18; 8:45 am]
BILLING CODE 6351–01–P
PO 00000
Frm 00009
Fmt 4702
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DEPARTMENT OF LABOR
Occupational Safety and Health
Administration
29 CFR Part 1910
[Docket No. OSHA–2018–0003]
RIN 1218–AB76
Revising the Beryllium Standard for
General Industry
Occupational Safety and Health
Administration (OSHA), Labor.
ACTION: Proposed rule; withdrawal.
AGENCY:
With this document, OSHA is
withdrawing the proposed rule that
accompanied its direct final rule (DFR)
amending the beryllium standard for
general industry to address the
application of the standard to materials
containing trace amounts of beryllium.
DATES: As of July 3, 2018, the proposed
rule published May 7, 2018 (83 FR
19989) is withdrawn.
FOR FURTHER INFORMATION CONTACT:
Press inquiries: Mr. Frank Meilinger,
OSHA Office of Communications, Room
N–3647, U.S. Department of Labor, 200
Constitution Avenue NW, Washington,
DC 20210; telephone: (202) 693–1999;
email: meilinger.francis2@dol.gov.
General information and technical
inquiries: William Perry or Maureen
Ruskin, Directorate of Standards and
Guidance, Room N–3718, OSHA, U.S.
Department of Labor, 200 Constitution
Avenue NW, Washington, DC 20210;
telephone: (202) 693–1950; fax: (202)
693–1678.
Copies of this Federal Register
document and news releases: Electronic
copies of these documents are available
at OSHA’s web page at https://
www.osha.gov.
SUMMARY:
On May 7,
2018, OSHA published a DFR amending
the application of the beryllium
standard to materials containing trace
amounts of beryllium (83 FR 19936).
OSHA also published a companion
proposed rule proposing the same
changes to the beryllium standard (83
FR 19989). In the DFR, OSHA stated
that it would withdraw the companion
proposed rule and confirm the effective
date of the DFR if no significant adverse
comments were submitted on the DFR
by June 6, 2018. OSHA received seven
comments in the record from Materion
Brush, Inc., Mead Metals Inc., National
Association of Manufacturers, Airborn,
Inc., Edison Electric Institute, and two
private citizens (Document ID OSHA–
2018–0003–0004 thru OSHA–2018–
0003–0010). The seven submissions
SUPPLEMENTARY INFORMATION:
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]]>Agencies
[Federal Register Volume 83, Number 128 (Tuesday, July 3, 2018)]
[Proposed Rules]
[Pages 31078-31086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-14272]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 83, No. 128 / Tuesday, July 3, 2018 /
Proposed Rules
[[Page 31078]]
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AE73
Financial Surveillance Examination Program Requirements for Self-
Regulatory Organizations
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is proposing to amend its regulations governing the minimum
standards for a self-regulatory organization's (``SRO'') financial
surveillance examination program of futures commission merchants
(``FCMs''). The proposed amendments would revise the scope of a third-
party expert's evaluation of the SRO's financial surveillance program
to cover only the examination standards used by SRO staff in conducting
FCM examinations. The proposed amendments also would revise the minimum
timeframes between when an SRO must engage a third-party expert to
evaluate its FCM examination standards.
DATES: Comments must be received on or before September 4, 2018.
ADDRESSES: You may submit comments, identified by RIN 3038-AE73, by any
of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above. Please submit your comments using only one of these
methods. To avoid possible delays with mail or in-person deliveries,
submissions through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.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 (``FOIA''), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Sec. 145.9 of the Commission's
regulations.\1\
---------------------------------------------------------------------------
\1\ Regulation 145.9. Commission regulations referred to herein
are found at 17 CFR chapter I.
---------------------------------------------------------------------------
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://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the FOIA.
FOR FURTHER INFORMATION CONTACT: Matthew B. Kulkin, Director, 202-418-
5213, [email protected]; Thomas Smith, Deputy Director, 202-418-5495,
[email protected]; Jennifer Bauer, Special Counsel, 202-418-5472,
[email protected]; or Joshua Beale, Special Counsel, 202-418-5446,
[email protected], Division of Swap Dealer and Intermediary Oversight,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
A. Commission Initiative to Simplify and Modernize Regulations
In March of 2017, Commission staff initiated an agency-wide
internal review of CFTC regulations and practices to identify those
areas that could be simplified to make them less burdensome and
costly.\2\ The Commission subsequently published in the Federal
Register on May 9, 2017 a Request for Information soliciting
suggestions from the public regarding how the Commission's existing
rules, regulations, or practices could be applied in a simpler, less
burdensome, and costly manner.\3\
---------------------------------------------------------------------------
\2\ See Remarks of Acting Chairman J. Christopher Giancarlo
before the 42nd Annual International Futures Industry Conference in
Boca Raton, FL, dated March 15, 2017. The remarks are available at
the Commission's website: https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20.
\3\ Project KISS, 82 FR 21494 (May 9, 2017); amended on May 24,
2017, 82 FR 23765 (May 24, 2017). The Federal Register Request for
Information, and the suggestion letters filed by the public are
available at the Commission's website: https://comments.cftc.gov/KISS/KissInitiative.aspx.
---------------------------------------------------------------------------
The CME Group (``CME'') submitted suggestions on a variety of
rules, regulations, and practices in responses to the Commission's
Request for Information.\4\ One area identified by CME for
simplification and the reduction of regulatory burden was Regulation
1.52, which imposes an obligation on SROs \5\ to conduct periodic
examinations of member FCMs \6\ for compliance with both SRO and
Commission minimum capital and other financial and related reporting
requirements. Specifically, the CME suggested that Regulation 1.52
should be amended to eliminate a requirement that a third-party public
accounting firm perform periodic evaluations and assessments of the
CME's surveillance program to oversee its member FCMs compliance with
Commission and CME financial and related reporting requirements.\7\
---------------------------------------------------------------------------
\4\ See Letter from Kathleen Cronin, Senior Managing Director,
General Counsel and Corporate Secretary, CME Group, dated September
29, 2017. The CME's letter is available at the Commission's website:
https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61395&SearchText=.
\5\ The term ``self-regulatory organization'' is defined in
Regulation 1.52 to include a contract market (as defined in
Regulation 1.3) or an RFA under section 17 of the Commodity Exchange
Act (``Act'') (7 U.S.C. 1 et seq.), but the term as defined in
Regulation 1.52 does not include a swap execution facility (as
defined in Regulation 1.3). See Regulation 1.52(a)(2).
\6\ The term ``futures commission merchant'' is generally
defined in Regulation 1.3 as (1) an entity that is engaged in
soliciting or accepting orders for the purchase or sale of any
commodity for future delivery or a swap and, in connection with the
solicitation and acceptance of such orders, accepts money,
securities or property (or extends credit in lieu thereof) to
margin, guarantee or secure futures or swaps transactions, or (2) an
entity registered as an FCM.
\7\ CME Letter, pp. 13-14.
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[[Page 31079]]
B. Statutory and Regulatory Background
FCMs perform critical functions to facilitate the efficient
operation of Commission-regulated exchange-traded derivatives markets.
In addition to trading for their own accounts and carrying the accounts
of their affiliates, FCMs are market intermediaries, standing between
customers trading futures and swaps transactions on one side and
designated contract markets (``DCMs'') and derivatives clearing
organizations (``DCOs'') on the other side. As part of their role as
market intermediaries, FCMs carry customer accounts and hold customer
funds to margin futures and cleared swap transactions. FCMs also
fulfill daily settlement obligations on behalf of customers by posting
sufficient funds to DCOs to support their customers' futures and swap
positions, including paying mark-to-market losses associated with such
positions. FCMs also are essential to the efficient operation of
Commission-regulated markets in that they guarantee each customer's
financial performance for futures and swap positions to DCOs by
agreeing to use their own financial resources to cover any shortfall
resulting from a customer default.\8\
---------------------------------------------------------------------------
\8\ See Regulation 39.16.
---------------------------------------------------------------------------
The Act acknowledges the critical role performed by FCMs. Section
4f(b) of the Act authorizes the Commission to adopt regulations
imposing minimum capital and financial reporting requirements on FCMs
to help ensure that they maintain adequate financial resources to meet
their obligations.\9\ Under this statutory authorization, the
Commission adopted regulations requiring FCMs, among other
requirements, to maintain a minimum level of regulatory capital,\10\ to
segregate customer funds from their own funds in specially designated
customer accounts,\11\ and to maintain appropriate risk management
programs to monitor and manage the risks associated with their
activities as FCMs.\12\
---------------------------------------------------------------------------
\9\ Section 4f(b) of the Act authorizes the Commission to adopt
FCM minimum financial and related reporting requirements. Section
4f(b) provides, in relevant part, that no person shall be registered
as an FCM unless such person meets the minimum financial
requirements that the Commission may prescribe by regulation as
necessary to insure such person meets its obligations as a
registrant, and each person registered as an FCM shall at all times
continue to meet such prescribed minimum financial requirements.
\10\ See Regulation 1.17 for FCM minimum capital requirements.
\11\ See Regulations 1.20, 22.2, and 30.7 for FCM segregation
requirements for customer accounts containing futures positions,
swap positions, and foreign futures positions, respectively.
\12\ See Regulation 1.11 for FCM risk management requirements.
---------------------------------------------------------------------------
The Commission also has adopted, under the authority granted by
section 4f(b), regulations imposing periodic financial reporting
requirements on FCMs that are intended to provide the Commission with
information regarding their financial condition. The financial
reporting requirements include daily statements demonstrating
compliance with the segregation of customer funds requirements,\13\
monthly unaudited and annual audited financial statements,\14\ and
regulatory notices upon the occurrence of specified events including
failing to meet minimum capital requirements, failing to comply with
segregation requirements, and failing to maintain current books and
records.\15\
---------------------------------------------------------------------------
\13\ See Regulations 1.32, 22.2 and 30.7 for FCM requirements to
prepare and to submit to the Commission daily segregation
computations and schedules for customer futures, cleared swaps and
foreign futures accounts, respectively.
\14\ See Regulation 1.10 for FCM requirements to file unaudited
monthly financial statements and annual audited financial
statements.
\15\ See Regulation 1.12.
---------------------------------------------------------------------------
In addition to authorizing the Commission to adopt regulations
imposing direct financial and related reporting requirements, the Act
further establishes a regulatory oversight structure that imposes an
obligation on DCMs and registered futures associations (``RFAs''),\16\
as SROs, to perform frontline regulatory oversight of market
intermediaries, including FCMs.\17\ In 2000, Congress affirmed this
regulatory structure of industry self-regulation by amending section 3
of the Act to state, in pertinent part, that it is the purpose of the
Act to serve the public interests through a system of effective self-
regulation of trading facilities, clearing systems, market participants
and market professionals under the oversight of the Commission.\18\
---------------------------------------------------------------------------
\16\ The National Futures Association (``NFA'') is the only
registered RFA. NFA's financial requirements for FCMs are available
at its website, www.nfa.futures.org.
\17\ Section 3(b) of the Act.
\18\ Section 108 of the Commodity Futures Modernization Act of
2000, Public Law 106-554, 114 Stat. 2763 (Dec. 21, 2000).
---------------------------------------------------------------------------
To achieve the objective of a self-regulatory structure, the Act
and Commission regulations require RFAs and DCMs to adopt financial and
related reporting requirements for member FCMs, and to periodically
examine FCMs for compliance with such requirements. Section 17(p) of
the Act requires an RFA to establish and submit for Commission approval
rules imposing minimum capital, segregation and other financial
requirements applicable to its members for which such requirements are
imposed by the Commission. The RFA's financial requirements for its
members must be at least as stringent as those set by the Act or
Commission regulations.\19\ Section 17(p) further provides that the RFA
must implement a program to audit and enforce compliance by its members
with the RFA's minimum financial requirements.\20\
---------------------------------------------------------------------------
\19\ See section 17(p)(2) of the Act.
\20\ Id.
---------------------------------------------------------------------------
With respect to DCMs, section 5(d)(11)(B) of the Act and Regulation
38.600 require, in relevant part, each DCM to implement rules to ensure
the financial integrity of any member FCM and the protection of
customer funds.\21\ DCMs also are required to monitor an FCM member's
compliance with the DCM's minimum financial requirements by reviewing
financial information filed with the DCM and by conducting periodic
examinations of the FCM.\22\
---------------------------------------------------------------------------
\21\ See also, Regulation 38.602 which provides that a DCM must
provide for the financial integrity of its transactions by
establishing and maintaining appropriate minimum financial standards
for its members and non-intermediated market participants, and
Regulation 38.603 which requires a DCM to have rules concerning the
protection of customer funds.
\22\ See Regulations 38.600 through 38.605.
---------------------------------------------------------------------------
The Commission's and SRO's minimum financial requirements for
member FCMs are intended to help ensure that FCMs can continue to meet
their financial and operational obligations to both customers and DCOs,
which is necessary in order for the Commission-regulated markets to
operate efficiently and effectively.
C. Current Commission Regulation 1.52
As noted in section I.B., above, the Act and Commission regulations
establish SROs (i.e., DCMs and NFA) as frontline regulators for FCMs.
Commission Regulation 1.52 establishes the minimum standards that the
Commission requires of an SRO oversight program, and includes an
explicit requirement that each SRO must adopt rules prescribing minimum
financial and related reporting requirements for member FCMs that are
the same as, or more stringent than, the requirements imposed by the
Commission.\23\ Consistent with the requirements of Regulation 1.52,
SROs have adopted rules imposing FCM capital and financial reporting
requirements that are at least as stringent as the FCM capital and
financial reporting requirements set
[[Page 31080]]
forth in applicable Commission regulations.\24\
---------------------------------------------------------------------------
\23\ See Regulation 1.52(b)(1).
\24\ For example, CME Rule 970 imposes capital and financial
reporting requirements on member FCMs that are at least as stringent
as the Commission's capital and financial reporting requirements.
CME rules may be accessed via the CME's website: https://www.cmegroup.com/rulebook/CME/I/9/9.pdf.
NFA FCM capital and financial reporting requirements are set
forth in Section 1 of the NFA's Financial Requirements section of
its rulebook and may be accessed at NFA's website: https://www.nfa.futures.org/rulebook/index.aspx.
---------------------------------------------------------------------------
In 2013, the Commission adopted new rules and rule amendments to
comprehensively enhance customer protections.\25\ As part of the 2013
Customer Protection Rulemaking, the Commission amended Regulation 1.52
to impose several additional obligations on SROs with respect to the
oversight of FCMs. Amended Regulation 1.52 requires each SRO to
establish and operate a supervisory program that includes written
policies and procedures concerning the application of the supervisory
program in the examination of its member registrants (including FCMs)
for the purpose of assessing whether each member registrant is in
compliance with applicable SRO and Commission regulations governing net
capital and related financial requirements, the obligations to
segregate customer funds, risk management requirements, financial
reporting requirements, recordkeeping requirements, and sales practices
and other compliance requirements. The supervisory program also must
adequately address the following elements: (1) The level, training, and
independence of SRO examination staff; (2) The SRO's ongoing
surveillance of member FCMs, including the review and analysis of
financial reports and regulatory notices received; (3) The SRO's
procedures for identifying and monitoring FCMs that are deemed to pose
a high degree of financial risk; (4) The SRO's conduct of on-site
examination of FCMs by SRO staff at least once every 18 months; and (5)
The documentation of all aspects of the SRO's operation of its
supervisory program.
---------------------------------------------------------------------------
\25\ Enhancing Protections Afforded Customers and Customer Funds
Held by Futures Commission Merchants and Derivatives Clearing
Organizations, 78 FR 68506 (Nov. 14, 2013) (the ``2013 Customer
Protection Rulemaking'').
---------------------------------------------------------------------------
The supervisory program also must, at a minimum, incorporate FCM
examination standards addressing: (1) The ethics of an SRO examiner;
(2) The independence of an SRO examiner; (3) The supervision, review,
and quality control of an SRO examiner's work product; (4) The evidence
and documentation to be reviewed and retained in connection with an
examination; (5) The examination planning process; (6) Materiality
assessment; (7) Quality control procedures to ensure that the SRO
examinations maintain the level of quality expected; (8) Communications
between an SRO examiner and the regulatory oversight committee, or the
functional equivalent of the regulatory oversight committee, of the SRO
of which the FCM is a member; (9) Communications between an SRO
examiner and an FCM's audit committee of the board of directors or
similar governing body; (10) Analytical review procedures; (11) Record
retention; and (12) Required items for inclusion in the SRO's
examination report, such as repeat violations, material items, and high
risk issues.\26\ Regulation 1.52 further provides that all aspects of
an SRO's supervisory program, including the FCM examination standards,
must conform to auditing standards issued by the Public Company
Accounting Oversight Board (``PCAOB'') as such PCAOB standards would
apply to a non-financial statement audit.\27\
---------------------------------------------------------------------------
\26\ Regulation 1.52(c) and (d).
\27\ The PCAOB is a nonprofit corporation established by
Congress to oversee the audits of public companies in order to
protect investors and the public interest by promoting informative,
accurate, and independent audit reports. The PCAOB also oversees the
audits of brokers and dealers registered with the Securities and
Exchange Commission. The PCAOB was not, however, vested with the
authority to oversee the audits of FCMs.
---------------------------------------------------------------------------
Regulation 1.52 also requires each SRO to engage an ``examinations
expert'' to evaluate its supervisory program prior to its initial use,
and to evaluate the SRO's application of the supervisory program at
least once every three years after its initial use.\28\ For each
evaluation, the SRO is required to obtain from the examinations expert
a written report on findings and recommendations issued under the
consulting services standards of the American Institute of Certified
Public Accountants (``AICPA'') that includes: (1) A statement that the
examinations expert has evaluated the supervisory program (including
its design to detect material weaknesses in an FCM's system of internal
controls), including any comments and recommendations regarding such
evaluation; (2) A statement that the examinations expert has evaluated
the application of the supervisory program by the SRO, including any
comments and recommendations in connection with such evaluation; and,
(3) A discussion and recommendations of any new or best practices as
prescribed by industry sources, including the AICPA and PCAOB.
---------------------------------------------------------------------------
\28\ An ``examinations expert'' is defined in Regulation 1.52(a)
as an accounting and auditing firm with substantial expertise in the
audits of FCMs, risk assessment, and internal control reviews, and
is an accounting and auditing firm that is acceptable to the
Commission.
---------------------------------------------------------------------------
II. Proposed Amendments to Regulation 1.52
A. Response To Request for Information
The CME stated in its response to the Commission's Request for
Information that it fully supported the Commission's objective of
strengthening and enhancing SRO oversight programs for FCMs as set
forth in the 2013 Customer Protection Rulemaking. CME further stated
that it expended significant resources revising the FCM supervisory
program to address the enhanced requirements of Regulation 1.52 that
were imposed by the 2013 Customer Protection Rulemaking. In this
regard, CME stated that it and NFA jointly engaged a public accounting
firm as a consultant during the development of the FCM examination
standards, and that the public accounting firm's expertise was
extremely beneficial in drafting the initial FCM examination standards
and revising its supervisory program to address such standards.
The CME, however, also suggested that the Commission should
eliminate the requirement for an SRO to engage an examinations expert
once every three years to evaluate the SRO's supervisory program. The
CME expressed its view that the engagement of an examinations expert at
least once every three years does not provide any meaningful regulatory
benefit. The CME noted that under the current regulatory framework,
staff of the Commission's Division of Swap Dealer and Intermediary
Oversight (``DSIO'') provides effective oversight of the SRO FCM
examination programs through the conduct of its SRO rule enforcement
reviews. The CME noted that it revises the FCM examinations programs to
incorporate any regulatory changes adopted by the Commission or SROs,
and provides the actual FCM examination programs, with the revisions,
to DSIO staff for review at least once each year.
Based upon the CME's response to the Commission's Request for
Information, and Commission staff's firsthand experience in the CME's
and NFA's implementation of their initial supervisory program,\29\ the
Commission
[[Page 31081]]
is proposing several amendments to Regulation 1.52 to revise the time
interval between mandatory examinations expert evaluations of the SRO
supervisory program, and to amend the scope of the examinations
expert's evaluation to focus on changes to auditing standards adopted
by the PCAOB since the last examinations expert's evaluation. The
Commission also is proposing several technical amendments to eliminate
redundancies in the rule text.
---------------------------------------------------------------------------
\29\ Since adoption of the amendments to Regulation 1.52
resulting from the 2013 Customer Protection Rulemaking, Commission
staff has participated in several meetings with the CME, NFA, and
their examinations expert to address issues and questions arising
during the drafting of the initial examination standards and
programs. In 2015, Commission staff, through delegated authority,
approved the initial FCM examination standards, and in 2017 approved
the CME's and NFA's examination programs. The examination standards
and programs are now fully implemented and are used in each DSRO
examination of an FCM.
---------------------------------------------------------------------------
B. Scope of the Examinations Expert's Evaluation
The examinations expert is currently required to evaluate, at least
once every three years, (1) the supervisory program of an SRO or a
Joint Audit Committee (``JAC''),\30\ and (2) the SRO's or JAC's
application of its supervisory program.\31\ The SRO or JAC also is
required to obtain from the examinations expert a written report on
finding and recommendations issued under the consulting services
standards of the AICPA that includes statements that the examinations
expert has evaluated the supervisory program and the SRO's or JAC's
application of the supervisory program, and an analysis of the
supervisory program's design to detect material weaknesses in internal
controls.
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\30\ As many FCMs are members of more than one SRO, Regulation
1.52 provides a permissive system that allows SROs to enter into
agreements allocating primary, but not exclusive, financial
oversight and examination responsibilities of FCMs that are members
of two or more SROs to one of the SROs, which is termed the
``designated self-regulatory organization'' (``DSRO''). The term
``designated self-regulatory organization'' is generally defined in
Regulation 1.3 to mean the SRO delegated the primary responsibility
to monitor and exam registrants that are subject to oversight by
more than one SRO for compliance with minimum financial and related
reporting requirements, and for receiving financial reports from
such registrants. SROs that agree to participate in a plan to
allocate common members to a DSRO are referred to as JAC members
under Regulation 1.52. The examination requirements proposed to be
amended are effectively identical for SROs and JACs, and the
Commission's proposed amendments would revise the examination
requirements for both the SROs and JACs.
\31\ Regulation 1.52(c)(2)(iv).
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The Commission is proposing to amend Regulations 1.52(c)(2)(iv) and
(d)(2)(ii)(I) to remove from the scope of the examinations expert's
evaluation the SRO's or JAC's application of its supervisory program
during periodic reviews and the analysis of the supervisory program's
design to detect material weaknesses in internal controls during both
periodic reviews and the initial review prior to the programs' initial
use. The Commission initially adopted in 2013 the requirement that the
examinations expert issue a written report on its findings and
recommendations of the SRO's application of its supervisory program,
including its internal controls, due to concerns that a third-party
assessment was necessary due to limited Commission resources and
expertise to perform a comparable periodic assessment.\32\ Since 2013,
however, Commission staff has been actively involved with the NFA, CME,
and their examinations expert in the development of a revised
supervisory program that meets the requirements of Regulation 1.52,
including the development of FCM examinations standards that are
consistent with PCAOB auditing standards. Commission staff also has
reviewed the detailed FCM examination programs, including several
programs designed to assess the adequacy of an FCM's internal controls
that were developed by the NFA and CME, for compliance with Regulation
1.52. Commission staff also has been performing scheduled oversight
reviews of NFA's and CME's execution of its revised supervisory
program, including its implementation and execution of programs
designed to assess the FCM's internal controls.
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\32\ Customer Protection Rulemaking, 78 FR 65506, 68562.
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Accordingly, following the adoption of the examination standards,
the Commission believes that the scope of the examinations expert's
review should be limited to the area of its expertise--auditing
standards--and that engaging an independent third-party to review the
entire program involves additional cost, but results only in a small,
incremental benefit. Having assessed the implementation of the revised
supervisory program, Commission staff has determined that it has
adequate resources and expertise in the application of CFTC regulations
to the operations of FCMs, and is appropriately situated to assess
whether SRO and JAC staff are accurately and properly applying
Commission requirements to FCMs in their execution of the examination
programs. Commission staff's review of SRO and JAC supervisory programs
includes detailed assessments of whether SRO or JAC staff complied with
their respective FCM examination standards, including internal control
testing and assessment, in the performance of FCM examinations. In this
regard, Commission staff generally review, based on a risk-based
approach, the most significant areas of an SRO's or JAC's FCM
examination program during a review, including: (1) The staffing levels
and adequate training and qualification of SRO or JAC staff members;
(2) The detailed testing performed by SRO or JAC staff in each
examination area (e.g., segregation of customer funds, capital
compliance, and recordkeeping); (3) The timeliness and effectiveness of
the SRO's or JAC's review of FCM financial reporting, including FCM
daily segregation computations, monthly unaudited and annual audited
financial statements, periodic reporting of customer investments, and
periodic regulatory notices; and (4) The effectiveness of the SRO's or
JAC's disciplinary program. Accordingly, the Commission believes that a
more efficient balance of oversight can be achieved by focusing the
examinations expert's evaluation on the SRO's or JAC's examination
standards, which is an area of the examinations expert's particular
expertise. While the Commission still notes that it has limited
resources to perform a holistic review of the SRO's or JAC's
examination program, covering both the design of the standards and the
effectiveness of the audit program, the Commission believes, as noted
above, that the proposed amendments strike a reasoned balance between
the Commission's expertise and that of the examinations expert.
The proposed amendments would continue to require an examinations
expert to provide the SRO or JAC with a written report on the
examinations expert's findings and recommendations. The Commission,
however, is not mandating the form and content of the written report,
other than that the report must accurately reflect the extent of the
examinations expert's evaluation, and include any findings and
recommendations resulting from its evaluation. The Commission is also
proposing that the written report will be provided to the Director of
the Division of Swap Dealer and Intermediary Oversight with the
understanding that the report will be shared with the Commission.
C. Frequency of the Examinations Expert's Evaluation of an SRO's
Supervisory Program
Regulations 1.52(c)(2)(iv) and (d)(2)(ii)(I) require an SRO and
JAC, respectively, to engage an examinations expert to evaluate their
FCM supervisory programs prior to the initiation of the programs, and
at least once every three years thereafter. The Commission believes
that an
[[Page 31082]]
examinations expert's evaluation provides important oversight of the
SRO FCM examination standards by an independent third-party that is an
expert in the understanding and application of the auditing standards
issued by the PCAOB. Accordingly, the Commission is not proposing to
eliminate the requirement in Regulation 1.52 for an SRO or JAC to
engage an examinations expert at the initiation of the development of
its supervisory program, or at different periods of time after the
initial evaluation.
The Commission, however, further believes that the frequency of an
examinations expert's evaluation of an SRO's or JAC's FCM examination
standards should not be based upon a fixed timeframe of once every
three years and is therefore proposing amendments that provide for
flexibility dependent upon changes in auditing standards issued by the
PCAOB.
Accordingly, the Commission is proposing that SROs and JACs must
review and revise their respective FCM examination standards promptly
after the issuance of new or amended auditing standards by the PCAOB
that have an impact on the FCM examination standards. The SRO or JAC
also must engage an examinations expert to evaluate the consistency of
the revised FCM examination standards with the PCAOB auditing standards
whenever the SRO or JAC adopts material amendments to their respective
FCM examination standards.\33\ The proposal would further provide the
DSIO Director with the authority to direct an SRO or JAC to engage an
examinations expert. This will address cases where DSIO staff believes
that new or amended PCAOB audit standards have a material impact on FCM
examinations standards, when an SRO of JAC has not otherwise engaged an
examinations expert.\34\
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\33\ The purpose of the proposal is for an SRO or JAC to
promptly amend their respective FCM examination standards whenever
the PCAOB issues new or revised auditing standards that are relevant
to the SRO's or JAC's examinations of member FCMs. The SRO or JAC
would further be required to engage an examinations expert to
evaluate the consistency of any material amendments to the FCM
examination standards with the PCAOB new or revised auditing
standards. However, the Commission would not expect an SRO or JAC to
engage an examinations expert if the amendments to the FCM
examination standards are not material. The Commission also would
not expect an SRO or JAC to engage an examinations expert more
frequently than once every 12 months.
In the context of the JAC, the annual JAC meeting required by
Regulation 1.52(d) may serve as the appropriate forum for discussing
amendments to the FCM examination standards, and if necessary, a
vote of JAC members could determine that engagement of the
examinations expert to more fully assess the supervisory program
standards in the context of a non-financial statement audit is
warranted.
\34\ The Commission also notes that proposal does not prescribe
a specific timeframe for which the SRO or JAC should implement any
revised examination standards, but only that the adoption must occur
``promptly.'' This is because the time needed to comport the newly
adopted auditing standard into a newly adopted examination standard
may vary depending on the complexity of the standard and whether the
examinations expert has been engaged. For avoidance of any doubt,
the Commission expects ``promptly'' adoption to occur within a
reasonable amount of time under the circumstances. In the event that
the adoption should take longer than one year from the time a PCAOB
auditing standard is made effective, the SRO or JAC may petition the
Director of the Division of Swap Dealer and Intermediary Oversight
for a longer permitted adoption timeframe.
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The proposal would also set a requirement that an SRO or JAC must
engage an examinations expert at least once every five years to address
situations where the SRO or JAC have not considered any new or amended
PCAOB auditing standards issued during the preceding five years to be
material to the FCM examination standards. The Commission is proposing
this five-year limit based upon the importance of the FCM examination
process by SROs and JACs and its belief that third-party experts should
evaluate the FCM examination standards at least once every five years
to ensure that they are consistent with PCAOB auditing standards. The
Commission requests specific comment on whether the amended timeframe
of five years is appropriate, or whether a different timeframe would be
more appropriate.
In proposing the amendment to revise the FCM examination standards,
the Commission is intending to limit the examinations expert's
evaluation to those FCM examination standards that are new or revised
since the last examinations expert's review or assessment. The
Commission does not expect the examinations expert to re-assess each
examination standard each time an evaluation is performed, but only
those standards that may be susceptible to change based on the
examinations expert's opinion, auditing standards adopted or amended by
the PCAOB, and the examinations expert's understanding of the CFTC
regulatory requirements in consultation with SRO or JAC.
D. Technical Amendments to Regulation 1.52
The Commission is proposing several technical amendments to
Regulation 1.52 which eliminate redundancies and simplify the intent of
the rule. Specifically, the Commission is consolidating the FCM
examination standards listed in paragraphs (c)(2)(ii) and (iii) of
Regulation 1.52 governing SROs into a single revised Regulation
1.52(c)(2)(ii).\35\ The Commission also is proposing to amend paragraph
(d)(2)(ii)(F) to reflect the consolidation of the FCM examination
standards in revised Regulation 1.52(c)(2)(ii).
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\35\ The Commission notes that current paragraphs (c)(2)(ii) and
(d)(2)(ii)(F) both contain an explanatory sentence of what topics
within PCAOB auditing standards should be used in order to conform
the examination standards. The Commission reads paragraph
(c)(2)(iii), and by cross-reference (d)(2)(ii)(G), to already
include each of these topics. Moreover, paragraph (c)(2)(iii) more
appropriately uses in this context the term ``examination,'' as
opposed to ``audit'' to articulate this construction.
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III. Cost-Benefit Considerations
A. Introduction
Section 15(a) of the Act requires the CFTC to consider the costs
and benefits of its actions before promulgating a regulation under the
Act or issuing certain orders.\36\ Section 15(a) of the Act further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. The CFTC considers the costs and benefits resulting
from its discretionary determinations with respect to the section 15(a)
factors below.
---------------------------------------------------------------------------
\36\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
Where reasonably feasible, the CFTC endeavors to estimate
quantifiable costs and benefits. Where quantification is not feasible,
the CFTC identifies and describes costs and benefits qualitatively.
The CFTC requests comment on the costs and benefits associated with
the proposed rule amendments. In particular, the CFTC requests that
commenters provide data and any other information or statistics that
the commenters relied on to reach any conclusions regarding the CFTC's
proposed considerations of costs and benefits.
B. Economic Baseline
The CFTC's economic baseline for this proposed rule amendment
analysis is the requirements of Regulation 1.52 that exist today.
Specifically, current Regulation 1.52 requires an SRO or a JAC to
engage an examinations expert to evaluate its supervisory program prior
to its initial use, and to evaluate the SRO's application of the
supervisory
[[Page 31083]]
program at least once every three years after its initial use.
The Commission's proposal would not alter the requirement for an
SRO or JAC to engage an examinations expert to evaluate its supervisory
program prior to the initial use of the supervisory program. The
Commission is proposing, however, to eliminate the requirement that the
examinations expert must review the SRO's or JAC's ongoing application
of its supervisory program during periodic reviews and the analysis of
the supervisory program's design to detect material weaknesses in
internal controls during both periodic reviews and the initial review
prior to the program's initial use. The Commission also is proposing to
revise the frequency of when an SRO or JAC must engage an examinations
expert, as discussed below.
The Commission's proposal to eliminate the requirement that an
examinations expert evaluate an SRO's or JAC's application of its
supervisory program and the program's design to detect material
weaknesses in internal controls will reduce costs to the SROs and JACs.
The proposal, however, would not substantially reduce the benefits
obtained from an evaluation of the SROs' and JACs' supervisory program,
including internal controls, as such reviews are performed by
Commission staff on a routine basis. Commission staff evaluates the
SRO's or JAC's execution of its supervisory program, including
performing detailed reviews of SRO and JAC examination work papers, to
assess the scope of the work performed by SRO and JAC staff members and
to determine whether the conclusions reached by SRO and JAC staff
members are supported by the work performed. Commission staff also
reviews all SRO and JAC examination programs for conducting
examinations of FCMs to assess the completeness of such programs and to
determine that such programs properly reflect any regulatory updates,
including rule amendments, adopted since the Commission staff's
previous review of the examination programs. Reviews of execution and
completeness of supervisory programs for FCMs occur no less frequently
than annually. Commission staff has a particular expertise in
determining whether registrants are in compliance with Commission
regulatory requirements that makes a third-party review redundant.
The Commission proposes to continue to require that an examinations
expert review the FCM examination standards contained in the
supervisory program for consistency with PCAOB auditing standards, but
is proposing to revise the timeframe for such reviews. Currently,
Regulation 1.52 requires an SRO or JAC to engage an examinations expert
at least once every three years to perform such a review. The
Commission is proposing to amend Regulation 1.52 to require an SRO or
JAC to engage an examinations expert if the PCAOB issued new or revised
auditing standards that are material to the SRO's or JAC's examination
of member FCMs.
The examinations expert's review, however, would be limited to only
the new or revised PCAOB auditing standards that are applicable to the
SRO's or JAC's examination of FCMs. Accordingly, the examinations
expert would not have to review all of the SRO's or JAC's FCM
examination standards for consistency with PCAOB audit standards. The
proposal would further require an SRO or JAC to engage an examinations
expert at least once every five years even if the SRO or JAC determined
that the PCAOB did not issue new or revised auditing standards during
the previous five-year period that are material to its examinations of
member FCMs. Based on past experience, the Commission anticipates that
the adoption of new or revised auditing standards that are material to
examination standards applicable to FCMs will be infrequent, and
therefore the triggering of an examinations expert review will also
likely be an infrequent event.\37\ Finally, the proposal would provide
that an SRO or JAC must engage an examinations expert if directed to by
the Director of the Division of Swap Dealer and Intermediary
Oversight.\38\
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\37\ Since 2016 PCAOB has adopted approximately two new
standards, neither of which had a significant impact on the
examination standards applicable to FCMs. See PCAOB website
available at: https://pcaobus.org/Standards/Pages/Current_Activities_Related_to_Standards.aspx.
\38\ For example, in circumstances where an SRO or JAC has not
engaged an examination expert yet DSIO staff believes a material
change to PCAOB auditing standards warrants such engagement.
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The proposed amendments to Regulation 1.52 are intended to
streamline the process under which examinations experts conduct their
reviews and the time period between those reviews. The Commission
believes that these amendments will make conducting the reviews more
efficient and less costly, while still balancing the importance of
having an independent third-party examinations expert in auditing
standards evaluating the examination standards used by SROs and the
JAC.
The Commission does not anticipate that there will be any
significant increased costs associated with the proposed amendments. By
narrowing the intended scope of examination reviews from an evaluation
of the supervisory program to an assessment of the examinations
standards for conformity with auditing standards established by the
PCAOB as they apply to examinations, the Commission is purposely
limiting the scope of the examinations expert's review. The Commission
anticipates that this limitation, coupled with extending the time
period between expert examiner reviews, will significantly limit the
costs associated with engaging and hiring an examinations expert.\39\
Nonetheless, the Commission believes that these amendments
appropriately balance the integrity of the examination program with its
costs while continuing to ensure that there is sufficient oversight
over the minimum financial requirements at FCMs. As noted, Commission
staff reviews no less frequently than annually all SRO and JAC
examination programs and anticipates that it will continue to do so.
These Commission staff reviews will continue to provide the benefits
that have been associated with the examinations experts' reviews.
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\39\ In the 2013 Customer Protection Rulemaking, the Commission
found that it was not feasible to quantify any costs associated with
utilizing an examinations expert, largely because several nationally
recognized accounting firms expressed their reluctance to provide
such information. While it is likely not feasible to quantify such
costs for the use of an examinations expert under the proposed
amendments, such costs are likely much less than the costs under the
existing rule. See, 2013 Customer Protection Rulemaking at 68605.
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C. CEA Section 15(a) Factors
i. Protection of Market Participants and the Public
The Commission preliminarily believes that this proposal maintains
the protection of market participants and the public provided by the
current regulation. The proposal will continue to protect market
participants and the public by ensuring that there is sufficient
oversight over the minimum financial requirements at FCMs. As noted,
the Commission believes that Commission staff is well-equipped to
provide reviews that, under the proposal, would no longer be provided
by outside examinations experts and Commission staff intends to
continue to conduct such reviews.
ii. Efficiency, Competitiveness, and Financial Integrity of Markets
The Commission preliminarily believes that Regulation 1.52 as
amended will continue to help ensure that FCMs can meet their financial
and
[[Page 31084]]
operational obligations to both customers and DCOs, which, along with
the Commission's ongoing reviews, will continue to foster the
efficiency and financial integrity of markets. The Commission has not
identified any effect of Regulation 1.52 on the competitiveness of
derivatives markets.
iii. Price Discovery
The Commission has not identified any material effect of the
proposed amendments on the price discovery process in futures and swap
markets.
iv. Sound Risk Management Practices
The Commission preliminarily believes that Regulation 1.52 as
amended, along with the Commission's ongoing reviews, will continue to
help ensure that FCMs can meet their financial and operational
obligations to both customers and DCOs, which should continue to foster
sound risk management practices.
v. Other Public Interest Considerations
The Commission has not identified any additional public interest
considerations associated with the proposal.
D. Consideration of Alternatives
The Commission considered adopting the CME's suggestion to fully
eliminate the requirement that a third-party public accounting firm
perform periodic evaluations and assessments of an SRO's program to
oversee its member FCMs' compliance with financial and related
reporting requirements. The Commission determined instead to eliminate
the requirement that the examinations expert must periodically review
the SRO's or JAC's ongoing application of its supervisory program,
while maintaining reviews of an FCM's examinations standards at a
modified interval. The Commission preliminarily believes that there are
significant benefits associated with having an outside auditor
performing evaluations of examination standards at least every five
years (and also when there are material and relevant changes in PCAOB
auditing standards) as required by the proposed amendments. While, as
noted, Commission staff is well-equipped to review the ongoing
application of SRO and JAC supervisory programs and intends to continue
to do so at least annually, the Commission believes that third-party
public accounting firms are best equipped to perform evaluations of
examination standards for conformity with auditing standards
established by the PCAOB as they apply to examinations.
The Commission also considered maintaining the current rule, but
the Commission anticipates that the proposal will significantly reduce
costs to SROs and JACs without materially impacting benefits.
The CFTC requests comment on these alternatives as well as any
other alternatives that commenters believe would present a superior
cost-benefit profile to the proposal.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \40\ requires Federal
agencies, in promulgating regulations, to consider the impact of those
regulations on small entities. The Commission has previously
established certain definitions of ``small entities'' to be used by the
Commission in evaluating the impact of its rules on small entities in
accordance with the RFA.\41\ The proposed regulations would affect
designated contract markets.
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\40\ 5 U.S.C. 601 et seq.
\41\ 47 FR 18618 (Apr. 30, 1982).
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The Commission has previously determined that designated contract
markets are not small entities for purposes of the RFA, and, thus, the
requirements of the RFA do not apply to designated contract
markets.\42\ Accordingly, the Chairman, on behalf of the Commission,
certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations
would not have a significant economic impact on a substantial number of
small entities.
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\42\ Id. at 18619.
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B. Paperwork Reduction Act
This proposed rulemaking does not amend existing information
collection requirements. The Paperwork Reduction Act (``PRA'') provides
that a federal agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid control number issued by the Office of Management and
Budget (``OMB'').\43\ The Commission is proposing amendments to rules
that have previously identified collections of information under a pre-
existing collection 3038-0052. The proposed amendments, however, only
increase the respondents permitted time to file required information
and reduce the requirements of review contained therein. As such, the
previously identified response hours in collection 3038-0052 remain a
reasonable burden hour estimate.
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\43\ 44 U.S.C. 3501 et seq.
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The collections contained in this rulemaking are mandatory
collections. In formulating burden estimates for the collections in
this rulemaking, to avoid double accounting of information collections
that already have been assigned control numbers by OMB, or are covered
as burden hours in collections of information pending before OMB, the
PRA analysis provided in the proposed rulemaking, along with the
information collection request (``ICR'') with burden estimates that
were incorporated into the rulemaking by reference and submitted to
OMB, accounted only burden estimates for collections of information
that have not previously been submitted to OMB. The Commission invites
comment on the collections of information contained in the proposed
rulemaking only to the extent that the collections in the proposed
rulemaking would increase the burden hours contained with respect to
each of the related currently valid or proposed collections.
List of Subjects in 17 CFR Part 1
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR part 1 as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9,
10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012).
0
2. Amend Sec. 1.52 as follows:
0
a. Revise paragraphs (c)(2)(ii), (iii), (iv), and (v);
0
b. Remove paragraphs (c)(2)(vi) and (vii);
0
c. Revise paragraphs (d)(2)(ii)(F), (G), (H), and (I);
0
d. Remove paragraphs (d)(2)(ii)(J) and (K); and
0
e. Revise paragraph (d)(2)(iii).
The revisions read as follows:
Sec. 1.52 Self-regulatory organization adoption and surveillance of
minimum financial requirements.
* * * * *
(c) * * *
(2) * * *
(ii) The supervisory program must, at a minimum, have examination
standards addressing the following:
(A) The ethics of an examiner;
[[Page 31085]]
(B) The independence of an examiner;
(C) The supervision, review, and quality control of an examiner's
work product;
(D) The evidence and documentation to be reviewed and retained in
connection with an examination;
(E) The sampling size and techniques used in an examination;
(F) The examination risk assessment process;
(G) The examination planning process;
(H) Materiality assessment;
(I) Quality control procedures to ensure that the examinations
maintain the level of quality expected;
(J) Communications between an examiner and the regulatory oversight
committee, or the functional equivalent of the regulatory oversight
committee, of the self-regulatory organization of which the futures
commission merchant is a member;
(K) Communications between an examiner and a futures commission
merchant's audit committee of the board of directors or other similar
governing body;
(L) Analytical review procedures;
(M) Record retention; and
(N) Required items for inclusion in the examination report, such as
repeat violations, material items, and high risk issues. The
examination report is intended solely for the information and use of
the self-regulatory organizations and the Commission, and is not
intended to be and should not be used by any other person or entity.
(iii)(A) Prior to the initial implementation of the supervisory
program, a self-regulatory organization must engage an examinations
expert to evaluate the examination standards for consistency with
auditing standards issued by the Public Company Accounting Oversight
Board as such auditing standards are applicable in the context of the
self-regulatory organization's examination of its futures commission
merchant members. At least once every five years after the initial
implementation of the supervisory program, a self-regulatory
organization must engage an examinations expert to evaluate the
examination standards for consistency with any new or amended auditing
standards issued by the Public Company Accounting Oversight Board since
the previous review performed by the examinations expert. At the
conclusion of each evaluation, a self-regulatory organization must
obtain a written report from the examinations expert in accordance with
paragraph (c)(2)(iii)(C) of this section.
(B) Notwithstanding paragraph (c)(2)(iii)(A) of this section, a
self-regulatory organization must review any new or amended auditing
standards issued by the Public Company Accounting Oversight Board, and
must revise its examination standards promptly to reflect any changes
in such auditing standards that are applicable in the context of the
self-regulatory organization's examination of its futures commission
merchant members. A self-regulatory organization must engage an
examinations expert to evaluate any material revisions that the self-
regulatory organization makes to the examination standards to conform
such standards with the Public Company Accounting Oversight Board's
auditing standards, or if directed to engage an examinations expert by
the Director of the Division of Swap Dealer and Intermediary Oversight.
At the conclusion of each review, a self-regulatory organization must
obtain a written report from the examinations expert in accordance with
paragraph (c)(2)(iii)(C) of this section.
(C) At the conclusion of the examinations expert's engagement
pursuant to paragraph (c)(2)(iii)(A) or (B) of this section, the self-
regulatory organization must obtain from the examinations expert a
written report on findings and recommendations issued under the
consulting services standards of the American Institute of Certified
Public Accountants. The self-regulatory organization must provide the
Director of the Division of Swap Dealer and Intermediary Oversight with
a copy of the examinations expert's written report, and the self-
regulatory organization's written responses to any of the examinations
expert's findings and recommendations, within thirty days of the
receipt thereof. Upon resolution of any questions or comments raised by
the Division of Swap Dealer and Intermediary Oversight, and upon
written notice from the Division of Swap Dealer and Intermediary
Oversight that it has no further comments or questions on the
examinations standards as amended (by reason of the examinations
expert's proposals, consideration of the Division of Swap Dealer and
Intermediary Oversight's questions or comments, or otherwise), the
self-regulatory organization shall commence applying such examinations
standards for examining its registered futures commission merchant
members for all examinations conducted with an ``as of'' date later
than the date of the Division of Swap Dealer and Intermediary's written
notification.
(iv) The supervisory program must require the self-regulatory
organization to report to its risk and/or audit committee of the board
of directors, or a functional equivalent committee, with timely reports
of the activities and findings of the supervisory program to assist the
risk and/or audit committee of the board of directors, or a functional
equivalent committee, to fulfill its responsibility of overseeing the
examination function.
(v) The examinations expert's written report, the self-regulatory
organization's response, if any, as well as any information concerning
the supervisory program is confidential.
(d) * * *
(2) * * *
(ii) * * *
(F) The Joint Audit Program must include examination standards
addressing the items listed in paragraph (c)(2)(ii) of this section.
(G)(1) Prior to the initial implementation of the Joint Audit
Program, the Joint Audit Committee must engage an examinations expert
to evaluate the examination standards for consistency with auditing
standards issued by the Public Company Accounting Oversight Board as
such auditing standards are applicable in the context of the Joint
Audit Committee's examination of its futures commission merchant
members. At least once every five years after the initial
implementation of the Joint Audit Program, the Joint Audit Committee
must engage an examinations expert to evaluate the examination
standards for consistency with any new or amended auditing standards
issued by the Public Company Accounting Oversight Board since the
previous review performed by the examinations expert. At the conclusion
of each review, the Joint Audit Committee must obtain a written report
from the examinations expert in accordance with paragraph
(d)(2)(ii)(G)(3) of this section.
(2) Notwithstanding paragraph (d)(2)(ii)(G)(1) of this section, the
Joint Audit Committee must review any new or amended auditing standards
issued by the Public Company Accounting Oversight Board, and must
revise its examination standards promptly to reflect any changes in
such auditing standards that are applicable in the context of the Joint
Audit Committee's examination of its futures commission merchant
members. The Joint Audit Committee must engage an examinations expert
to evaluate any material revisions that the Joint Audit Committee makes
to the examination standards to conform such standards with the Public
Company Accounting Oversight Board's auditing standards, or if directed
to engage an examinations expert by the Director of the Division of
[[Page 31086]]
Swap Dealer and Intermediary Oversight. The Joint Audit Committee must
obtain a written report from the examinations expert in accordance with
paragraph (d)(2)(ii)(G)(3) of this section.
(3) At the conclusion of the examinations expert's engagement
pursuant to paragraph (d)(2)(ii)(G)(1) or (2) of this section, the
Joint Audit Committee must obtain from the examinations expert a
written report on findings and recommendations issued under the
consulting services standards of the American Institute of Certified
Public Accountants. The Joint Audit Committee must provide the Director
of the Division of Swap Dealer and Intermediary Oversight with a copy
of the examinations expert's written report, and the Joint Audit
Committee's written responses to any of the examinations expert's
findings and recommendations, within thirty days of the receipt
thereof. Upon resolution of any questions or comments raised by the
Division of Swap Dealer and Intermediary Oversight, and upon written
notice from the Division of Swap Dealer and Intermediary Oversight that
it has no further comments or questions on the examinations standards
as amended (by reason of the examinations expert's proposals,
consideration of the Division of Swap Dealer and Intermediary
Oversight's questions or comments, or otherwise), the Joint Audit
Committee shall commence applying such examinations standards for
examining its registered futures commission merchant members for all
examinations conducted with an ``as of'' date later than the date of
the Division of Swap Dealer and Intermediary's written notification.
(H) The Joint Audit Program must require the Joint Audit Committee
members to report to their respective risk and/or audit committee of
their respective board of directors, or a functional equivalent
committee, with timely reports of the activities and findings of the
Joint Audit Program to assist the risk and/or audit committee of the
board of directors, or a functional equivalent committee, to fulfill
its responsibility of overseeing the examination function.
(I) The examinations expert's written report, the Joint Audit
Committee's response, if any, as well as any information concerning the
supervisory program is confidential.
(iii) Meetings of the Joint Audit Committee. (A) The Joint Audit
Committee members must meet at least once each year. During such
meetings, the Joint Audit Committee members shall consider revisions to
the Joint Audit Program as a result of regulatory changes, revisions to
the examination standards resulting from new or amended auditing
standards issued by the Public Company Accounting Oversight Board, or
the results of an examinations expert's review.
(B) In addition to the items considered in paragraph (d)(2)(iii)(A)
of this section, the Joint Audit Committee members must consider the
following items during the meetings:
(1) Coordinating and sharing information between the Joint Audit
Committee members, including issues and industry concerns in connection
with examinations of futures commission merchants;
(2) Identifying industry regulatory reporting issues and financial
and operational internal control issues and modifying the Joint Audit
Program accordingly;
(3) Issuing risk alerts for futures commission merchants and/or
designated self-regulatory organization examiners on an as-needed
basis;
(4) Responding to industry issues; and
(5) Providing industry feedback to Commission proposals.
(C) Minutes must be taken of all meetings and distributed to all
members on a timely basis.
(D) The Director of the Division of Swap Dealer and Intermediary
Oversight must receive timely prior notice of each meeting, have the
right to attend and participate in each meeting and receive written
copies of the minutes required pursuant to paragraph (d)(2)(iii)(C) of
this section, respectively.
* * * * *
Issued in Washington, DC, on June 28, 2018, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix to Financial Surveillance Examination Program Requirements for
Self-Regulatory Organizations--Commission Voting Summary
On this matter, Chairman Giancarlo and Commissioners Quintenz
and Behnam voted in the affirmative. No Commissioner voted in the
negative.
[FR Doc. 2018-14272 Filed 7-2-18; 8:45 am]
BILLING CODE 6351-01-P
