Chief Compliance Officer Duties and Annual Report Requirements for Futures Commission Merchants, Swap Dealers, and Major Swap Participants, 43510-43524 [2018-18432]

Download as PDF 43510 Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 3 RIN 3038–AE56 Chief Compliance Officer Duties and Annual Report Requirements for Futures Commission Merchants, Swap Dealers, and Major Swap Participants Commodity Futures Trading Commission. ACTION: Final rule. AGENCY: SUMMARY: The Commodity Futures Trading Commission (‘‘Commission’’ or ‘‘CFTC’’) is amending its regulations regarding certain duties of chief compliance officers (‘‘CCOs’’) of swap dealers (‘‘SDs’’), major swap participants (‘‘MSPs’’), and futures commission merchants (‘‘FCMs’’) (collectively, ‘‘Registrants’’); and certain requirements for preparing, certifying, and furnishing to the Commission an annual report containing an assessment of the Registrant’s compliance activities. DATES: This rule is effective September 26, 2018. FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, 202–418– 5213, mkulkin@cftc.gov; Erik Remmler, Deputy Director, 202–418–7630, eremmler@cftc.gov; Pamela M. Geraghty, Special Counsel, 202–418– 5634, pgeraghty@cftc.gov; or Fern B. Simmons, Special Counsel, 202–418– 5901, fsimmons@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: Commission regulation or the rules of a registered futures association.4 On November 19, 2010, the Commission proposed regulations implementing the CCO requirements,5 and in April 2012, the Commission adopted the final CCO regulations (‘‘CCO Rules Adopting Release’’).6 For purposes of this release, § 3.3 7 and the related definitions in § 3.1 of the Commission’s regulations are herein referred to as the ‘‘CCO Rules.’’ B. The Proposal On May 8, 2017, the Commission published for public comment a Notice of Proposed Rulemaking (‘‘Proposal’’) 8 to amend the CCO Rules. In particular, the Proposal addressed certain CCO duties and requirements for preparing and furnishing the CCO Annual Report. The Proposal sought to incorporate knowledge gained through Commission staff’s experience in administering the implementation of § 3.3 and to more closely harmonize certain provisions with corresponding Securities and Exchange Commission (‘‘SEC’’) rules for CCOs of security-based swap dealers and major security-based swap participants (collectively, ‘‘SEC Registrants’’).9 To provide greater clarity regarding the CCO reporting line required by section 4s(k)(2)(A) of the Act and § 3.3(a)(1), the Commission proposed to define ‘‘senior officer’’ in § 3.1 as ‘‘the chief executive officer or other equivalent officer of a registrant.’’ With regard to CCO duties, the Proposal would include additional language in § 3.3(d)(1) to clarify that the CCO’s duty with respect to administering policies and procedures would be specific to the Registrant’s business as an SD, MSP, or FCM, as applicable.10 The Proposal I. Background amozie on DSK3GDR082PROD with RULES A. Statutory and Regulatory Background As amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’),1 sections 4d(d) and 4s(k) of the Commodity Exchange Act (‘‘CEA’’ or ‘‘Act’’) require each Registrant to designate an individual to serve as its CCO.2 Sections 4s(k)(2) and (3) set forth certain requirements and duties for CCOs of SDs and MSPs, including the requirement to prepare and sign an annual compliance report (‘‘CCO Annual Report’’).3 CEA section 4d(d) requires CCOs of FCMs to ‘‘perform such duties and responsibilities’’ as are established by 1 See Dodd-Frank Act, Public Law 111–203, 124 Stat. 1376 (2010). 2 7 U.S.C. 6d(d) and 6s(k)(1). 3 7 U.S.C. 6s(k)(2) and (3). VerDate Sep<11>2014 16:25 Aug 24, 2018 Jkt 244001 47 U.S.C. 6d(d). Designation of a Chief Compliance Officer; Required Compliance Policies; and Annual Report of a Futures Commission Merchant, Swap Dealer, or Major Swap Participant, 75 FR 70881 (proposed Nov. 19, 2010). 6 17 CFR 3.3(d)–(f). See Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules, 77 FR 20128 (Apr. 3, 2012). 7 17 CFR 3.3 (2017). Commission regulations are found at 17 CFR chapter I, and may be accessed through the Commission’s website, www.cftc.gov. 8 Chief Compliance Officer Duties and Annual Report Requirements for Futures Commission Merchants, Swap Dealers, and Major Swap Participants; Amendments, 82 FR 21330 (proposed May 8, 2017). 9 See Business Conduct Standards for SecurityBased Swap Dealers and Major Security-Based Swap Participants, 81 FR 29960 (May 13, 2016) (‘‘SEC Adopting Release’’). 10 As noted in the Proposal, the change to referencing the Registrant’s business as an SD or MSP is not intended to affect the scope of the duties of the CCO. 82 FR at 21332 (Citing the CCO Rules Adopting Release, 77 FR 20158 (‘‘[T]he Commission 5 See PO 00000 Frm 00010 Fmt 4700 Sfmt 4700 would also modify the language in § 3.3(d)(2) to clarify that the CCO must take ‘‘reasonable steps’’ to resolve conflicts of interest, and to require in § 3.3(d)(3) that a CCO take reasonable steps to ensure compliance with the Act and Commission regulations by, among other things, ‘‘ensuring the registrant establishes, maintains, and reviews written policies and procedures reasonably designed to achieve compliance.’’ The Commission further proposed to amend § 3.3(d)(4) and (5) to remove the requirement in each provision that the CCO consult with the board of directors or senior officer in connection with establishing procedures for addressing noncompliance issues. The Proposal also would clarify that policies and procedures are to be ‘‘reasonably designed’’ to achieve their stated purpose, and would amend § 3.3(d)(4) to include remediating matters identified ‘‘through any means.’’ Regarding the CCO Annual Report requirements, the Proposal would clarify § 3.3(e) by eliminating the requirement that a Registrant address ‘‘each’’ applicable CFTC regulatory requirement to which it is subject when assessing its written policies and procedures (‘‘WPPs’’). Additionally, the Commission proposed to clarify that the CCO Annual Report’s discussion of compliance resources be limited to a discussion of resources for the specific activities for which the Registrant is registered. Finally, the Proposal would amend § 3.3(f)(1) to add the Registrant’s audit committee (or equivalent body) as a required recipient of the CCO Annual Report in addition to the board of directors and the senior officer. C. Harmonization With SEC Regulations Using language identical to CEA section 4s(k), the Dodd-Frank Act amended the Securities Exchange Act of 1934 by adding section 15F(k) to establish CCO requirements for SEC Registrants.11 In compliance with sections 712(a)(1)–(2) of the Dodd-Frank Act, the Commission and SEC staffs consulted and coordinated together, and with prudential regulators, in developing the respective CCO rules for purposes of regulatory consistency.12 The SEC initially proposed rule 15Fk– 1 to implement CCO requirements and duties for SEC Registrants in July is clarifying in the final rules that the CCO’s duties extend only to the activities of the registrant that are regulated by the Commission, namely swaps activities of SDs and MSPs and the derivatives activities included in the definition of FCM under section 1(a)(28) of the CEA.’’)). 11 15 U.S.C. 78o–10(k). 12 Public Law 111–203, 124 Stat. 1376, 1641–1642 (codified at 15 U.S.C. 8302(a)(1)–(2)). E:\FR\FM\27AUR1.SGM 27AUR1 Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations amozie on DSK3GDR082PROD with RULES 2011.13 In May 2013, after the CFTC adopted the CCO Rules, the SEC reopened the comment period for its outstanding Dodd-Frank Act Title VII rulemakings, including rule 15Fk–1.14 SEC staff continued to consult with CFTC staff leading up to the adoption of rule 15Fk–1 in May 2016.15 While the CFTC regulates derivatives markets and the SEC regulates securities markets, many of the participants in these markets are the same. Similar activities in these markets are often regulated by each agency in similar ways under similar statutory mandates.16 In this regard, the CFTC and SEC have taken steps through ongoing communication and coordination to harmonize similar regulations, including the regulations addressed in this release. Several of the proposed amendments would further harmonize CFTC and SEC regulations. More specifically, the following provisions in the Proposal align the CFTC CCO regulations with the corresponding SEC CCO regulations: • Including a definition of ‘‘senior officer’’ in § 3.1 that is identical to the SEC’s definition; • Including additional language in § 3.3(d)(1) to clarify that the CCO’s duty with respect to administering policies and procedures would be specific to the Registrant’s business as an SD, MSP, or FCM, as applicable; • Modifying the language in § 3.3(d)(2) to require reasonable steps be taken to resolve conflicts of interest; • Requiring the CCO to identify noncompliance issues ‘‘through any means’’; • Removing the additional requirement in § 3.3(d)(4) and (5) that the CCO consult with the board of directors or senior officer in connection with establishing procedures for addressing noncompliance issues; and • Replacing the requirement in § 3.3(e) that a Registrant address ‘‘each’’ applicable CFTC regulatory requirement to which it is subject when assessing its 13 See Business Conduct Standards for SecurityBased Swap Dealers and Major Security-Based Swap Participants, 76 FR 42396 (proposed Jul. 18, 2011). 14 See Reopening of Comment Periods for Certain Rulemaking Releases and Policy Statement Applicable to Security-Based Swaps, 78 FR 30800 (May 23, 2013). 15 17 CFR 240.15Fk–1. See SEC Adopting Release, 81 FR 29960. 16 For example, the provisions of the Dodd-Frank Act that provide for establishing regulations for swap dealers by the CFTC are nearly identical to most of the provisions of the Dodd-Frank Act that provide for establishing regulations for securitybased swap dealers by the SEC. See Dodd-Frank Act, Public Law 111–203, 124 Stat. 1376, 1711– 1712, 1793 (2010) (codified at 7 U.S.C. 6s and 15 U.S.C. 78o–10). VerDate Sep<11>2014 16:25 Aug 24, 2018 Jkt 244001 WPPs with a requirement to address the applicable regulations generally. Furthermore, in the Proposal, the Commission solicited comments regarding potential additional rule changes that would further harmonize the CFTC and SEC regulations. After careful review of the comments received, the final rule includes the following additional harmonizing amendments: • In § 3.3(d)(2), the CCO must take reasonable steps to resolve any ‘‘material’’ conflicts of interest; • In § 3.3(d)(4), the CCO must ‘‘take reasonable steps to ensure the registrant’’ establishes, maintains, and reviews written policies and procedures for the remediation of noncompliance issues; • In § 3.3(d)(5), the CCO must ‘‘take reasonable steps to ensure the registrant’’ establishes written procedures for the handling of noncompliance issues; and • In § 3.3(f)(3), the CCO Annual Report certification includes language from the certifying individual that the CCO Annual Report is accurate and complete ‘‘in all material respects.’’ II. Summary of Comments The Commission received eleven comment letters and Commission staff participated in one ex parte teleconference concerning the Proposal.17 The majority of commenters generally supported the Commission’s efforts to clarify the role and duties of the CCO, reduce burdens associated with preparing the CCO Annual Report, and further harmonize the CCO Rules with parallel SEC rules. One commenter expressed general support for the proposed modifications and recognition of the Commission’s efforts as a meaningful step towards increasing regulatory certainty.18 Another commenter expressed concern that a number of the proposals weaken the CCO regulatory regime (by, among other things, reducing CCO accountability).19 Two comments exclusively sought clarity on the Proposal’s impact on the 17 Comment letters were submitted by the following entities: Allen & Overy LLP; Automated Compliance Management, LLC (‘‘ACM’’); Better Markets; Chris Barnard; Futures Industry Association and Securities Industry and Financial Markets Association (‘‘FIA/SIFMA’’); International Swaps and Derivatives Association (ISDA); Japanese Bankers Association (‘‘JBA’’); National Futures Association (‘‘NFA’’); the Natural Gas Supply Association (‘‘NGSA’’); Paws Nutritional Org.; and TD Ameritrade Futures and Forex LLC (‘‘TD Ameritrade’’). All comment letters are available on the Commission’s website at https:// comments.cftc.gov/PublicComments/CommentList. aspx?id=1811. 18 See NGSA comment letter. 19 See Better Markets comment letter. PO 00000 Frm 00011 Fmt 4700 Sfmt 4700 43511 continued ability of non-U.S. SDs to benefit from the Commission’s substituted compliance determinations that pertain to § 3.3.20 Some commenters cautioned against complete harmonization with the SEC regarding the requirement to furnish the CCO Annual Report, but requested more complete alignment in other areas addressing the role and duties of the CCO.21 As outlined below, several commenters suggested modifications to the rule text and requested further interpretive guidance regarding the role and duties of the CCO and CCO Annual Report content.22 Additionally, several commenters suggested modifications to the rule text to add a materiality qualifier to the CCO Annual Report certification.23 For the reasons provided below, the Commission accepted some of these recommendations in the amendments, as adopted, and accompanying guidance, and declined to accept certain other recommendations. III. Final Rule A. Regulation 3.1—Definitions 1. Regulation 3.1(j)—‘‘Senior Officer’’ The Commission proposed to define ‘‘senior officer’’ in § 3.1 as ‘‘the chief executive officer or other equivalent officer of a registrant.’’ The Commission received four comments addressing the proposed definition.24 Chris Barnard and Better Markets supported the proposed definition. FIA/SIFMA requested that the Commission address the variety of organizational structures present among Registrants and define ‘‘senior officer’’ to include ‘‘a more senior officer within the Registrant’s group-wide compliance, risk, legal or other control function who in turn reports to the holding company’s board of directors or CEO (or equivalent officer).’’ 25 FIA/SIFMA further requested that the Commission expand its interpretation of the phrase ‘‘other equivalent officer’’ to include the most senior officer of a Registrant with supervisory responsibility for all of the 20 See Allen & Overy and JBA comment letters. e.g., FIA/SIFMA and ISDA comment 21 See, letters. 22 See, e.g., Better Markets, FIA/SIFMA, ISDA, NFA, and TD Ameritrade comment letters. 23 See FIA/SIFMA, ISDA, and NFA comment letters. 24 See Chris Barnard, Better Markets, ISDA, and FIA/SIFMA comment letters. 25 See FIA/SIFMA comment letter. Similarly, while TD Ameritrade did not comment directly on the proposed definition, it requested that the Commission consider including a variety of senior roles at a Registrant for inclusion in the definition of ‘‘other equivalent officer’’ for purposes of allowing the CCO to report to someone other than the CEO. E:\FR\FM\27AUR1.SGM 27AUR1 43512 Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations Registrant’s business as an FCM, SD, or MSP. ISDA expressed support for the Commission’s proposed definition, but requested the Commission provide Registrants the ability to determine individually who would qualify as an ‘‘equivalent officer.’’ Upon consideration of the comments, the Commission is adopting the definition as proposed. This definition of ‘‘senior officer’’ clarifies the Commission’s long-standing interpretation that compliance with the statutory requirement to have the CCO ‘‘report directly to the board or to the senior officer’’ 26 requires a CCO to have a direct reporting line to the board of directors or the highest executive officer in the legal entity that is the Registrant.27 As stated in the Proposal, the ‘‘chief executive officer’’ is typically the highest executive level, but the Commission is including in the definition the phrase ‘‘other equivalent officer’’ to address Registrants who may have a different title for the highest executive officer.28 This approach is also consistent with the SEC’s definition of ‘‘senior officer’’ in SEC rule 15Fk– 1(e)(2), and is intended to ensure the CCO’s independence from influence, interference, or retaliation.29 The Commission is also declining to broaden its definition of ‘‘senior officer’’ or expand its interpretation of ‘‘other equivalent officer.’’ The Commission notes that the definition of ‘‘senior officer,’’ as adopted, does not preclude additional CCO reporting lines that Registrants may wish to implement for practical day-to-day oversight.30 In response to ISDA’s comment, the Commission believes that the definition and guidance provide sufficient flexibility. Registrants should be able to ensure that regardless of a firm’s chosen nomenclature, the CCO has a direct reporting line to the highest executivelevel individual at the Registrant. 2. Other Definitions In response to the Commission’s request for comment regarding whether other definitions should be added to § 3.1, FIA/SIFMA requested that the 26 7 U.S.C. 6s(k)(2)(A) (emphasis added). CCO Rules Adopting Release, 77 FR at 20188. This concept was incorporated in § 3.3 and therefore applies to FCMs equally. 28 Proposal, 82 FR at 21331. For example, some firms do not have a chief executive officer, but instead give the highest level executive the title of ‘‘president,’’ ‘‘member,’’ or ‘‘general partner.’’ 29 Id. See also CCO Rules Adopting Release, 77 FR at 20188. 30 See CFTC Staff Advisory No. 16–62 (Jul. 25, 2016), available at https://www.cftc.gov/idc/groups/ public/%40lrlettergeneral/documents/letter/1662.pdf. amozie on DSK3GDR082PROD with RULES 27 See VerDate Sep<11>2014 16:25 Aug 24, 2018 Jkt 244001 Commission define ‘‘material noncompliance issue’’ as it relates to the requirement in § 3.3(e)(5) to describe in the CCO Annual Report ‘‘any material noncompliance issues identified and the corresponding action taken.’’ The Commission is declining to define ‘‘material noncompliance issue’’ at this time. Since the adoption of the CCO Rules, Registrants have defined and implemented their own materiality standards when categorizing noncompliance issues. Given the variation in size and nature of businesses among Registrants required to submit CCO Annual Reports, it is the Commission’s view that materiality is dependent upon many factors that impact Registrants to varying degrees. While some factors ought to be considered by all Registrants, e.g., whether the issue may involve a violation of the CEA or a Commission regulation, there is no ‘‘one size fits all’’ approach. Indeed, setting forth a standard of materiality could result in an overly prescriptive model for many Registrants. Based on experience in overseeing the implementation of § 3.3(e), Commission staff believes that Registrants have generally developed and applied adequate internal materiality standards for purposes of the CCO Annual Report. B. Regulation 3.3(d)—Chief Compliance Officer Duties 1. Regulation 3.3(d)(1)—Duty To Administer Compliance Policies and Procedures The Commission proposed to amend § 3.3(d)(1) to require that a CCO’s duties include administering each of the registrant’s policies and procedures relating to its business as a futures commission merchant, swap dealer, or major swap participant that are required to be established pursuant to the Act and Commission regulations. ISDA and FIA/SIFMA generally supported the Commission’s proposed changes 31 and recommended that the Commission further harmonize § 3.3(d)(1) with the SEC’s CCO rules. Specifically, ISDA and FIA/SIFMA recommended that the Commission should clarify in guidance that the duty to administer policies and procedures means reviewing, evaluating, and advising the Registrant on its compliance policies and procedures.32 Alternatively, ISDA proposed that the Commission strike the term ‘‘administering each’’ from § 3.3(d)(1), and replace it with ‘‘reviewing, evaluating, and advising the registrant 31 NFA also endorsed the proposed amendment to § 3.3(d)(1). See NFA comment letter. 32 See SEC Adopting Release, 81 FR at 30057. PO 00000 Frm 00012 Fmt 4700 Sfmt 4700 on the development, implementation, and monitoring’’ of the Registrant’s compliance policies and procedures. ISDA asserted that the current proposed language creates an undue burden on CCOs who do not necessarily ‘‘administer’’ or execute each policy and/or procedure relating to an applicable CFTC rule. Rather, ISDA explained, various business units and control functions within a firm establish policies and procedures for their respective areas, with the ultimate supervisory authority residing with the CEO or other senior officer. After considering the comments received, the Commission is adopting § 3.3(d)(1) as proposed. As the Commission has previously stated, and as discussed below, the role of the CCO, under the Dodd-Frank Act, goes beyond the customary and traditional advisory role of a CCO and requires more active engagement.33 The Commission expects the CCO to be actively engaged in administering a firm’s compliance policies and procedures, as described further below. The language of § 3.3(d)(1), however, is not intended to diminish the role and direct involvement of other senior officers, supervisors and other employees with more direct knowledge, expertise, and responsibilities for various regulated activities within their business lines. Thus, while the CCO plays a central role in administering a firm’s policies and procedures, other personnel may implement the procedures on a day-to-day basis when undertaking related activities in the normal course of business. Furthermore, the Commission reiterates that the Registrant is ultimately responsible for the effective implementation of the policies and procedures.34 In response to ISDA and FIA/SIFMA’s request for clarification on the CCO’s duty to administer policies and procedures, it is the Commission’s view that a CCO may, in many circumstances, be able to fulfill his or her role through actively engaging in processes involving ‘‘reviewing, evaluating, and advising’’ on policies and procedures and compliance matters, while others in the organization are 33 See CCO Rules Adopting Release, 77 FR at 20162. (‘‘In response to comments advocating a purely advisory role for the CCO, the Commission observes that the role of the CCO required under the CEA, as amended by the Dodd-Frank Act, goes beyond what has been represented by commenters as the customary and traditional role of a compliance officer.’’) 34 See 75 FR 70881, 70883 (proposed Nov. 19, 2010). The CCO’s duty to administer policies and procedures does not ‘‘otherwise contradict wellestablished tenets of law regarding the allocation of responsibility within a business association.’’ E:\FR\FM\27AUR1.SGM 27AUR1 Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations amozie on DSK3GDR082PROD with RULES responsible for the daily implementation thereof. However, if, in the normal course, the CCO becomes aware (or reasonably should have been aware) of significant issues that are not being addressed in a reasonably satisfactory manner, the CCO is expected to take further action to address those issues. Importantly, for such circumstances, CEA section 4s(k)(2)(A) provides the CCO with a reporting line directly to the board or the senior officer. Accordingly, it may be appropriate for the CCO, depending on the facts and circumstances, to use that reporting line to elevate any such significant issues that have not been otherwise addressed satisfactorily. Through this active engagement and, if appropriate, utilizing the available escalation measures described above, the CCO may be able to demonstrate that he or she has fulfilled the role assigned to him or her under the regulation. 2. Regulation 3.3(d)(2)—Duty To Resolve Conflicts of Interest Proposed § 3.3(d)(2) would require the CCO, in consultation with the board of directors or the senior officer, to take reasonable steps to resolve any conflicts of interest that may arise. ISDA and FIA/SIFMA supported the proposed revisions to § 3.3(d)(2) and provided additional recommendations. Both commenters recommended that the CCO’s duty to resolve conflicts of interest should be limited to ‘‘material’’ conflicts of interest and should apply only to issues that arise in connection with the Registrant’s business as an FCM, SD, or MSP. ISDA suggested that, consistent with the SEC’s view, the Commission should explicitly state that the primary responsibility to resolve conflicts of interest falls on the Registrant and that the CCO’s role would include identifying, advising, and escalating, as appropriate, to senior officers matters involving conflicts of interest. ISDA further suggested that the Commission replace ‘‘resolve’’ with ‘‘minimize’’ in the rule text. Similarly, FIA/SIFMA recommended that the Commission clarify that ‘‘resolution’’ involves either negation or mitigation of the conflict of interest. Better Markets generally did not support the Commission’s proposed changes to § 3.3(d)(2). Among other reasons, Better Markets is of the view that the proposed changes are not consistent with applicable statutory language to ‘‘resolve any conflicts’’ and will dilute the CCO’s duty to address conflicts of interest. Having considered these comments, the Commission is adopting § 3.3(d)(2) VerDate Sep<11>2014 16:25 Aug 24, 2018 Jkt 244001 as proposed but with further modifications to provide that CCOs have a duty to take reasonable steps to resolve ‘‘material’’ conflicts of interest ‘‘relating to the registrant’s business as a futures commission merchant, swap dealer, or major swap participant.’’ The additional language refines the Commission’s view that CCOs cannot reasonably be expected to personally resolve every potential conflict of interest that may arise, and the Commission affirms that ‘‘routinely encountered conflicts could be resolved in the normal course of business . . .’’ consistent with the CCO’s general administration of internal policies and procedures, which must include conflicts of interest policies.35 Requiring the CCO to resolve every conflict of interest, including non-material conflicts, in consultation with the board of directors or the senior officer would potentially take too much of the CCO’s and senior management’s time away from other necessary activities when non-material conflicts can usually be resolved effectively by other staff in the normal course of business. The Commission believes that this is consistent with the underlying objective of this provision, which imposes a duty on CCOs to resolve matters under the Act and Commission regulations within the practical limits of their position at the Registrant. The Commission believes that the additional language does not dilute the CCO’s duty to address conflicts of interest, and that the rule as amended fulfills the purposes of CEA section 4s(k).36 Rather than spreading time and resources over many conflict issues—both material and nonmaterial—the changes will allow the CCO to focus his or her time and resources on the material conflict issues, and more broadly, the other important compliance duties required by regulation. The Commission is also of the view that amending § 3.3(d)(2) to limit the scope of the CCO’s responsibility to conflicts relating to the Registrant’s business as an FCM, SD, or MSP clarifies that CCOs have a duty to resolve matters under the Act and Commission regulations, rather than any conflict that ‘‘may arise.’’ The Commission declines to implement comments suggesting that CCOs have a duty to simply minimize, rather than ‘‘resolve’’ conflicts of 35 See Proposal, 82 FR at 21332. The addition of a materiality qualifier also further harmonizes § 3.3(d)(2) with the SEC’s parallel CCO rule. See 17 CFR 240.15Fk–1(b)(3). 36 See 77 FR at 21332 (‘‘If strictly interpreted, the current rule text creates an undue burden on CCOs, likely taking them away from more important compliance activities.’’) PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 43513 interest. CEA section 4s(k)(2)(C) explicitly requires conflict resolution.37 While resolution can include the mitigation of conflicts to the point where they are no longer material, resolution also encompasses the elimination of conflicts if reasonably practicable.38 In response to ISDA’s request that the Commission state that a CCO’s role in resolving conflicts would involve identifying, advising on, and escalating to management conflicts of interest, the Commission is declining to incorporate that language into the regulatory text. However, the Commission believes that such an approach provides a reasonable framework for CCOs to use in fulfilling their duty to take reasonable steps to resolve material conflicts of interest. As the Commission has previously acknowledged, active engagement ‘‘may involve actions other than making the final decision.’’ 39 Should CCOs choose to incorporate the ‘‘identify, advise and escalate’’ framework into their conflict resolution procedures, however, a passive implementation of that framework should not be viewed as fulfilling the CCO’s duties for conflict resolution. The requirement to ‘‘take reasonable steps’’ requires an active role in the conflict resolution process, including, for example: (1) Direct involvement of the CCO in developing and implementing active processes for conflict identification, evaluation, and resolution; (2) advising on the effectiveness of alternatives to mitigate or eliminate conflicts; and (3) escalating conflict issues if the conflicts are not otherwise resolved or mitigated as required by § 3.3(d)(2), including through the CCO’s direct reporting line to the board of directors or the senior officer if necessary or appropriate. The Commission believes that the determination of what is a ‘‘material’’ conflict for a particular Registrant should be assessed based on the facts and circumstances relevant to that Registrant and the conflict. Although the Commission notes that there are some conflicts that are typically treated as material,40 the Commission declines 37 See 38 See 7 U.S.C. 6s(k)(2)(C). CCO Rules Adopting Release, 77 FR at 20161. 39 Id. 40 For example, similar to the SEC’s approach, conflicts between the business interests of a Registrant and its regulatory requirements, and conflicts between or with associated persons of a Registrant are often material. See SEC Adopting Release, 81 FR 29960 at 30056–30057 (‘‘Such conflicts of interest could include conflicts between the commercial interests of an SBS Entity and its statutory and regulatory responsibilities, and E:\FR\FM\27AUR1.SGM Continued 27AUR1 43514 Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations at this time to define materiality in this context to avoid creating an unintentionally prescriptive model. The Commission expects each Registrant to develop its own appropriate standard or procedure for determining if a conflict is ‘‘material’’ for purposes of the rule. amozie on DSK3GDR082PROD with RULES 3. Regulation 3.3(d)(3)—Duty To Ensure Compliance The Proposal would make a wording change to § 3.3(d)(3) to simplify the text 41 and to add that a CCO’s duty in § 3.3(d)(3) to ensure compliance with the Act and the Commission’s regulations includes ‘‘ensuring the registrant establishes, maintains, and reviews WPPs reasonably designed to achieve compliance.’’ ISDA and FIA/SIFMA recommended that the Commission further harmonize paragraph (d)(3) with the SEC’s corresponding rule by removing the existing general duty for the CCO to take reasonable steps to ensure compliance and only require the CCO to ensure that the Registrant establishes, maintains, and reviews policies and procedures as the CCO’s duty.42 ISDA and FIA/SIFMA also asserted that the change would address uncertainty regarding the breadth of a CCO’s supervisory authority and concerns that ensuring compliance is an impracticable requirement for CCOs. TD Ameritrade commented that the Commission should align paragraph (d)(3) with FINRA Rule 3130 by clarifying that the CCO is required to ‘‘have processes in place’’ for the Registrant to establish, maintain, and review WPPs reasonably designed to achieve compliance. TD Ameritrade contended that the proposed language in paragraph (d)(3), which requires CCOs to ensure compliance, rather than simply have processes in place, is cumbersome and perhaps places a higher burden on CCOs than intended by the Commission. Better Markets commented that the proposed amendment to paragraph (d)(3) could be viewed as defining the full scope of the CCO’s duty to ensure compliance, rather than merely clarifying the extent of the duty. Better Markets noted that the duty to ensure compliance is broad and cannot be conflicts between, among, or with associated persons of the SBS Entity.’’). 41 The Proposal would change the words ‘‘. . . relating to the swap dealer’s or major swap participant’s activities, or to the future commission merchant’s business as a futures commission merchant’’ to ‘‘. . . relating to the registrant’s business as a futures commission merchant, swap dealer or major swap participant.’’ 42 See FIA/SIFMA and ISDA comment letters (emphasis added). See also 17 CFR 240.15Fk– 1(b)(2). VerDate Sep<11>2014 16:25 Aug 24, 2018 Jkt 244001 equated with a CCO’s obligation to administer policies and procedures. To eliminate uncertainty, Better Markets recommended further clarifying that the additional language is ‘‘without limitation.’’ 43 Having considered the totality of the responses received, the Commission believes that the proposed amendment to § 3.3(d)(3) adding that the duty includes ‘‘ensuring the registrant establishes, maintains, and reviews WPPs reasonably designed to achieve compliance’’ creates ambiguity, rather than clarity, with respect to the scope of a CCO’s duty to ensure compliance. Therefore, the Commission is declining to adopt that proposed amendment to § 3.3(d)(3).44 A CCO’s duty in § 3.3(d)(3) to ensure compliance with the Act and Commission regulations therefore remains the same as adopted in the CCO Rules Adopting Release. Current § 3.3(d)(3) implements CEA section 4s(k)(2)(E). CEA section 4s(k)(2)(E) requires that the CCO shall ensure compliance with the Act (including regulations) relating to swaps, including each rule prescribed by the Commission under that section. Thus, the Commission believes § 3.3(d)(3) requires more than, as suggested by some commenters, simply taking reasonable steps to ensure the Registrant establishes, maintains, and reviews written compliance policies and procedures.45 The Commission, however, acknowledges commenters’ concerns regarding the uncertainty as to the breadth of a CCO’s responsibility and the practicality of broad expectations for the CCO in this regard given the wide variety of swap dealing and other activities undertaken by different Registrants. When finalizing § 3.3(d)(3), the Commission recognized that requiring a CCO to ‘‘ensure compliance’’ could be an impracticable standard and limited the CCO’s duty to ‘‘taking reasonable steps to ensure compliance.’’ 46 At the time, however, the Commission did not provide guidance on what ‘‘taking reasonable steps to ensure compliance’’ means. Accordingly, the Commission is taking this opportunity, with the benefit of several years of experience implementing the CCO Rules, to provide further guidance as to the breadth of the 43 Better Markets comment letter. proposed non-substantive change that simplifies the wording of § 3.3(d)(3) is being adopted for the reasons stated in the Proposal. 45 See 7 U.S.C. 6s(k)(2)(E) (requiring the CCO to ensure compliance with the Act (including regulations) relating to swaps, including each rule prescribed by the Commission under that section). 46 See CCO Rules Adopting Release, 77 FR at 20162. 44 The PO 00000 Frm 00014 Fmt 4700 Sfmt 4700 CCO obligations under § 3.3(d)(3) and the practical expectations for fulfilling those obligations. As stated by the Commission previously, the CCO’s duty to take reasonable steps to ensure compliance includes active engagement in the dayto-day implementation of compliance policies and procedures.47 This engagement would likely include a reasonable level of involvement in compliance monitoring, identifying non-compliance or potential noncompliance events, advising on the mitigation and correction of compliance activities, and, where necessary, escalating significant matters that require senior management attention.48 Whether the CCO’s activities constitute ‘‘reasonable steps’’ depends on the facts and circumstances of the Registrant’s related business activities, such as the size of the business, the diversity and complexity of the swaps or FCM activities, and the overlap with other compliance activities in the firm (e.g., where swap dealing activities may be contained within business lines that are subject to additional regulation outside the CEA). In taking reasonable steps to ensure compliance, the Commission believes that a CCO cannot reasonably be expected to have sole and complete responsibility for ensuring compliance with the Act and the relevant regulations.49 As such, § 3.3(d)(3) does not require the CCO to guarantee compliance or be granted final supervisory authority.50 The regulation does not diminish the role and direct involvement of other senior officers, supervisors, and employees with more direct knowledge, expertise, and responsibilities for the regulated business activities to effect compliance. As such, the Commission is of the view that a CCO may reasonably rely on these personnel to implement many of the policies and procedures needed to ensure compliance as part of their regular business activities (in this regard, such personnel are sometimes referred to as the ‘‘first line’’ of compliance).51 The Commission also 47 See supra at note 33. example, escalation could be to the board or the senior officer to whom the CCO reports either through the CCO Annual Report, annual or more frequent meetings, or other mechanisms. 49 See 75 FR at 70883 (‘‘The chief compliance officer can only ensure the registrant’s compliance to the full capacity of an individual person . . .’’). 50 See CCO Rules Adopting Release, 77 FR at 20162 (‘‘[T]he Commission does not believe . . . that the CCO’s duties under the CEA or § 3.3 requires that the CCO be granted ultimate supervisory authority by a registrant.’’). 51 For example, in working with other personnel at the Registrant, it would be reasonable to expect 48 For E:\FR\FM\27AUR1.SGM 27AUR1 Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations notes that, pursuant to § 3.3(a)(1), the CCO has a direct reporting line to the board or the senior officer of the Registrant. To the extent the CCO determines that he or she cannot fulfill the duty established in § 3.3(d)(3) because of the actions or inaction of others, a lack of resources, or otherwise, the CCO has an avenue for escalating these issues to the highest level of management within the Registrant. In doing so, the CCO may be able to demonstrate that he or she has taken reasonable steps to fulfill the duty created in § 3.3(d)(3). 4. Regulation 3.3(d)(4) and (5)—Duty To Remediate Noncompliance Issues amozie on DSK3GDR082PROD with RULES The Commission proposed to amend § 3.3(d)(4) by adding language that the duty to remediate noncompliance issues identified by the CCO encompasses maintaining and reviewing, in addition to establishing, written policies and procedures. The Commission also proposed to amend § 3.3(d)(4) and (5) by removing the requirement that the CCO consult with the board of directors or senior officer in establishing: (1) Policies and procedures for the remediation of noncompliance issues identified by the CCO; and (2) procedures for the handling, management response, remediation, retesting, and closing of noncompliance issues. The Proposal would also clarify that the policies and procedures should be ‘‘reasonably designed’’ to remediate noncompliance issues. Lastly, the Commission proposed to amend paragraph (d)(4) to include the remediation of matters identified ‘‘through any means’’ by the CCO, including the specific discovery methods already listed in § 3.3(d)(4). FIA/SIFMA generally supported the Commission’s proposed amendments to paragraphs (d)(4) and (5), and requested that the Commission further add to paragraphs (d)(4) and (5) that the CCO’s duty is to take ‘‘reasonable steps to ensure that the registrant’’ establishes the required policies and procedures for the remediation of noncompliance issues, rather than to be directly responsible for establishing the policies and procedures. FIA/SIFMA noted that this change, consistent with the SEC’s CCO rules, reflects the fact that it is the responsibility of the Registrant, not the that a CCO would participate in (though not necessarily have sole or principal responsibility for implementing) the development and implementation of compliance training, monitoring and spot checking of first line compliance activities, the identification of possible compliance weaknesses, and the escalation to supervisors and senior management of the remediation or mitigation of weaknesses identified, as appropriate. VerDate Sep<11>2014 16:25 Aug 24, 2018 Jkt 244001 CCO in his or her personal capacity, to establish the specified policies and procedures. Better Markets disagreed with the Commission’s proposed changes. Better Markets contended that the removal of the board of directors and senior officer consultation requirement could marginalize the board of directors’ role and send the message that the board of directors needs to be only occasionally involved in the remediation of noncompliance issues. Better Markets further asserted that the proposed change that policies and procedures be ‘‘reasonably designed’’ makes it easier for Registrants to meet their legal obligations without actually realizing the underlying regulatory goal of remediating noncompliance issues. With respect to the specific noncompliance discovery methods listed in paragraph (d)(4), ISDA recommended that the Commission provide legal certainty to Registrants by clarifying that the term ‘‘complaint that can be validated’’ means ‘‘a written complaint that can be supported upon a reasonable investigation.’’ 52 ISDA noted that this clarification would further harmonize the Commission’s CCO Rules with the SEC’s, and would provide legal certainty with respect to which kinds of noncompliance issues need to be escalated to the CCO. In light of the comments received, the Commission is adopting proposed paragraphs (d)(4) and (5) with additional modifications to clarify the Commission’s position that the CCO’s duty with respect to establishing the Registrant’s noncompliance remediation policies and procedures is to take reasonable steps to ensure that the registrant fulfills that responsibility. Accordingly, § 3.3(d)(4) and (5), as adopted, require a CCO to take ‘‘reasonable steps to ensure the registrant’’ establishes, maintains and reviews the applicable policies and procedures. With respect to the other proposed amendments to paragraphs (d)(4) and (5), the Commission is adopting those amendments for the reasons discussed in the Proposal. In response to the concern raised by Better Markets that removing the consultation clause will diminish the board of directors and senior officer role, the Commission believes that there are two reasons to maintain the proposed changes to § 3.3(d)(4) and (5). As discussed in the Proposal, the CCO should manage and remediate noncompliance issues in consultation, as appropriate, with personnel that are experts in these matters, including, if 52 ISDA PO 00000 comment letter. Frm 00015 Fmt 4700 Sfmt 4700 43515 appropriate, senior management and the board of directors. Requiring further consultation with the board of directors or the senior officer on these procedures in the ordinary course would be an unnecessary burden on the Registrants. Furthermore, the Commission notes that, under § 3.3(a)(1), the CCO must report to the board of directors or the senior officer. Accordingly, to the extent the CCO is of the view that the policies and procedures being established do not meet the requirements of the Commission’s regulations and is unable to effect the necessary changes through other means, it would be appropriate for the CCO, as a reasonable step for ensuring that the appropriate policies and procedures are established, to elevate the issue to the board of directors or the senior officer to whom the CCO reports. Thus, an appropriate avenue for consultation with the board of directors or the senior officer is already part of the regulatory requirements in the CCO Rules. With respect to ISDA’s recommendation that the Commission clarify the ‘‘complaint that can be validated’’ standard, the Commission declines to clarify the standard in the manner requested. The Commission believes that noncompliance should be a focus for CCOs, and accordingly, all noncompliance complaints, whether written or verbal, should be investigated using reasonable means. The Commission further notes that the CCO may identify noncompliance issues ‘‘through any means’’ and ‘‘a complaint that can be validated’’ is one of many ways in which a CCO may identify such issues. C. Regulation 3.3(e)—CCO Annual Report Below is a subsection-by-subsection review of the comments received on the proposed changes to the CCO Annual Report requirements and a description of the changes being adopted.53 On December 22, 2014, CFTC staff issued Advisory No. 14–153 providing guidance to Registrants on the form and content requirements of the CCO Annual Reports (‘‘CCO Annual Report Advisory’’). In their comment letter, FIA/SIFMA requested that the Commission address the effect of the rule amendments on the guidance in the CCO Annual Report Advisory. The Commission believes that providing updated guidance in concert 53 In connection with the proposed amendments, the Proposal also would renumber the paragraphs within § 3.3(e) and make other non-substantive changes related to the renumbering. Those changes are being adopted for the reasons stated in the Proposal. E:\FR\FM\27AUR1.SGM 27AUR1 43516 Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations with adopting the amendments to § 3.3(e) will help to increase the final rule’s efficiency and clarity. Accordingly, the Commission is providing guidance regarding the CCO Annual Report in new Appendix C to Part 3, ‘‘Guidance on the Application of Rule 3.3(e), Chief Compliance Officer Annual Report Form and Content.’’ The CCO Annual Report Advisory is hereby superseded by this final release including the new Appendix C to Part 3. The Commission or its staff may issue updated guidance regarding the CCO Annual Report in the future based on experience gained as Registrants implement the amended content requirements. 1. Regulation 3.3(e)(1)—Description of the Registrant’s WPPs Section 3.3(e)(1) requires a CCO to describe the Registrant’s WPPs, including its code of ethics and conflicts of interest (‘‘COI’’) policies. Proposed § 3.3(e)(1) sought to clarify that only the WPPs that relate to a Registrant’s business as an FCM, SD, or MSP must be described in the CCO Annual Report by adding text referring to the policies and procedures described in § 3.3(d). The Commission did not receive any comments specific to proposed § 3.3(e)(1),54 and is adopting amended § 3.3(e)(1) as proposed.55 amozie on DSK3GDR082PROD with RULES 2. Regulation 3.3(e)(2)—Assessment of the Effectiveness of the Policies and Procedures Proposed § 3.3(e)(2) would eliminate the express mandate to identify and assess the effectiveness of each WPP for each regulatory requirement under the CEA and Commission regulations in the CCO Annual Report. The Commission received six comments regarding this proposed amendment. FIA/SIFMA, ISDA, NFA, and TD Ameritrade generally supported the change. Specifically, ISDA noted that the proposed revisions ‘‘would strike a proper balance between providing the Commission with meaningful analyses of firms’ compliance programs and conserving the time and resources of both the Commission and firms.’’ 56 Similarly, NFA stated, ‘‘NFA believes it will improve the quality of the report by allowing firms to focus on providing 54 Three commenters expressed general support of the proposed amendments to § 3.3(e). See TD Ameritrade, FIA/SIFMA, and ISDA comment letters. 55 The Commission notes that § 3.3(e)(1) retains the statutory requirement in CEA section 4s(k)(3)(A)(ii), 7 U.S.C. 6s(k)(3)(A)(ii), to describe the Registrant’s Conflict of Interest and Code of Ethics policies (if the Registrant had previously adopted a Code of Ethics). 56 See ISDA comment letter. VerDate Sep<11>2014 16:25 Aug 24, 2018 Jkt 244001 meaningful summaries of their WPPs, together with a detailed discussion of the annual assessment and recommended improvements.’’ 57 Better Markets opposed the proposed amendment and expressed its belief that the ‘‘detailed assessment of the policies and procedures, relative to each specific regulatory requirement, is a valuable exercise that brings rigor to the process.’’ 58 ACM explained that Registrants, using ACM’s product, often obtain sub-certifications from subject matter experts within the firm for each applicable requirement. ACM sought clarification regarding whether the proposed amendment is intended to eliminate the requirement-byrequirement review. The Commission has considered the comments and is adopting amended § 3.3(e)(2) as proposed. As adopted, the rule requires the CCO Annual Report to contain, among other things, a description of the CCO’s assessment of the effectiveness of the Registrant’s WPPs relating to its business as an FCM, SD, or MSP. In response to Better Markets and ACM, the Commission affirms that the rule, as amended, does not require the CCO Annual Report to contain an assessment of the WPPs’ effectiveness with respect to each applicable requirement under the Act and regulations. However, the CCO must still conduct an underlying assessment of the policies and procedures to meet the requirements of the rule. The Commission affirms that Registrants may still rely on the use of sub-certifications or any other methodology they have previously employed to conduct the assessment of their compliance programs pursuant to § 3.3(d) and (e). In further response to Better Markets’ concern that removing the requirementby-requirement assessment from the CCO Annual Report would weaken the self-assessment process, the Commission notes that the final rule does not remove a CCO’s duty to undertake the review. The Commission believes that a robust and meaningful self-assessment process is maintained through the affirmative CCO duties to ensure review of the WPPs and to describe the CCO’s assessment in the CCO Annual Report. Furthermore, as described in the Proposal, the Commission believes that reducing the burden associated with preparing the CCO Annual Report will permit CCOs and Registrants to both improve their compliance assessment processes and 57 See 58 See PO 00000 NFA comment letter. Better Markets comment letter. Frm 00016 Fmt 4700 Sfmt 4700 allocate more time and resources to more critical areas within the firm. 3. Regulation 3.3(e)(4)—Resources Set Aside for Compliance Proposed § 3.3(e)(4) would clarify that the discussion of resources only need address those resources set aside for compliance activities that relate to the Registrant’s business as an FCM, SD, or MSP. The Commission received comments from FIA/SIFMA, NFA, and ISDA generally supporting the proposed amendment. ISDA suggested that the Commission rescind related guidance in the CCO Annual Report Advisory regarding quantification of resources and allow Registrants to provide a narrative assessment of the sufficiency of compliance resources.59 Similarly, FIA/SIFMA requested that the Commission state that Rule 3.3(e)(4) does not require specific numerical estimates.60 The Commission is adopting amended § 3.3(e)(4) as proposed. Regarding the description of compliance resources, the Commission previously addressed the issues raised by ISDA, FIA, and SIFMA in the CCO Rules Adopting Release. At the outset, the Commission has recognized that a primary purpose of the CCO Annual Report is to provide ‘‘an efficient means to focus the registrant’s board and senior management on areas requiring additional compliance resources.’’ 61 A detailed discussion of the current state of compliance resources, including as appropriate, quantitative information, forms an integral part of a CCO Annual Report that, as the Commission stated, ‘‘will help FCMs, SDs, MSPs and the Commission to assess whether the registrant has mechanisms in place to address adequately compliance problems that could lead to a failure of the registrant.’’ 62 In requiring a description of the compliance resources in the CCO Annual Report, but not prescribing the description’s form or manner (which is left to the Registrant’s reasonable discretion) the Commission is balancing the need for context and critical information, and the potential burdens on the CCO in performing the underlying resources identification and analysis.63 The description of resources required by § 3.3(e)(4) is intended to inform the Registrant and the Commission as to the sufficiency of resources dedicated to 59 See ISDA comment letter. FIA/SIFMA comment letter. 61 See CCO Rules Adopting Release, 77 FR at 20190. 62 Id. at 20193. 63 Id. at 20164. 60 See E:\FR\FM\27AUR1.SGM 27AUR1 Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations compliance. Moreover, by requiring inclusion in the CCO Annual Report, the Commission recognizes that the usefulness of this information may lie in the trends and impacts of isolated events that can be observed over time regarding staffing levels, financial resources devoted to compliance, or the addition or subtraction of operational or technological resources. Some of the categories of resources CCOs are required to describe under § 3.3(e)(4) are, by their nature, quantitative (e.g., number of compliance personnel and budgetary information). However, the Commission also recognizes that, depending on a Registrant’s structure and the nature of its business, a quantitative description may include approximations and estimates. It is the Commission’s view that, in complying with § 3.3(e)(4), each Registrant should focus on whether its CCO Annual Report is effectively providing its senior leadership and the Commission with the ability to reasonably assess the state of the Registrant’s compliance resources, irrespective of how it expresses the quantitative information. D. Regulation 3.3(f)—Furnishing the CCO Annual Report and Related Matters In view of the comments received on proposed § 3.3(f) and related matters, the Commission is making a number of changes described below. As a general matter, to provide the reader greater clarity, the Commission is adding descriptive paragraph headings to § 3.3(f)(1) through (6) for the final rule. amozie on DSK3GDR082PROD with RULES 1. Regulation 3.3(f)(1)—Furnishing the CCO Annual Report Proposed § 3.3(f)(1) would harmonize the requirements under the SEC and CFTC CCO Rules to require that the CCO Annual Report be furnished to all members of the board of directors, senior officer, and audit committee (or equivalent body) prior to being furnished to the Commission. The Commission received three comments addressing the proposed amendment. Better Markets supported the proposed amendment as a means to strengthen the CCO framework. ISDA and FIA/SIFMA opposed the amendment and asserted that it is burdensome and unnecessary in light of the variability among Registrants. Specifically, ISDA and FIA/SIFMA commented that the proposed amendment would add burdens and costs given that the audit committees and boards of directors do not necessarily meet prior to the deadline to file the CCO Annual Report with the VerDate Sep<11>2014 16:25 Aug 24, 2018 Jkt 244001 Commission.64 FIA/SIFMA also contended that harmonization with the SEC is not appropriate for this rule because there is greater variety of corporate forms and organizational structures among FCMs, SDs, and MSPs than SEC-regulated entities and the change may raise questions for those Registrants that do not have a board of directors or audit committee. Additionally, FIA/SIFMA asserted the board of directors of an SD that is part of a large, diversified commercial bank may already have full meeting agendas that do not warrant the addition of another board obligation. Alternatively, ISDA and FIA/SIFMA commented that if the Commission decided to adopt the proposed amendment, it should make appropriate modifications to accommodate existing board and audit committee meeting schedules. FIA/ SIFMA also sought further clarification that the rule would not require a Registrant to establish a board of directors or audit committee, and that it could be satisfied through submission to certain other equivalent personnel. After considering commenters’ concerns, the Commission has determined to retain the current approach in § 3.3(f)(1) to require the CCO to provide the annual report to the board of directors or the senior officer prior to furnishing it to the Commission.65 The Commission, however, is also adopting a modified version of proposed § 3.3(f)(1) with respect to furnishing the CCO Annual Report to the audit committee (or equivalent body). In response to comments, § 3.3(f)(1)(ii), as adopted, requires that the CCO Annual Report must be furnished to the audit committee (or equivalent body), if the Registrant has such a committee. In addition, if the Registrant has an audit committee (or equivalent body), then the CCO Annual Report must be furnished to that committee not later than its next scheduled meeting after the date on which the CCO Annual Report is furnished to the Commission, but in no event more than 90 days after the Registrant’s CCO Annual Report is furnished to the Commission. The Commission is adding the 90 day time frame to ensure that the audit committee receives the report in a timely manner in furtherance of this provision, but without causing unnecessary disruption to its operation. 64 See ISDA and FIA/SIFMA comment letters. conforming change was made to § 3.3(f)(1)(iii) regarding making and maintaining a record of furnishing the report to the board of directors or the senior officer, and the audit committee. 43517 The Commission believes that a flexible approach to the timing of furnishing the CCO Annual Report to the audit committee (or equivalent body) addresses commenters’ concerns about meeting schedules and the CCO Annual Report submission deadline and better serves the underlying purpose of furnishing the report to the appropriate representatives of senior management at a time that allows for appropriate review by them. The Commission further believes that although the rule as adopted is not identical to the SEC’s approach, the two approaches both preserve the goal of ensuring that management with overall responsibility for governance and internal controls is informed of the Registrant’s state of compliance in a timely manner while recognizing the inherent differences between CFTC and SEC Registrants. The SEC’s CCO rules apply to security-based swap dealers and major security-based swap participants, which are likely to consist of a smaller number of large financial entities or affiliates thereof, most of which are likely required by regulation to have audit committees.66 By contrast, the CFTC’s CCO Rules apply to SDs that range from large financial enterprises to regional banks to commodity dealers to limited purpose affiliates, as well as FCMs. In light of this greater variety of firms subject to the CFTC CCO Rules, the Commission believes a more flexible approach is appropriate. Similarly, in response to FIA/SIFMA’s comment that some Registrants may not have a board of directors or audit committee, the Commission acknowledges that some types of entities that are Registrants are not required to have such bodies, particularly audit committees, and therefor may not have established such a body. The Commission affirms that the rule was not intended to require Registrants to establish either type of body. Accordingly, the final rule text provides that furnishment to the audit committee or equivalent body is required only if such a committee or body has been established. If not, compliance with § 3.3(f)(1) may be met by furnishing the CCO Annual Report to the senior officer or board members only, as applicable. 2. Regulation 3.3(f)(3)—Certification In response to the Commission’s request for comment on additional changes to further harmonize with the 65 A PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 66 See SEC Adopting Release, 81 FR at 30105 (estimating that approximately 55 entities might register as security-based swap dealers or major security-based swap participants). E:\FR\FM\27AUR1.SGM 27AUR1 amozie on DSK3GDR082PROD with RULES 43518 Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations SEC regulations that correspond to § 3.3(f), the Commission received four comments regarding the CCO Annual Report certification language in § 3.3(f)(3). Citing the Commission’s stated goal of harmonizing § 3.3 with SEC rule 15Fk–1(c)(2)(ii)(D) and concerns regarding potential excess CCO liability, NFA, FIA/SIFMA, and ISDA urged the Commission to include a materiality qualifier. FIA/SIFMA and ISDA recommended that the phrase ‘‘in all material respects’’ be added. TD Ameritrade requested that the Commission assess whether the ‘‘under the penalty of law’’ standard is the correct standard for CCOs. The Commission is adopting § 3.3(f) as proposed with one change. The Commission is adding qualifying language, ‘‘in all material respects’’ to the requirement to certify that the information contained in the CCO Annual Report is accurate and complete. Consistent with the SEC’s approach, this modification provides a reasonable standard and additional clarity regarding the obligations and potential liability of the certifying official. When the Commission adopted the CCO Rules in 2012, it was of the view that limiting the certification language with the qualification ‘‘to the best of his or her knowledge and reasonable belief’’ would address concerns of overbroad liability.67 The rule, the Commission reasoned, ‘‘would not impose liability for compliance matters that are beyond the certifying officer’s knowledge and reasonable belief at the time of the certification.’’ 68 This language, however, as noted by FIA/SIFMA, ISDA, and TD Ameritrade, may not completely address concerns regarding immaterial inaccuracies or omissions in the CCO Annual Report, notwithstanding the certifying official’s good faith efforts to exercise appropriate due diligence. As noted in the CCO Rules Adopting Release, the Commission appreciates that, for many Registrants, the breadth and complexity of the information contained in the CCO Annual Report inherently requires reliance on many individuals to gather the information for, and prepare, the report.69 The Commission understands that immaterial inaccuracies or omissions rarely undermine the compliance information contained in the CCO Annual Report. Accordingly, it is reasonable and appropriate to expect that the CCO or chief executive officer would, ‘‘to the best of his or her 67 CCO Rules Adopting Release, 77 FR at 20163. 68 Id. 69 Id. at 20162–3. VerDate Sep<11>2014 16:25 Aug 24, 2018 Jkt 244001 knowledge and reasonable belief’’ certify that ‘‘the information in in the annual report is accurate and complete in all material respects’’ (emphasis added).70 3. Regulation 3.3(f)(6)—Incorporation by Reference and Treatment of Affiliated Registrants FIA/SIFMA commented that, because affiliated SDs often share a common SD compliance program, much of the information in the CCO Annual Reports is the same. FIA/SIFMA therefore requested that the Commission permit flexibility in how reports from affiliated registrants address common matters. The Commission believes that, as a procedural matter within the scope of this rulemaking, it is appropriate to provide the requested flexibility. Permitting the consolidation of all relevant information concerning Registrants that control, are controlled by, or are under common control with, other Registrants (‘‘Affiliated Registrants’’) into one cohesive report could lead to greater efficiency for those Registrants and improved regulatory oversight. In addition, the request is consistent with provisions in § 3.3(f)(6) permitting individual Registrants and Registrants that are registered in more than one capacity, e.g., as an SD and FCM (‘‘Dual Registrants’’), to incorporate by reference sections of a CCO Annual Report furnished to the Commission within the current or immediately preceding reporting period. Accordingly, the Commission is amending § 3.3(f)(6) to permit Affiliated Registrants to incorporate within their CCO Annual Reports information shared across related Registrants. More broadly, the Commission believes that the annual compliance reporting requirement should not be subject to restrictive formatting requirements that do not serve the purpose of the reports. To the extent that the same information can be presented once for multiple reporting requirements (e.g., for a Dual Registrant or Affiliated Registrants) thereby creating efficiencies without undermining the purpose and utility of the CCO Annual Report, the Commission believes it is appropriate to permit the practice. In view of the foregoing, the Commission is reorganizing § 3.3(f)(6) into three subparagraphs to more clearly set forth the different scenarios in which 70 The Commission also notes that adding ‘‘in all material respects’’ to § 3.3(f)(3) is consistent with the related duty under § 3.3(f)(4) to promptly amend and recertify the CCO Annual Report if ‘‘material errors or omissions’’ in the report are identified (emphasis added). PO 00000 Frm 00018 Fmt 4700 Sfmt 4700 Affiliated Registrants or Dual Registrants can present the same information used in multiple reports or file one combined report addressing multiple reporting requirements. New subparagraph (i) incorporates without modification the current language in § 3.3(f)(6). Subparagraph (i) permits an individual Registrant to incorporate by reference sections in a CCO Annual Report that it furnished to the Commission within the current or immediately preceding reporting period. Like § 3.3(f)(6) as originally adopted, new subparagraph (ii) permits Dual Registrants to cross-reference sections in CCO Annual Reports submitted on behalf of either of its registrations within the current or immediately preceding reporting period. To address ambiguity regarding whether incorporation by reference can be achieved through the annual preparation and submission of a single CCO Annual Report by a Dual Registrant, the Commission is adding clarifying language to § 3.3(f)(6)(ii). Under new § 3.3(f)(6)(ii), a Dual Registrant may submit a single CCO Annual Report covering the annual reporting requirements relevant to each registration category, provided that: (1) The requirements of § 3.3(e) are clearly addressed and identifiable as they apply to the Dual Registrant in each of its registration capacities; (2) to the extent a section of the CCO Annual Report addresses shared compliance programs, resources, or other elements related to compliance, there is a clear description of the commonality and delineation of any differences; and (3) the Registrant complies with the requirements of § 3.3(f)(1) and (3) to certify and furnish the CCO Annual Report for each of its registrations. Regarding this last requirement, the Commission would expect the Dual Registrant to separately certify the CCO Annual Report with respect to each registration category, even if the same CCO or CEO serves as the certifying officer for each registration. Subparagraph 3.3(f)(6)(iii) permits Affiliated Registrants to use incorporation by reference within their individually required CCO Annual Reports to address matters shared across related registered legal entities. The Commission believes that providing greater flexibility to Affiliated Registrants may provide a more efficient process in achieving the goals of the CCO Annual Report by leveraging current structures and expertise. Regarding the extent of incorporation by reference, consistent with the Commission’s view that a flexible approach as to form is warranted, the E:\FR\FM\27AUR1.SGM 27AUR1 Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations Commission is not prescribing a strict requirement. For example, Affiliated Registrants could submit two separate reports, one of which incorporates by reference listed sections of the other. As another example, Affiliated Registrants could create a master report covering multiple affiliates in a manner similar to that described above for Dual Registrants in which information common to the affiliates is provided once in the report and identified as such and then other sections or appendices provide information specific to each affiliate separately. To the extent Affiliated Registrants choose to combine the contents of their individual CCO Annual Reports, the Commission would require the CCO or CEO for each Registrant to certify the applicable contents of the report consistent with § 3.3(f)(3). The Commission expects that CCOs of Affiliated Registrants who share common compliance program elements be actively engaged in evaluating, assessing, and advising senior management with regard to those elements within their respective duties to a particular Registrant. Accordingly, how a CCO determines to address such common compliance program elements should not undermine the content or representations made in the CCO Annual Report so long as the references are clear and the information is fully accessible to senior management and the Commission. amozie on DSK3GDR082PROD with RULES E. Other Comments 1. Volcker Rule The Commission received two comments regarding the compliance requirements of subpart D of part 75 of the Commission’s regulations and their relation to § 3.3. Specifically, FIA/ SIFMA requested that the Commission revisit the footnote in the part 75 adopting release that includes the compliance requirements under subpart D of part 75 among the regulations covered by § 3.3(d) and (e).71 Similarly, ISDA requested that the Commission remove the requirement for an applicable FCM or SD to address Volcker compliance program requirements in its CCO Annual Report. At this time, the Commission is declining to address the Volcker Rule compliance program requirements issue, as it was not considered in the Proposal. However, the Commission notes that the issue that commenters are raising 71 See Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds, 79 FR 5808, 6020 n. 2521 (Jan. 31, 2014). VerDate Sep<11>2014 16:25 Aug 24, 2018 Jkt 244001 requires serious consideration, and it may address the issue in future guidance or rulemakings. 2. Substituted Compliance The Commission received three comments regarding the applicability of the Proposal to its outstanding comparability determinations for nonU.S. SDs and MSPs. ISDA, the JBA, and Allen & Overy requested clarification from the Commission that the proposed amendments will not have any impact on the current substituted compliance determinations that pertain to § 3.3. The Commission confirms that any existing substituted compliance determinations with respect to § 3.3 are not affected by this rulemaking. IV. Related Matters A. Regulatory Flexibility Act The Regulatory Flexibility Act (‘‘RFA’’) 72 requires that agencies consider whether a proposed rule will have a significant economic impact on a substantial number of small entities and, if so, provide a regulatory flexibility analysis of the impact. As noted in the Proposal, the regulations adopted herein would affect FCMs, SDs, and MSPs that are required to be registered with the Commission. The Commission has previously determined that FCMs, SDs, and MSPs are not small entities for purposes of the RFA. The Commission received no comments on the Proposal’s RFA discussion. Accordingly, the Chairman, on behalf of the Commission, certifies, pursuant to 5 U.S.C. 605(b), that these regulations will not have a significant economic impact on a substantial number of small entities. B. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (‘‘PRA’’) 73 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’’). As discussed in the Proposal, the final rules contain a collection of information for which the Commission has previously received a control number from OMB. The title for this collection of information is OMB control number 3038–0080—Annual Report for Chief Compliance Officer of Registrants. As a general matter, the rules, as adopted: (1) Define the term ‘‘senior officer’’; (2) clarify the scope of the CCO duties and the content requirements of the CCO 72 5 U.S.C. 601 et seq. U.S.C. 3501 et seq. 73 44 PO 00000 Frm 00019 Fmt 4700 Sfmt 4700 43519 Annual Report; (3) add the Registrant’s audit committee as a party that must receive the CCO Annual Report; (4) add a materiality qualifier to the CCO Annual Report certification language; and (5) provide procedural instruction for Dual and Affiliated Registrants in the preparation and submission of CCO Annual Reports that address common information across the same or related legal entities. As discussed in the Proposal and herein, the Commission believes that these regulations, as adopted, will not impose any new information collection requirements that require approval of OMB under the PRA. As such, the final rules do not impose any new burden or any new information collection requirements in addition to those that already exist in connection with the preparation and delivery of the CCO Annual Report pursuant to the Commission’s regulations. C. Cost-Benefit Considerations 1. General Considerations Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing certain orders. Section 15(a) 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 Commission considers the costs and benefits resulting from its discretionary determinations with respect to the section 15(a) factors relative to the status quo baseline—that is existing § 3.3—and how various regulated entities comply with existing § 3.3 today. The Commission notes that the consideration of costs and benefits below is based on the understanding that the markets function internationally, with many transactions involving U.S. firms taking place across international boundaries; with some Commission registrants being organized outside of the United States; with leading industry members typically conducting operations both within and outside the United States; and with industry members commonly following substantially similar business practices wherever located. While the Commission does not specifically refer to matters of location, the below discussion of costs and benefits refers to E:\FR\FM\27AUR1.SGM 27AUR1 amozie on DSK3GDR082PROD with RULES 43520 Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations the effects of the final rule on all activity subject to the final regulation, whether by virtue of the activity’s physical location in the United States or by virtue of the activity’s connection with or effect on U.S. commerce under CEA section 2(i).74 In particular, the Commission notes that some registrants subject to § 3.3 are located outside of the United States. The Commission is adopting amendments to the CCO Rules that: (1) Define the term ‘‘senior officer’’; (2) clarify the scope of the CCO duties and the content requirements of the CCO Annual Report; (3) add the Registrant’s audit committee as a party that must receive the CCO Annual Report; (4) add a materiality qualifier to the CCO Annual Report certification language; and (5) clarify and permit additional procedural methods for Dual and Affiliated Registrants in the preparation and submission of CCO Annual Reports that address common information across the same or related legal entities. The Proposal requested public comment on the costs and benefits of the proposed regulations, and specifically invited comments on: (1) The extent to which the proposed amendments reduce burdens and costs for Registrants, if at all; (2) whether any of the proposed amendments create any additional burdens or costs for Registrants; (3) whether the nature of, and the extent to which, costs associated with the CCO duties described in § 3.3(d) could change as a result of the adoption of the Proposal, including monetary estimates; (4) what, if any, transition or ongoing costs or savings would result from the adoption of the proposed amendments; (5) whether the proposed amendments to the CCO Annual Report’s submission requirements in § 3.3(f)(1) would cause undue burden; and (6) the Commission’s preliminary consideration of the costs and benefits associated with the proposed amendments. Several commenters indirectly addressed the qualitative costs and benefits of the Proposal; however, none included quantitative data or other information in support of a measurable analysis. As such, the Commission is unable to quantify reliably the costs and benefits of this rulemaking. Instead, the Commission gives a qualitative discussion. As described in the sections above, in support of their comments, several commenters proposed alternative rule text and suggested the Commission provide additional clarification or 74 7 U.S.C. 2(i). VerDate Sep<11>2014 16:25 Aug 24, 2018 Jkt 244001 guidance. In response to certain comments, the Commission adopted alternatives—particularly with respect to the furnishing and certification requirements of the CCO Annual Report—that the Commission believes will further reduce costs and burdens to Registrants while still providing the Commission with the information it needs to monitor the state of compliance by Registrants. Informed by commenters, the discussion below considers the rule’s costs and benefits generally and in light of the five factors specified in section 15(a) of the CEA.75 2. Regulation 3.3(d)—Chief Compliance Officer Duties As discussed above, the Commission amended § 3.3(d) to clarify certain CCO duties. Specifically, the Commission added language to § 3.3(d)(1) to clarify that the CCO’s duty with respect to administering policies and procedures is specific to the Registrant’s business as an FCM, SD, or MSP, as applicable. As amended, § 3.3(d)(2) incorporates an implied reasonableness standard regarding the duty to resolve conflicts of interest and limits the duty to material conflicts that relate to the Registrant’s business as an FCM, SD, or MSP. The Commission amended § 3.3(d)(4) to include the remediation of matters identified ‘‘through any means’’ by the CCO, including the specific discovery methods listed in § 3.3(d)(4). Lastly, the Commission amended § 3.3(d)(4) and (5) to remove the requirement in each provision that the CCO consult with the board of directors or senior officer in connection with resolving noncompliance issues and to clarify that the CCO’s duty is to take ‘‘reasonable steps to ensure that the registrant’’ establishes policies and procedures for the remediation and resolution by management of noncompliance issues. The Commission did not receive any specific comments regarding whether any costs associated with CCO duties would change as a result of the amendments to § 3.3(d). Better Markets opposed several of the proposed amendments to § 3.3(d) that it viewed as 75 The final rules add a definition of ‘‘senior officer’’ to § 3.1. As stated in the Proposal, the Commission believes this addition in and of itself had no impact for purposes of determining the costs and benefits of the proposal. Nevertheless, the Commission sought public comment on whether the definition of ‘‘senior officer’’ has any cost and benefit considerations. The Commission received no comments on any cost and benefit considerations of the proposed definition, and, therefore, the analysis of the costs and benefits of the final rules is restricted to the amendments to § 3.3. PO 00000 Frm 00020 Fmt 4700 Sfmt 4700 ‘‘likely to weaken the CCO regime.’’ 76 The Commission considered Better Markets views and does not believe that the final rules will reduce CCO accountability or marginalize the CCO role. Because the amendments to § 3.3(d) provide greater specificity regarding the role of the CCO and the scope of the CCO’s duties while further harmonizing with parallel SEC rules, the Commission believes that the final rule does not impose any additional costs to Registrants, market participants, the markets, or the general public. The Commission expects the greater clarity provided in the amended rule will reduce burdens on CCOs and improve overall compliance by applying a reasonableness standard to CCO responsibilities rather than deterring effective CCO activities due to concerns of uncertain liability. This greater clarity should also encourage a greater willingness of potential CCOs to vie for and take positions with Registrants. As noted by one commenter, clarifying the CCO’s role within a Registrant’s overall organization fosters accountability for senior business management and supervisors, and reduces obstacles in attracting and retaining highly qualified professionals to serve as CCOs.77 Additionally, by further harmonizing the CFTC’s and SEC’s CCO duties, CCOs of dual SEC–CFTC registrants should be able to fulfill their duties more efficiently and cost effectively. 3. Regulation 3.3(e)—Annual Report In adopting amendments to § 3.3(e), the Commission eliminated the requirement to address ‘‘each’’ applicable CFTC regulatory requirement to which a Registrant is subject in the assessment of the WPPs, since the CCO must still conduct an underlying assessment of the effectiveness of the policies and procedures to meet the requirements of the rule. The Commission further removed the requirement to identify each WPP with respect to each applicable requirement, given that the WPPs are already required to be described in § 3.3(e)(1). Lastly, the Commission clarified that the scope of the resources devoted to compliance that need to be described under § 3.3(e)(4) should be limited to a discussion of resources for the specific activities for which the Registrant is registered. The comments received for these proposed amendments were generally supportive. For example, one commenter stated that ‘‘this Proposal will increase efficiencies by 76 Better 77 See E:\FR\FM\27AUR1.SGM Markets comment letter. FIA/SIFMA comment letter. 27AUR1 Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations amozie on DSK3GDR082PROD with RULES streamlining the obligations for market participants that are regulated by both the CFTC and SEC and eliminate unnecessary duplicative policies related to the CCO Annual Report.’’ 78 One commenter stated that the removal of the requirement-by-requirement assessment from the rule will ‘‘allow for more effective conversations to occur between its business partners and the Compliance Department, creating for a more holistic assessment of the Firm’s compliance.’’ 79 Similarly, another commenter highlighted the benefit to overall compliance of focusing the CCO and compliance personnel on WPPs holistically.80 Only one commenter expressed a concern that the proposed changes equated to a weakening of the process.81 As discussed in the Proposal, in implementing § 3.3(e), the Commission received consistent feedback from Registrants that the exercise of documenting their assessment on a requirement-by-requirement basis was creating a significant economic burden in time and resources. Eliminating the requirement-by-requirement assessment is intended to reduce the burdens on Registrants of producing the CCO Annual Report while maintaining its primary purpose. It is the Commission’s view, supported by commenters, that by reducing the burden associated with this aspect of the CCO Annual Report, CCO and other compliance resources may be better focused on other compliance functions. As discussed in section II.C.2, the final rule does not remove or lessen the CCO’s duties to, among other things, ensure the Registrant is reviewing and assessing the continued soundness of its WPPs. In addition, the amendments harmonize certain CFTC and SEC CCO Annual Report content requirements in an effort to reduce the costs to dual registrants of complying with two regulatory regimes. The Commission believes that the final rule also provides relief for Registrants from resource and time pressures in preparing their CCO Annual Reports. 4. Regulation 3.3(f)—Furnishing the Annual Report and Related Matters The Commission amended § 3.3(f)(1) to require the CCO to provide the CCO Annual Report to the audit committee or a functionally equivalent body not later than the committee’s next scheduled meeting, but in no event more than 90 days following the furnishing of the 78 See NGSA comment letter. TD Ameritrade comment letter. See also NFA comment letter. 80 See FIA/SIFMA comment letter. 81 See Better Markets comment letter. 79 See VerDate Sep<11>2014 16:25 Aug 24, 2018 Jkt 244001 report to the Commission. The Commission also amended the CCO Annual Report’s certification requirement by adding a materiality qualifier to the certification language in § 3.3(f)(3). Lastly, the Commission amended § 3.3(f)(6) to provide procedures for Dual and Affiliated Registrants in the preparation and submission of CCO Annual Reports that address common information across the same or related legal entities. As discussed above, the Commission received comments from ISDA and FIA/ SIFMA asserting that the proposal requiring the senior officer, board of directors, and audit committee to receive the CCO Annual Report would increase operational and regulatory burdens. FIA/SIFMA noted that requiring the boards of directors of SDs that are large, diversified commercial banks to receive the CCO Annual Report would exacerbate current problems associated with the volume of review they must already undertake, further reducing the amount of time they should be allocating to overseeing enterprise risk and strategy. Both commenters believed that the Proposal would add costs, complexities, and possibly, conflicts for Registrants because the deadline to submit the CCO Annual Report to the Commission may not align with board of directors and audit committee meetings, impeding their ability to ensure proper review. Advocates of adding a materiality qualifier to the CCO Annual Report certification language identified several benefits, including reducing burdens by further harmonizing the Commission’s rule with the SEC’s parallel rule, providing a measure of clarity to CCOs and potential CCOs regarding their own personal liability, and reducing deterrence of highly qualified people from taking or staying in the CCO role.82 In support of its request for greater flexibility in the preparation of CCO Annual Reports by Affiliated Registrants, FIA/SIFMA noted the benefits of streamlining the overall process. In response to concerns regarding the proposed CCO Annual Report submission requirements, the Commission has modified § 3.3(f)(1) to accommodate the practicality of audit committee and board meeting schedules. Because the final rule maintains the requirement that either the senior officer or the board of directors receive the CCO Annual Report prior to its submission to the Commission, Registrants should not 82 See FIA/SIFMA, ISDA, and NFA comment letters. PO 00000 Frm 00021 Fmt 4700 Sfmt 4700 43521 have to change existing internal document submission processes for board meetings to comply. As adopted, the final rule adds the audit committee (or equivalent body) as a recipient of the report, but allows for the report to be furnished to the audit committee not later than the next scheduled meeting, but in no event more than 90 days after submission of the report to the Commission is required. Since the rule does not set a timeline for the review of the CCO Annual Report by any of its internal recipients—leaving such matters to the discretion of each Registrant, the Commission believes that any additional costs arising out of the requirement to submit the report to the audit committee should be minimal. The Commission does not believe the final amendments to § 3.3(f)(1), (3) and (6) impose any new costs or burdens since they do not require Registrants to affirmatively undertake new duties or requirements. As described above and in the Proposal, the Commission believes that the amendments to § 3.3(f) will ensure that the CCO’s findings and recommendations will be distributed to the groups within each Registrant with responsibility for governance and internal controls. Further, the Commission believes the amendments provide greater flexibility and opportunity for Dual and Affiliated Registrants to streamline their CCO Annual Report preparation processes, which may result in a less costly CCO Annual Report. D. Section 15(a) Factors As noted above, section 15(a) of the CEA 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. 1. Protection of Market Participants and the Public The final rules will continue to protect market participants and the public because they do not fundamentally alter the CCO duties or the annual compliance reporting requirements of § 3.3. While the amendment removing the requirementby-requirement reporting may reduce the extent of reporting detail, the Commission believes that change will allow the CCO to focus more directly on identifying and describing in the CCO Annual Report material compliance E:\FR\FM\27AUR1.SGM 27AUR1 43522 Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations issues and other related matters deserving of greater attention. Accordingly, the Commission believes that the reduction in content requirements will not affect the protection of market participants and the public. 2. Efficiency, Competitiveness, and Financial Integrity of Markets The Commission believes that the amended CCO Rules will not negatively impact market efficiency, competitiveness, or integrity because each CCO Annual Report addresses internal compliance programs of each Registrant and are not publicly available. The amendments affecting CCO duties only clarify those duties and do not affect the performance of derivatives markets. amozie on DSK3GDR082PROD with RULES 3. Price Discovery The Commission did not identify a specific effect on price discovery as a result of the Proposal because the Proposal did not address any pricing issues. The Commission did not receive any comments on this issue. Thus, the Commission continues to believe that this rulemaking will not have an impact on price discovery. 4. Sound Risk Management Practices The Commission believes that the final amendments to the CCO duties and CCO Annual Report requirements will not have a meaningful effect on Registrants’ risk management practices. The final rules do not directly impact a Registrant’s risk management practices because they clarify the scope of the CCO’s duties and CCO Annual Report contents, and do not require changes to a Registrant’s risk management program.83 Furthermore, the final amendments to the CCO Annual Report content requirements do not affect the Registrant’s obligation to address material noncompliance issues relating to its risk management program in the CCO Annual Report. The Commission believes that including the audit committee and either the board of directors or the senior officer as recipients of the CCO Annual Report may benefit Registrants’ overall risk management practices by ensuring that those with overall responsibility for governance and internal controls are informed of the report contents. Finally, the Commission does not believe that the addition of the materiality qualifier to the CCO Annual Report certification language, or the additional procedural mechanisms for addressing common matter across Dual and Affiliated 83 See, e.g., 17 CFR 23.600. VerDate Sep<11>2014 16:25 Aug 24, 2018 Registrants impacts Registrants’ risk management practices, as they do not impact the CCO Annual Report’s content and underlying assessment. 5. Other Public Interest Considerations The Commission has not identified any other public interest considerations for this rulemaking. E. Antitrust Considerations Section 15(b) of the Act requires the Commission to take into consideration the public interest to be protected by the antitrust laws and endeavor to take the least anticompetitive means of achieving the purposes of the Act, in issuing any order or adopting any Commission rule or regulation (including any exemption under section 4(c) or 4c(b)), or in requiring or approving any bylaw, rule, or regulation of a contract market or registered futures association established pursuant to section 17 of the Act.84 The Commission believes that the public interest to be protected by the antitrust laws is generally to protect competition. The Commission has reflected on the final rule to determine whether it is anticompetitive and has identified no anticompetitive effects. Because the Commission has determined that the final rulemaking has no anticompetitive effects, the Commission has not identified any less anticompetitive means of achieving the purposes of the Act. List of Subjects in 17 CFR Part 3 Administrative practice and procedure, Chief compliance officer, Commodity futures, Futures commission merchants, Major swap participants, Registration, Swap dealers, Reporting and recordkeeping requirements. For the reasons stated in the preamble, the Commodity Futures Trading Commission amends 17 CFR chapter I as follows: PART 3—REGISTRATION 1. The authority citation for part 3 continues to read as follows: ■ Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b–1, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21, and 23. 2. In § 3.1, add paragraph (j) to read as follows: ■ § 3.1 Definitions. * * 84 7 Jkt 244001 PO 00000 * * * U.S.C. 19(b). Frm 00022 Fmt 4700 Sfmt 4700 (j) Senior officer. Senior officer means the chief executive officer or other equivalent officer of a registrant. ■ 3. In § 3.3, revise paragraphs (d), (e), and (f) to read as follows: § 3.3 Chief compliance officer. * * * * * (d) Chief compliance officer duties. The chief compliance officer’s duties shall include, but are not limited to: (1) Administering each of the registrant’s policies and procedures relating to its business as a futures commission merchant, swap dealer, or major swap participant that are required to be established pursuant to the Act and Commission regulations; (2) In consultation with the board of directors or the senior officer, taking reasonable steps to resolve material conflicts of interest relating to the registrant’s business as a futures commission merchant, swap dealer, or major swap participant that may arise; (3) Taking reasonable steps to ensure compliance with the Act and Commission regulations relating to the registrant’s business as a futures commission merchant, swap dealer or major swap participant; (4) Taking reasonable steps to ensure the registrant establishes, maintains, and reviews written policies and procedures reasonably designed to remediate noncompliance issues identified by the chief compliance officer through any means, including any compliance office review, lookback, internal or external audit finding, self-reporting to the Commission and other appropriate authorities, or complaint that can be validated; (5) Taking reasonable steps to ensure the registrant establishes written procedures reasonably designed for the handling, management response, remediation, retesting, and resolution of noncompliance issues; and (6) Preparing and signing the annual report required under paragraphs (e) and (f) of this section. (e) Annual report. The chief compliance officer annually shall prepare a written report that covers the most recently completed fiscal year of the futures commission merchant, swap dealer, or major swap participant. The annual report shall, at a minimum, contain a description of: (1) The written policies and procedures of the futures commission merchant, swap dealer, or major swap participant described in paragraph (d) of this section, including the code of ethics and conflicts of interest policies; (2) The futures commission merchant’s, swap dealer’s, or major swap participant’s assessment of the E:\FR\FM\27AUR1.SGM 27AUR1 amozie on DSK3GDR082PROD with RULES Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations effectiveness of its policies and procedures relating to its business as a futures commission merchant, swap dealer or major swap participant; (3) Areas for improvement, and recommended potential or prospective changes or improvements to its compliance program and resources devoted to compliance; (4) The financial, managerial, operational, and staffing resources set aside for compliance with respect to the Act and Commission regulations relating to its business as a futures commission merchant, swap dealer or major swap participant, including any material deficiencies in such resources; (5) Any material noncompliance issues identified and the corresponding action taken; and (6) Any material changes to compliance policies and procedures during the coverage period for the report. (f) Furnishing the annual report and related matters—(1) Furnishing the annual report. (i) Prior to furnishing the annual report to the Commission, the chief compliance officer shall provide the annual report to the board of directors or senior officer of the futures commission merchant, swap dealer, or major swap participant for its review. (ii) If the futures commission merchant, swap dealer, or major swap participant has established an audit committee (or an equivalent body), then the chief compliance officer shall furnish the annual report to the audit committee (or equivalent body) not later than its next scheduled meeting after the annual report is furnished to the Commission, but in no event more than 90 days after the applicable date specified in paragraph (f)(2) of this section for furnishing the annual report to the Commission. (iii) A written record of transmittal of the annual report to the board of directors or the senior officer, and audit committee, if applicable, shall be made and maintained in accordance with § 1.31 of this chapter. (2) Furnishing the annual report to the Commission. (i) Except as provided in paragraph (f)(2)(ii) of this section, the annual report shall be furnished electronically to the Commission not more than 90 days after the end of the fiscal year of the futures commission merchant, swap dealer, or major swap participant. (ii) The annual report of a swap dealer or major swap participant that is eligible to comply with a substituted compliance regime for paragraph (e) of this section pursuant to a comparability determination of the Commission may be furnished to the Commission VerDate Sep<11>2014 16:25 Aug 24, 2018 Jkt 244001 electronically up to 15 days after the date on which the comparable annual report must be completed under the requirements of the applicable substituted compliance regime. If the substituted compliance regime does not specify a date by which the comparable annual report must be completed, then the annual report shall be furnished to the Commission by the date specified in paragraph (f)(2)(i) of this section. (3) Certification. The report shall include a certification by the chief compliance officer or chief executive officer of the registrant that, to the best of his or her knowledge and reasonable belief, and under penalty of law, the information contained in the annual report is accurate and complete in all material respects. (4) Amending the annual report. The futures commission merchant, swap dealer, or major swap participant shall promptly furnish an amended annual report if material errors or omissions in the report are identified. An amendment must contain the certification required under paragraph (f)(3) of this section. (5) Extensions. A futures commission merchant, swap dealer, or major swap participant may request from the Commission an extension of time to furnish its annual report, provided the registrant’s failure to timely furnish the report could not be eliminated by the registrant without unreasonable effort or expense. Extensions of the deadline will be granted at the discretion of the Commission. (6) Incorporation by reference and related registrants—(i) Prior reports. A futures commission merchant, swap dealer, or major swap participant may incorporate by reference sections of an annual report that has been furnished within the current or immediately preceding reporting period to the Commission. (ii) Dual registrants. If a futures commission merchant, swap dealer, or major swap participant is registered in more than one capacity with the Commission, an annual report submitted as one registrant may incorporate by reference sections in the annual report furnished within the current or immediately preceding reporting period as the other registrant. A dual registrant may submit one annual report that addresses the requirements set forth in paragraphs (e), (f)(1) and (f)(3) of this section with respect to each registration capacity. (iii) Affiliated registrants. If a futures commission merchant, swap dealer, or major swap participant controls, is controlled by, or is under common control with, one or more other futures commission merchants, swap dealers, or PO 00000 Frm 00023 Fmt 4700 Sfmt 4700 43523 major swap participants, and each of the affiliated registrants must submit an annual report, an affiliated registrant may incorporate by reference in its annual report sections from an annual report prepared by any of its affiliated registrants furnished within the current or immediately preceding reporting period. Affiliated registrants may submit one annual report that addresses the requirements set forth in paragraphs (e), (f)(1) and (f)(3) of this section with respect to each affiliated registrant. * * * * * ■ 4. Add appendix C to part 3 to read as follows: Appendix C to Part 3—Guidance on the Application of § 3.3(e), Chief Compliance Officer Annual Report Form and Content A. Description of the Registrant’s WPPs (§ 3.3(e)(1)) In acknowledgment of the large number of WPPs that a Registrant implements to comply with CFTC regulations, the Commission understands that for purposes of the CCO Annual Report, specific WPP descriptions may be appropriately brief while still identifying the basic purpose of the policy or procedure and how the policy or procedure operates to achieve that purpose. The CCO Annual Report should include a summary overview that describes the general forms and types of WPPs the Registrant has, such as a compliance manual specific to the Registrant, global corporate manuals or policies, and/or business-unit-specific WPPs that support the applicable regulatory requirements. This summary overview would provide a narrative of the Registrant’s system or program of WPPs, how they work as a whole, and how the Registrant generally puts the WPPs into practice as part of its compliance activities. With respect to the COI policy, it is the Commission’s view that the CCO should describe the COI policy specific to the Registrant, addressing the specific requirements of § 1.71 or § 23.605 of this chapter, as applicable. B. Assessment of the Effectiveness of the Policies and Procedures (§ 3.3(e)(2)) The Commission expects a CCO Annual Report to contain a comprehensive discussion of: the assessment process; and the results of the effectiveness assessment. The regulation does not dictate the form or manner for the effectiveness assessment. Rather, the Commission would expect each Registrant to follow a process and present the resulting assessment in a form and manner that is appropriate for the size and complexity of the Registrant’s applicable business activities and structure. While § 3.3(e)(2) no longer has a ‘‘requirement-byrequirement’’ standard, the CCO Annual Report should address all of the general areas of regulation applicable to the Registrant. C. Areas for Improvement and Recommended Changes (§ 3.3(e)(3)) 1. Section 3.3(e)(3) requires two components in the CCO Annual Report: an E:\FR\FM\27AUR1.SGM 27AUR1 43524 Federal Register / Vol. 83, No. 166 / Monday, August 27, 2018 / Rules and Regulations amozie on DSK3GDR082PROD with RULES identification and discussion of each area that needs improvement; and a discussion of what changes are recommended to address each area needing improvement. In addressing these two elements, the CCO Annual Report should include, as applicable: A discussion of why the particular area needs improvement; a discussion of the proposed improvements and the time frame for their implementation; and a cross-reference to the regulation that a recommended change would address. 2. In general, identifying areas in need of improvement and recommending steps to effect those improvements should be a core function of compliance. Accordingly, a CCO Annual Report that makes no recommendations for changes or improvements to the compliance program may raise concerns about the adequacy of the compliance program review intended by the CCO Annual Report process. Moreover, there should be continuity from one reporting cycle to the next, such that where a previous CCO Annual Report discussed future changes or improvements that were being considered or planned, subsequent CCO Annual Reports should discuss the outcomes of the changes that were implemented during the most recent scope period, any monitoring or testing of those changes, whether any compliance issues arose from the changes and, if there were any issues, how those issues were handled. While this section may address improvements to the compliance program that have already been completed, the Commission believes that this section primarily should discuss recommended improvements in process and/or future plans to improve the Registrant’s compliance program or resources devoted to compliance. D. Resources Set Aside for Compliance (§ 3.3(e)(4)) 1. The resources description required by § 3.3(e)(4) should be appropriate for assisting the Registrant’s senior management and the CFTC in assessing whether sufficient resources are dedicated to compliance. Accordingly, the description should include the following types of information: the budget allocated to the compliance department of the Registrant for compliance with the CEA and Commission regulations; full-time compliance staffing levels for such compliance activities; partially allocated staff counts (if applicable), with information on how much of such employees’ time is devoted to the Registrant’s compliance matters that are subject to CFTC oversight; an explanation of managerial resources (the explanation should clearly identify the division between staffing resources and management resources devoted to compliance); general infrastructure information (e.g., computers, complianceoriented software, technology infrastructure, etc.); and if applicable, a description of the use of third party vendors or outsourcing for compliance activities. In most cases, to effectively inform the board of directors or senior officer and the Commission, the description should include quantifiable information for the financial, managerial, operational, and staffing resources allocated to compliance with the CEA and Commission regulations. VerDate Sep<11>2014 16:25 Aug 24, 2018 Jkt 244001 2. The Commission understands that a discussion of specific compliance budget allocations may not be as straightforward as described above depending on the size and complexity of the Registrant’s compliance program and the extent to which the Registrant’s compliance resources may be shared for other non-CFTC regulated business activities. The purpose of the CCO Annual Report requirement is to convey to senior management and the CFTC a clear understanding of the resources the Registrant has set aside for compliance with the CEA and Commission regulations. While some of the compliance resources used in a Registrant’s CFTC compliance-related program may be used for compliance activities in other parts of a larger corporate enterprise, this sharing of resources does not negate the Registrant’s obligation to discuss how the Registrant’s compliance program is being resourced. For those instances where compliance resources are shared, it is recognized that the description of the shared resources may reasonably be more general in nature, providing approximations and estimates based on expected needs. However, the Commission expects that the CCO Annual Report will still address shared resources in as much detail as is necessary to convey the information needed to assess the overall compliance activities of the Registrant. 3. Section 3.3(e)(4) also requires that the CCO Annual Report include a discussion of any material deficiencies in compliance resources. If there have been reductions in the compliance program of the Registrant since the prior reporting period, for example, if there has been a reduction in compliance staff, a significant compliance budget decrease, or the Registrant initiated significant new business activities without a corresponding increase in compliance resources, the CCO Annual Report should include an explanation of why the compliance resources are not deficient in light of the changes. If there are no material deficiencies in the resources devoted to compliance, the Commission recommends that the CCO Annual Report contain an express statement to that effect so that the recipients of the report can see that the requirement was assessed. E. Material Noncompliance Issues (§ 3.3(e)(5)) The CCO Annual Report should include an explanation of the standard the Registrant used to determine a non-compliance event’s materiality. In addition, this section of the CCO Annual Report should contain a description of each material non-compliance issue identified either through selfassessment procedures conducted within the Registrant, or noted by any external entities which conducted a review of the Registrant (such as a designated self-regulatory organization). The description should also include the corresponding actions taken, described in reasonable detail, as well as specific references to the Commission regulation or regulations that are implicated by the non-compliance event. Specifically, the Commission recommends that the CCO Annual Report include a discussion of the PO 00000 Frm 00024 Fmt 4700 Sfmt 9990 Registrant’s deliberations on a course of remediation, how the implementation of the remediation is being or was executed, any follow-up testing of the remediation, and any noteworthy results from such testing. Additionally, the Commission recommends that CCOs consider including an overview of how the CCO or compliance department handles and tracks non-compliance events in general. F. Material Changes to WPPs (§ 3.3(e)(6)) When describing any material changes to the WPPs, a description of the standard of materiality used should be provided. This description will provide meaningful context for any reported changes to the WPPs. Issued in Washington, DC, on August 21, 2018, by the Commission. Christopher Kirkpatrick, Secretary of the Commission. Note: The following appendices will not appear in the Code of Federal Regulations. Appendices to Chief Compliance Officer Duties and Annual Report Requirements for Futures Commission Merchants, Swap Dealers, and Major Swap Participants; Amendments— Commission Voting Summary and Chairman’s Statement Appendix 1—Commission Voting Summary On this matter, Chairman Giancarlo and Commissioners Quintenz and Behnam voted in the affirmative. No Commissioner voted in the negative. Appendix 2—Statement of Chairman J. Christopher Giancarlo As part of the CFTC’s Project KISS efforts, this final rule will streamline and clarify a Chief Compliance Officer’s (CCO) obligations, as well as harmonize certain provisions with the Securities and Exchange Commission’s (SEC) rules. Clarifying the role and responsibilities of the CCO should enable greater accountability and improve overall compliance, as well as reduce burdens on CCOs and uncertainty for registrants. The rule continues to impose a duty on CCOs to resolve matters but within the practical limits of their position at the CFTC-registered entity. The rule also continues to impose a duty for the CCO to undertake an annual review but reduces the burdens associated with the review, which will allow the CCO to devote more time and resources to compliance activities at the registrant. In addition, further harmonizing definitions and CCO duties of dual CFTC– SEC registrants should improve efficiency and further reduce the burdens on CCOs. I would like to thank CFTC staff for their efforts. I would also like to thank Commissioners Quintenz and Behnam for their support. [FR Doc. 2018–18432 Filed 8–24–18; 8:45 am] BILLING CODE 6351–01–P E:\FR\FM\27AUR1.SGM 27AUR1

Agencies

Commodity Futures Trading Commission

[Federal Register Volume 83, Number 166 (Monday, August 27, 2018)]
[Rules and Regulations]
[Pages 43510-43524]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18432]



[[Page 43510]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 3

RIN 3038-AE56


Chief Compliance Officer Duties and Annual Report Requirements 
for Futures Commission Merchants, Swap Dealers, and Major Swap 
Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is amending its regulations regarding certain duties of chief 
compliance officers (``CCOs'') of swap dealers (``SDs''), major swap 
participants (``MSPs''), and futures commission merchants (``FCMs'') 
(collectively, ``Registrants''); and certain requirements for 
preparing, certifying, and furnishing to the Commission an annual 
report containing an assessment of the Registrant's compliance 
activities.

DATES: This rule is effective September 26, 2018.

FOR FURTHER INFORMATION CONTACT: Matthew Kulkin, Director, 202-418-
5213, [email protected]; Erik Remmler, Deputy Director, 202-418-7630, 
[email protected]; Pamela M. Geraghty, Special Counsel, 202-418-5634, 
[email protected]; or Fern B. Simmons, Special Counsel, 202-418-5901, 
[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. Statutory and Regulatory Background

    As amended by the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act''),\1\ sections 4d(d) and 4s(k) of the 
Commodity Exchange Act (``CEA'' or ``Act'') require each Registrant to 
designate an individual to serve as its CCO.\2\ Sections 4s(k)(2) and 
(3) set forth certain requirements and duties for CCOs of SDs and MSPs, 
including the requirement to prepare and sign an annual compliance 
report (``CCO Annual Report'').\3\ CEA section 4d(d) requires CCOs of 
FCMs to ``perform such duties and responsibilities'' as are established 
by Commission regulation or the rules of a registered futures 
association.\4\ On November 19, 2010, the Commission proposed 
regulations implementing the CCO requirements,\5\ and in April 2012, 
the Commission adopted the final CCO regulations (``CCO Rules Adopting 
Release'').\6\ For purposes of this release, Sec.  3.3 \7\ and the 
related definitions in Sec.  3.1 of the Commission's regulations are 
herein referred to as the ``CCO Rules.''
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    \1\ See Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 
(2010).
    \2\ 7 U.S.C. 6d(d) and 6s(k)(1).
    \3\ 7 U.S.C. 6s(k)(2) and (3).
    \4\ 7 U.S.C. 6d(d).
    \5\ See Designation of a Chief Compliance Officer; Required 
Compliance Policies; and Annual Report of a Futures Commission 
Merchant, Swap Dealer, or Major Swap Participant, 75 FR 70881 
(proposed Nov. 19, 2010).
    \6\ 17 CFR 3.3(d)-(f). See Swap Dealer and Major Swap 
Participant Recordkeeping, Reporting, and Duties Rules, 77 FR 20128 
(Apr. 3, 2012).
    \7\ 17 CFR 3.3 (2017). Commission regulations are found at 17 
CFR chapter I, and may be accessed through the Commission's website, 
www.cftc.gov.
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B. The Proposal

    On May 8, 2017, the Commission published for public comment a 
Notice of Proposed Rulemaking (``Proposal'') \8\ to amend the CCO 
Rules. In particular, the Proposal addressed certain CCO duties and 
requirements for preparing and furnishing the CCO Annual Report. The 
Proposal sought to incorporate knowledge gained through Commission 
staff's experience in administering the implementation of Sec.  3.3 and 
to more closely harmonize certain provisions with corresponding 
Securities and Exchange Commission (``SEC'') rules for CCOs of 
security-based swap dealers and major security-based swap participants 
(collectively, ``SEC Registrants'').\9\
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    \8\ Chief Compliance Officer Duties and Annual Report 
Requirements for Futures Commission Merchants, Swap Dealers, and 
Major Swap Participants; Amendments, 82 FR 21330 (proposed May 8, 
2017).
    \9\ See Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, 81 FR 29960 (May 
13, 2016) (``SEC Adopting Release'').
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    To provide greater clarity regarding the CCO reporting line 
required by section 4s(k)(2)(A) of the Act and Sec.  3.3(a)(1), the 
Commission proposed to define ``senior officer'' in Sec.  3.1 as ``the 
chief executive officer or other equivalent officer of a registrant.'' 
With regard to CCO duties, the Proposal would include additional 
language in Sec.  3.3(d)(1) to clarify that the CCO's duty with respect 
to administering policies and procedures would be specific to the 
Registrant's business as an SD, MSP, or FCM, as applicable.\10\ The 
Proposal would also modify the language in Sec.  3.3(d)(2) to clarify 
that the CCO must take ``reasonable steps'' to resolve conflicts of 
interest, and to require in Sec.  3.3(d)(3) that a CCO take reasonable 
steps to ensure compliance with the Act and Commission regulations by, 
among other things, ``ensuring the registrant establishes, maintains, 
and reviews written policies and procedures reasonably designed to 
achieve compliance.'' The Commission further proposed to amend Sec.  
3.3(d)(4) and (5) to remove the requirement in each provision that the 
CCO consult with the board of directors or senior officer in connection 
with establishing procedures for addressing noncompliance issues. The 
Proposal also would clarify that policies and procedures are to be 
``reasonably designed'' to achieve their stated purpose, and would 
amend Sec.  3.3(d)(4) to include remediating matters identified 
``through any means.''
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    \10\ As noted in the Proposal, the change to referencing the 
Registrant's business as an SD or MSP is not intended to affect the 
scope of the duties of the CCO. 82 FR at 21332 (Citing the CCO Rules 
Adopting Release, 77 FR 20158 (``[T]he Commission is clarifying in 
the final rules that the CCO's duties extend only to the activities 
of the registrant that are regulated by the Commission, namely swaps 
activities of SDs and MSPs and the derivatives activities included 
in the definition of FCM under section 1(a)(28) of the CEA.'')).
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    Regarding the CCO Annual Report requirements, the Proposal would 
clarify Sec.  3.3(e) by eliminating the requirement that a Registrant 
address ``each'' applicable CFTC regulatory requirement to which it is 
subject when assessing its written policies and procedures (``WPPs''). 
Additionally, the Commission proposed to clarify that the CCO Annual 
Report's discussion of compliance resources be limited to a discussion 
of resources for the specific activities for which the Registrant is 
registered. Finally, the Proposal would amend Sec.  3.3(f)(1) to add 
the Registrant's audit committee (or equivalent body) as a required 
recipient of the CCO Annual Report in addition to the board of 
directors and the senior officer.

C. Harmonization With SEC Regulations

    Using language identical to CEA section 4s(k), the Dodd-Frank Act 
amended the Securities Exchange Act of 1934 by adding section 15F(k) to 
establish CCO requirements for SEC Registrants.\11\ In compliance with 
sections 712(a)(1)-(2) of the Dodd-Frank Act, the Commission and SEC 
staffs consulted and coordinated together, and with prudential 
regulators, in developing the respective CCO rules for purposes of 
regulatory consistency.\12\
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    \11\ 15 U.S.C. 78o-10(k).
    \12\ Public Law 111-203, 124 Stat. 1376, 1641-1642 (codified at 
15 U.S.C. 8302(a)(1)-(2)).
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    The SEC initially proposed rule 15Fk-1 to implement CCO 
requirements and duties for SEC Registrants in July

[[Page 43511]]

2011.\13\ In May 2013, after the CFTC adopted the CCO Rules, the SEC 
re-opened the comment period for its outstanding Dodd-Frank Act Title 
VII rulemakings, including rule 15Fk-1.\14\ SEC staff continued to 
consult with CFTC staff leading up to the adoption of rule 15Fk-1 in 
May 2016.\15\
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    \13\ See Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, 76 FR 42396 
(proposed Jul. 18, 2011).
    \14\ See Reopening of Comment Periods for Certain Rulemaking 
Releases and Policy Statement Applicable to Security-Based Swaps, 78 
FR 30800 (May 23, 2013).
    \15\ 17 CFR 240.15Fk-1. See SEC Adopting Release, 81 FR 29960.
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    While the CFTC regulates derivatives markets and the SEC regulates 
securities markets, many of the participants in these markets are the 
same. Similar activities in these markets are often regulated by each 
agency in similar ways under similar statutory mandates.\16\ In this 
regard, the CFTC and SEC have taken steps through ongoing communication 
and coordination to harmonize similar regulations, including the 
regulations addressed in this release.
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    \16\ For example, the provisions of the Dodd-Frank Act that 
provide for establishing regulations for swap dealers by the CFTC 
are nearly identical to most of the provisions of the Dodd-Frank Act 
that provide for establishing regulations for security-based swap 
dealers by the SEC. See Dodd-Frank Act, Public Law 111-203, 124 
Stat. 1376, 1711-1712, 1793 (2010) (codified at 7 U.S.C. 6s and 15 
U.S.C. 78o-10).
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    Several of the proposed amendments would further harmonize CFTC and 
SEC regulations. More specifically, the following provisions in the 
Proposal align the CFTC CCO regulations with the corresponding SEC CCO 
regulations:
     Including a definition of ``senior officer'' in Sec.  3.1 
that is identical to the SEC's definition;
     Including additional language in Sec.  3.3(d)(1) to 
clarify that the CCO's duty with respect to administering policies and 
procedures would be specific to the Registrant's business as an SD, 
MSP, or FCM, as applicable;
     Modifying the language in Sec.  3.3(d)(2) to require 
reasonable steps be taken to resolve conflicts of interest;
     Requiring the CCO to identify noncompliance issues 
``through any means'';
     Removing the additional requirement in Sec.  3.3(d)(4) and 
(5) that the CCO consult with the board of directors or senior officer 
in connection with establishing procedures for addressing noncompliance 
issues; and
     Replacing the requirement in Sec.  3.3(e) that a 
Registrant address ``each'' applicable CFTC regulatory requirement to 
which it is subject when assessing its WPPs with a requirement to 
address the applicable regulations generally.
    Furthermore, in the Proposal, the Commission solicited comments 
regarding potential additional rule changes that would further 
harmonize the CFTC and SEC regulations. After careful review of the 
comments received, the final rule includes the following additional 
harmonizing amendments:
     In Sec.  3.3(d)(2), the CCO must take reasonable steps to 
resolve any ``material'' conflicts of interest;
     In Sec.  3.3(d)(4), the CCO must ``take reasonable steps 
to ensure the registrant'' establishes, maintains, and reviews written 
policies and procedures for the remediation of noncompliance issues;
     In Sec.  3.3(d)(5), the CCO must ``take reasonable steps 
to ensure the registrant'' establishes written procedures for the 
handling of noncompliance issues; and
     In Sec.  3.3(f)(3), the CCO Annual Report certification 
includes language from the certifying individual that the CCO Annual 
Report is accurate and complete ``in all material respects.''

II. Summary of Comments

    The Commission received eleven comment letters and Commission staff 
participated in one ex parte teleconference concerning the 
Proposal.\17\ The majority of commenters generally supported the 
Commission's efforts to clarify the role and duties of the CCO, reduce 
burdens associated with preparing the CCO Annual Report, and further 
harmonize the CCO Rules with parallel SEC rules. One commenter 
expressed general support for the proposed modifications and 
recognition of the Commission's efforts as a meaningful step towards 
increasing regulatory certainty.\18\ Another commenter expressed 
concern that a number of the proposals weaken the CCO regulatory regime 
(by, among other things, reducing CCO accountability).\19\ Two comments 
exclusively sought clarity on the Proposal's impact on the continued 
ability of non-U.S. SDs to benefit from the Commission's substituted 
compliance determinations that pertain to Sec.  3.3.\20\ Some 
commenters cautioned against complete harmonization with the SEC 
regarding the requirement to furnish the CCO Annual Report, but 
requested more complete alignment in other areas addressing the role 
and duties of the CCO.\21\ As outlined below, several commenters 
suggested modifications to the rule text and requested further 
interpretive guidance regarding the role and duties of the CCO and CCO 
Annual Report content.\22\ Additionally, several commenters suggested 
modifications to the rule text to add a materiality qualifier to the 
CCO Annual Report certification.\23\ For the reasons provided below, 
the Commission accepted some of these recommendations in the 
amendments, as adopted, and accompanying guidance, and declined to 
accept certain other recommendations.
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    \17\ Comment letters were submitted by the following entities: 
Allen & Overy LLP; Automated Compliance Management, LLC (``ACM''); 
Better Markets; Chris Barnard; Futures Industry Association and 
Securities Industry and Financial Markets Association (``FIA/
SIFMA''); International Swaps and Derivatives Association (ISDA); 
Japanese Bankers Association (``JBA''); National Futures Association 
(``NFA''); the Natural Gas Supply Association (``NGSA''); Paws 
Nutritional Org.; and TD Ameritrade Futures and Forex LLC (``TD 
Ameritrade''). All comment letters are available on the Commission's 
website at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1811.
    \18\ See NGSA comment letter.
    \19\ See Better Markets comment letter.
    \20\ See Allen & Overy and JBA comment letters.
    \21\ See, e.g., FIA/SIFMA and ISDA comment letters.
    \22\ See, e.g., Better Markets, FIA/SIFMA, ISDA, NFA, and TD 
Ameritrade comment letters.
    \23\ See FIA/SIFMA, ISDA, and NFA comment letters.
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III. Final Rule

A. Regulation 3.1--Definitions

1. Regulation 3.1(j)--``Senior Officer''
    The Commission proposed to define ``senior officer'' in Sec.  3.1 
as ``the chief executive officer or other equivalent officer of a 
registrant.'' The Commission received four comments addressing the 
proposed definition.\24\ Chris Barnard and Better Markets supported the 
proposed definition. FIA/SIFMA requested that the Commission address 
the variety of organizational structures present among Registrants and 
define ``senior officer'' to include ``a more senior officer within the 
Registrant's group-wide compliance, risk, legal or other control 
function who in turn reports to the holding company's board of 
directors or CEO (or equivalent officer).'' \25\ FIA/SIFMA further 
requested that the Commission expand its interpretation of the phrase 
``other equivalent officer'' to include the most senior officer of a 
Registrant with supervisory responsibility for all of the

[[Page 43512]]

Registrant's business as an FCM, SD, or MSP. ISDA expressed support for 
the Commission's proposed definition, but requested the Commission 
provide Registrants the ability to determine individually who would 
qualify as an ``equivalent officer.''
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    \24\ See Chris Barnard, Better Markets, ISDA, and FIA/SIFMA 
comment letters.
    \25\ See FIA/SIFMA comment letter. Similarly, while TD 
Ameritrade did not comment directly on the proposed definition, it 
requested that the Commission consider including a variety of senior 
roles at a Registrant for inclusion in the definition of ``other 
equivalent officer'' for purposes of allowing the CCO to report to 
someone other than the CEO.
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    Upon consideration of the comments, the Commission is adopting the 
definition as proposed. This definition of ``senior officer'' clarifies 
the Commission's long-standing interpretation that compliance with the 
statutory requirement to have the CCO ``report directly to the board or 
to the senior officer'' \26\ requires a CCO to have a direct reporting 
line to the board of directors or the highest executive officer in the 
legal entity that is the Registrant.\27\
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    \26\ 7 U.S.C. 6s(k)(2)(A) (emphasis added).
    \27\ See CCO Rules Adopting Release, 77 FR at 20188. This 
concept was incorporated in Sec.  3.3 and therefore applies to FCMs 
equally.
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    As stated in the Proposal, the ``chief executive officer'' is 
typically the highest executive level, but the Commission is including 
in the definition the phrase ``other equivalent officer'' to address 
Registrants who may have a different title for the highest executive 
officer.\28\ This approach is also consistent with the SEC's definition 
of ``senior officer'' in SEC rule 15Fk-1(e)(2), and is intended to 
ensure the CCO's independence from influence, interference, or 
retaliation.\29\ The Commission is also declining to broaden its 
definition of ``senior officer'' or expand its interpretation of 
``other equivalent officer.'' The Commission notes that the definition 
of ``senior officer,'' as adopted, does not preclude additional CCO 
reporting lines that Registrants may wish to implement for practical 
day-to-day oversight.\30\
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    \28\ Proposal, 82 FR at 21331. For example, some firms do not 
have a chief executive officer, but instead give the highest level 
executive the title of ``president,'' ``member,'' or ``general 
partner.''
    \29\ Id. See also CCO Rules Adopting Release, 77 FR at 20188.
    \30\ See CFTC Staff Advisory No. 16-62 (Jul. 25, 2016), 
available at https://www.cftc.gov/idc/groups/public/%40lrlettergeneral/documents/letter/16-62.pdf.
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    In response to ISDA's comment, the Commission believes that the 
definition and guidance provide sufficient flexibility. Registrants 
should be able to ensure that regardless of a firm's chosen 
nomenclature, the CCO has a direct reporting line to the highest 
executive-level individual at the Registrant.
2. Other Definitions
    In response to the Commission's request for comment regarding 
whether other definitions should be added to Sec.  3.1, FIA/SIFMA 
requested that the Commission define ``material noncompliance issue'' 
as it relates to the requirement in Sec.  3.3(e)(5) to describe in the 
CCO Annual Report ``any material noncompliance issues identified and 
the corresponding action taken.'' The Commission is declining to define 
``material noncompliance issue'' at this time. Since the adoption of 
the CCO Rules, Registrants have defined and implemented their own 
materiality standards when categorizing non-compliance issues. Given 
the variation in size and nature of businesses among Registrants 
required to submit CCO Annual Reports, it is the Commission's view that 
materiality is dependent upon many factors that impact Registrants to 
varying degrees. While some factors ought to be considered by all 
Registrants, e.g., whether the issue may involve a violation of the CEA 
or a Commission regulation, there is no ``one size fits all'' approach. 
Indeed, setting forth a standard of materiality could result in an 
overly prescriptive model for many Registrants. Based on experience in 
overseeing the implementation of Sec.  3.3(e), Commission staff 
believes that Registrants have generally developed and applied adequate 
internal materiality standards for purposes of the CCO Annual Report.

B. Regulation 3.3(d)--Chief Compliance Officer Duties

1. Regulation 3.3(d)(1)--Duty To Administer Compliance Policies and 
Procedures
    The Commission proposed to amend Sec.  3.3(d)(1) to require that a 
CCO's duties include administering each of the registrant's policies 
and procedures relating to its business as a futures commission 
merchant, swap dealer, or major swap participant that are required to 
be established pursuant to the Act and Commission regulations.
    ISDA and FIA/SIFMA generally supported the Commission's proposed 
changes \31\ and recommended that the Commission further harmonize 
Sec.  3.3(d)(1) with the SEC's CCO rules. Specifically, ISDA and FIA/
SIFMA recommended that the Commission should clarify in guidance that 
the duty to administer policies and procedures means reviewing, 
evaluating, and advising the Registrant on its compliance policies and 
procedures.\32\ Alternatively, ISDA proposed that the Commission strike 
the term ``administering each'' from Sec.  3.3(d)(1), and replace it 
with ``reviewing, evaluating, and advising the registrant on the 
development, implementation, and monitoring'' of the Registrant's 
compliance policies and procedures. ISDA asserted that the current 
proposed language creates an undue burden on CCOs who do not 
necessarily ``administer'' or execute each policy and/or procedure 
relating to an applicable CFTC rule. Rather, ISDA explained, various 
business units and control functions within a firm establish policies 
and procedures for their respective areas, with the ultimate 
supervisory authority residing with the CEO or other senior officer.
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    \31\ NFA also endorsed the proposed amendment to Sec.  
3.3(d)(1). See NFA comment letter.
    \32\ See SEC Adopting Release, 81 FR at 30057.
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    After considering the comments received, the Commission is adopting 
Sec.  3.3(d)(1) as proposed. As the Commission has previously stated, 
and as discussed below, the role of the CCO, under the Dodd-Frank Act, 
goes beyond the customary and traditional advisory role of a CCO and 
requires more active engagement.\33\ The Commission expects the CCO to 
be actively engaged in administering a firm's compliance policies and 
procedures, as described further below.
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    \33\ See CCO Rules Adopting Release, 77 FR at 20162. (``In 
response to comments advocating a purely advisory role for the CCO, 
the Commission observes that the role of the CCO required under the 
CEA, as amended by the Dodd-Frank Act, goes beyond what has been 
represented by commenters as the customary and traditional role of a 
compliance officer.'')
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    The language of Sec.  3.3(d)(1), however, is not intended to 
diminish the role and direct involvement of other senior officers, 
supervisors and other employees with more direct knowledge, expertise, 
and responsibilities for various regulated activities within their 
business lines. Thus, while the CCO plays a central role in 
administering a firm's policies and procedures, other personnel may 
implement the procedures on a day-to-day basis when undertaking related 
activities in the normal course of business.
    Furthermore, the Commission reiterates that the Registrant is 
ultimately responsible for the effective implementation of the policies 
and procedures.\34\ In response to ISDA and FIA/SIFMA's request for 
clarification on the CCO's duty to administer policies and procedures, 
it is the Commission's view that a CCO may, in many circumstances, be 
able to fulfill his or her role through actively engaging in processes 
involving ``reviewing, evaluating, and advising'' on policies and 
procedures and compliance matters, while others in the organization are

[[Page 43513]]

responsible for the daily implementation thereof. However, if, in the 
normal course, the CCO becomes aware (or reasonably should have been 
aware) of significant issues that are not being addressed in a 
reasonably satisfactory manner, the CCO is expected to take further 
action to address those issues. Importantly, for such circumstances, 
CEA section 4s(k)(2)(A) provides the CCO with a reporting line directly 
to the board or the senior officer. Accordingly, it may be appropriate 
for the CCO, depending on the facts and circumstances, to use that 
reporting line to elevate any such significant issues that have not 
been otherwise addressed satisfactorily. Through this active engagement 
and, if appropriate, utilizing the available escalation measures 
described above, the CCO may be able to demonstrate that he or she has 
fulfilled the role assigned to him or her under the regulation.
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    \34\ See 75 FR 70881, 70883 (proposed Nov. 19, 2010). The CCO's 
duty to administer policies and procedures does not ``otherwise 
contradict well-established tenets of law regarding the allocation 
of responsibility within a business association.''
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2. Regulation 3.3(d)(2)--Duty To Resolve Conflicts of Interest
    Proposed Sec.  3.3(d)(2) would require the CCO, in consultation 
with the board of directors or the senior officer, to take reasonable 
steps to resolve any conflicts of interest that may arise. ISDA and 
FIA/SIFMA supported the proposed revisions to Sec.  3.3(d)(2) and 
provided additional recommendations. Both commenters recommended that 
the CCO's duty to resolve conflicts of interest should be limited to 
``material'' conflicts of interest and should apply only to issues that 
arise in connection with the Registrant's business as an FCM, SD, or 
MSP. ISDA suggested that, consistent with the SEC's view, the 
Commission should explicitly state that the primary responsibility to 
resolve conflicts of interest falls on the Registrant and that the 
CCO's role would include identifying, advising, and escalating, as 
appropriate, to senior officers matters involving conflicts of 
interest. ISDA further suggested that the Commission replace 
``resolve'' with ``minimize'' in the rule text. Similarly, FIA/SIFMA 
recommended that the Commission clarify that ``resolution'' involves 
either negation or mitigation of the conflict of interest.
    Better Markets generally did not support the Commission's proposed 
changes to Sec.  3.3(d)(2). Among other reasons, Better Markets is of 
the view that the proposed changes are not consistent with applicable 
statutory language to ``resolve any conflicts'' and will dilute the 
CCO's duty to address conflicts of interest.
    Having considered these comments, the Commission is adopting Sec.  
3.3(d)(2) as proposed but with further modifications to provide that 
CCOs have a duty to take reasonable steps to resolve ``material'' 
conflicts of interest ``relating to the registrant's business as a 
futures commission merchant, swap dealer, or major swap participant.'' 
The additional language refines the Commission's view that CCOs cannot 
reasonably be expected to personally resolve every potential conflict 
of interest that may arise, and the Commission affirms that ``routinely 
encountered conflicts could be resolved in the normal course of 
business . . .'' consistent with the CCO's general administration of 
internal policies and procedures, which must include conflicts of 
interest policies.\35\ Requiring the CCO to resolve every conflict of 
interest, including non-material conflicts, in consultation with the 
board of directors or the senior officer would potentially take too 
much of the CCO's and senior management's time away from other 
necessary activities when non-material conflicts can usually be 
resolved effectively by other staff in the normal course of business. 
The Commission believes that this is consistent with the underlying 
objective of this provision, which imposes a duty on CCOs to resolve 
matters under the Act and Commission regulations within the practical 
limits of their position at the Registrant. The Commission believes 
that the additional language does not dilute the CCO's duty to address 
conflicts of interest, and that the rule as amended fulfills the 
purposes of CEA section 4s(k).\36\ Rather than spreading time and 
resources over many conflict issues--both material and non-material--
the changes will allow the CCO to focus his or her time and resources 
on the material conflict issues, and more broadly, the other important 
compliance duties required by regulation. The Commission is also of the 
view that amending Sec.  3.3(d)(2) to limit the scope of the CCO's 
responsibility to conflicts relating to the Registrant's business as an 
FCM, SD, or MSP clarifies that CCOs have a duty to resolve matters 
under the Act and Commission regulations, rather than any conflict that 
``may arise.''
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    \35\ See Proposal, 82 FR at 21332. The addition of a materiality 
qualifier also further harmonizes Sec.  3.3(d)(2) with the SEC's 
parallel CCO rule. See 17 CFR 240.15Fk-1(b)(3).
    \36\ See 77 FR at 21332 (``If strictly interpreted, the current 
rule text creates an undue burden on CCOs, likely taking them away 
from more important compliance activities.'')
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    The Commission declines to implement comments suggesting that CCOs 
have a duty to simply minimize, rather than ``resolve'' conflicts of 
interest. CEA section 4s(k)(2)(C) explicitly requires conflict 
resolution.\37\ While resolution can include the mitigation of 
conflicts to the point where they are no longer material, resolution 
also encompasses the elimination of conflicts if reasonably 
practicable.\38\
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    \37\ See 7 U.S.C. 6s(k)(2)(C).
    \38\ See CCO Rules Adopting Release, 77 FR at 20161.
---------------------------------------------------------------------------

    In response to ISDA's request that the Commission state that a 
CCO's role in resolving conflicts would involve identifying, advising 
on, and escalating to management conflicts of interest, the Commission 
is declining to incorporate that language into the regulatory text. 
However, the Commission believes that such an approach provides a 
reasonable framework for CCOs to use in fulfilling their duty to take 
reasonable steps to resolve material conflicts of interest. As the 
Commission has previously acknowledged, active engagement ``may involve 
actions other than making the final decision.'' \39\
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    \39\ Id.
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    Should CCOs choose to incorporate the ``identify, advise and 
escalate'' framework into their conflict resolution procedures, 
however, a passive implementation of that framework should not be 
viewed as fulfilling the CCO's duties for conflict resolution. The 
requirement to ``take reasonable steps'' requires an active role in the 
conflict resolution process, including, for example: (1) Direct 
involvement of the CCO in developing and implementing active processes 
for conflict identification, evaluation, and resolution; (2) advising 
on the effectiveness of alternatives to mitigate or eliminate 
conflicts; and (3) escalating conflict issues if the conflicts are not 
otherwise resolved or mitigated as required by Sec.  3.3(d)(2), 
including through the CCO's direct reporting line to the board of 
directors or the senior officer if necessary or appropriate.
    The Commission believes that the determination of what is a 
``material'' conflict for a particular Registrant should be assessed 
based on the facts and circumstances relevant to that Registrant and 
the conflict. Although the Commission notes that there are some 
conflicts that are typically treated as material,\40\ the Commission 
declines

[[Page 43514]]

at this time to define materiality in this context to avoid creating an 
unintentionally prescriptive model. The Commission expects each 
Registrant to develop its own appropriate standard or procedure for 
determining if a conflict is ``material'' for purposes of the rule.
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    \40\ For example, similar to the SEC's approach, conflicts 
between the business interests of a Registrant and its regulatory 
requirements, and conflicts between or with associated persons of a 
Registrant are often material. See SEC Adopting Release, 81 FR 29960 
at 30056-30057 (``Such conflicts of interest could include conflicts 
between the commercial interests of an SBS Entity and its statutory 
and regulatory responsibilities, and conflicts between, among, or 
with associated persons of the SBS Entity.'').
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3. Regulation 3.3(d)(3)--Duty To Ensure Compliance
    The Proposal would make a wording change to Sec.  3.3(d)(3) to 
simplify the text \41\ and to add that a CCO's duty in Sec.  3.3(d)(3) 
to ensure compliance with the Act and the Commission's regulations 
includes ``ensuring the registrant establishes, maintains, and reviews 
WPPs reasonably designed to achieve compliance.''
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    \41\ The Proposal would change the words ``. . . relating to the 
swap dealer's or major swap participant's activities, or to the 
future commission merchant's business as a futures commission 
merchant'' to ``. . . relating to the registrant's business as a 
futures commission merchant, swap dealer or major swap 
participant.''
---------------------------------------------------------------------------

    ISDA and FIA/SIFMA recommended that the Commission further 
harmonize paragraph (d)(3) with the SEC's corresponding rule by 
removing the existing general duty for the CCO to take reasonable steps 
to ensure compliance and only require the CCO to ensure that the 
Registrant establishes, maintains, and reviews policies and procedures 
as the CCO's duty.\42\ ISDA and FIA/SIFMA also asserted that the change 
would address uncertainty regarding the breadth of a CCO's supervisory 
authority and concerns that ensuring compliance is an impracticable 
requirement for CCOs.
---------------------------------------------------------------------------

    \42\ See FIA/SIFMA and ISDA comment letters (emphasis added). 
See also 17 CFR 240.15Fk-1(b)(2).
---------------------------------------------------------------------------

    TD Ameritrade commented that the Commission should align paragraph 
(d)(3) with FINRA Rule 3130 by clarifying that the CCO is required to 
``have processes in place'' for the Registrant to establish, maintain, 
and review WPPs reasonably designed to achieve compliance. TD 
Ameritrade contended that the proposed language in paragraph (d)(3), 
which requires CCOs to ensure compliance, rather than simply have 
processes in place, is cumbersome and perhaps places a higher burden on 
CCOs than intended by the Commission.
    Better Markets commented that the proposed amendment to paragraph 
(d)(3) could be viewed as defining the full scope of the CCO's duty to 
ensure compliance, rather than merely clarifying the extent of the 
duty. Better Markets noted that the duty to ensure compliance is broad 
and cannot be equated with a CCO's obligation to administer policies 
and procedures. To eliminate uncertainty, Better Markets recommended 
further clarifying that the additional language is ``without 
limitation.'' \43\
---------------------------------------------------------------------------

    \43\ Better Markets comment letter.
---------------------------------------------------------------------------

    Having considered the totality of the responses received, the 
Commission believes that the proposed amendment to Sec.  3.3(d)(3) 
adding that the duty includes ``ensuring the registrant establishes, 
maintains, and reviews WPPs reasonably designed to achieve compliance'' 
creates ambiguity, rather than clarity, with respect to the scope of a 
CCO's duty to ensure compliance. Therefore, the Commission is declining 
to adopt that proposed amendment to Sec.  3.3(d)(3).\44\ A CCO's duty 
in Sec.  3.3(d)(3) to ensure compliance with the Act and Commission 
regulations therefore remains the same as adopted in the CCO Rules 
Adopting Release.
---------------------------------------------------------------------------

    \44\ The proposed non-substantive change that simplifies the 
wording of Sec.  3.3(d)(3) is being adopted for the reasons stated 
in the Proposal.
---------------------------------------------------------------------------

    Current Sec.  3.3(d)(3) implements CEA section 4s(k)(2)(E). CEA 
section 4s(k)(2)(E) requires that the CCO shall ensure compliance with 
the Act (including regulations) relating to swaps, including each rule 
prescribed by the Commission under that section. Thus, the Commission 
believes Sec.  3.3(d)(3) requires more than, as suggested by some 
commenters, simply taking reasonable steps to ensure the Registrant 
establishes, maintains, and reviews written compliance policies and 
procedures.\45\ The Commission, however, acknowledges commenters' 
concerns regarding the uncertainty as to the breadth of a CCO's 
responsibility and the practicality of broad expectations for the CCO 
in this regard given the wide variety of swap dealing and other 
activities undertaken by different Registrants. When finalizing Sec.  
3.3(d)(3), the Commission recognized that requiring a CCO to ``ensure 
compliance'' could be an impracticable standard and limited the CCO's 
duty to ``taking reasonable steps to ensure compliance.'' \46\ At the 
time, however, the Commission did not provide guidance on what ``taking 
reasonable steps to ensure compliance'' means. Accordingly, the 
Commission is taking this opportunity, with the benefit of several 
years of experience implementing the CCO Rules, to provide further 
guidance as to the breadth of the CCO obligations under Sec.  3.3(d)(3) 
and the practical expectations for fulfilling those obligations.
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    \45\ See 7 U.S.C. 6s(k)(2)(E) (requiring the CCO to ensure 
compliance with the Act (including regulations) relating to swaps, 
including each rule prescribed by the Commission under that 
section).
    \46\ See CCO Rules Adopting Release, 77 FR at 20162.
---------------------------------------------------------------------------

    As stated by the Commission previously, the CCO's duty to take 
reasonable steps to ensure compliance includes active engagement in the 
day-to-day implementation of compliance policies and procedures.\47\ 
This engagement would likely include a reasonable level of involvement 
in compliance monitoring, identifying non-compliance or potential non-
compliance events, advising on the mitigation and correction of 
compliance activities, and, where necessary, escalating significant 
matters that require senior management attention.\48\ Whether the CCO's 
activities constitute ``reasonable steps'' depends on the facts and 
circumstances of the Registrant's related business activities, such as 
the size of the business, the diversity and complexity of the swaps or 
FCM activities, and the overlap with other compliance activities in the 
firm (e.g., where swap dealing activities may be contained within 
business lines that are subject to additional regulation outside the 
CEA).
---------------------------------------------------------------------------

    \47\ See supra at note 33.
    \48\ For example, escalation could be to the board or the senior 
officer to whom the CCO reports either through the CCO Annual 
Report, annual or more frequent meetings, or other mechanisms.
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    In taking reasonable steps to ensure compliance, the Commission 
believes that a CCO cannot reasonably be expected to have sole and 
complete responsibility for ensuring compliance with the Act and the 
relevant regulations.\49\ As such, Sec.  3.3(d)(3) does not require the 
CCO to guarantee compliance or be granted final supervisory 
authority.\50\ The regulation does not diminish the role and direct 
involvement of other senior officers, supervisors, and employees with 
more direct knowledge, expertise, and responsibilities for the 
regulated business activities to effect compliance. As such, the 
Commission is of the view that a CCO may reasonably rely on these 
personnel to implement many of the policies and procedures needed to 
ensure compliance as part of their regular business activities (in this 
regard, such personnel are sometimes referred to as the ``first line'' 
of compliance).\51\ The Commission also

[[Page 43515]]

notes that, pursuant to Sec.  3.3(a)(1), the CCO has a direct reporting 
line to the board or the senior officer of the Registrant. To the 
extent the CCO determines that he or she cannot fulfill the duty 
established in Sec.  3.3(d)(3) because of the actions or inaction of 
others, a lack of resources, or otherwise, the CCO has an avenue for 
escalating these issues to the highest level of management within the 
Registrant. In doing so, the CCO may be able to demonstrate that he or 
she has taken reasonable steps to fulfill the duty created in Sec.  
3.3(d)(3).
---------------------------------------------------------------------------

    \49\ See 75 FR at 70883 (``The chief compliance officer can only 
ensure the registrant's compliance to the full capacity of an 
individual person . . .'').
    \50\ See CCO Rules Adopting Release, 77 FR at 20162 (``[T]he 
Commission does not believe . . . that the CCO's duties under the 
CEA or Sec.  3.3 requires that the CCO be granted ultimate 
supervisory authority by a registrant.'').
    \51\ For example, in working with other personnel at the 
Registrant, it would be reasonable to expect that a CCO would 
participate in (though not necessarily have sole or principal 
responsibility for implementing) the development and implementation 
of compliance training, monitoring and spot checking of first line 
compliance activities, the identification of possible compliance 
weaknesses, and the escalation to supervisors and senior management 
of the remediation or mitigation of weaknesses identified, as 
appropriate.
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4. Regulation 3.3(d)(4) and (5)--Duty To Remediate Noncompliance Issues
    The Commission proposed to amend Sec.  3.3(d)(4) by adding language 
that the duty to remediate noncompliance issues identified by the CCO 
encompasses maintaining and reviewing, in addition to establishing, 
written policies and procedures. The Commission also proposed to amend 
Sec.  3.3(d)(4) and (5) by removing the requirement that the CCO 
consult with the board of directors or senior officer in establishing: 
(1) Policies and procedures for the remediation of noncompliance issues 
identified by the CCO; and (2) procedures for the handling, management 
response, remediation, retesting, and closing of noncompliance issues. 
The Proposal would also clarify that the policies and procedures should 
be ``reasonably designed'' to remediate noncompliance issues. Lastly, 
the Commission proposed to amend paragraph (d)(4) to include the 
remediation of matters identified ``through any means'' by the CCO, 
including the specific discovery methods already listed in Sec.  
3.3(d)(4). FIA/SIFMA generally supported the Commission's proposed 
amendments to paragraphs (d)(4) and (5), and requested that the 
Commission further add to paragraphs (d)(4) and (5) that the CCO's duty 
is to take ``reasonable steps to ensure that the registrant'' 
establishes the required policies and procedures for the remediation of 
noncompliance issues, rather than to be directly responsible for 
establishing the policies and procedures. FIA/SIFMA noted that this 
change, consistent with the SEC's CCO rules, reflects the fact that it 
is the responsibility of the Registrant, not the CCO in his or her 
personal capacity, to establish the specified policies and procedures.
    Better Markets disagreed with the Commission's proposed changes. 
Better Markets contended that the removal of the board of directors and 
senior officer consultation requirement could marginalize the board of 
directors' role and send the message that the board of directors needs 
to be only occasionally involved in the remediation of noncompliance 
issues. Better Markets further asserted that the proposed change that 
policies and procedures be ``reasonably designed'' makes it easier for 
Registrants to meet their legal obligations without actually realizing 
the underlying regulatory goal of remediating noncompliance issues.
    With respect to the specific noncompliance discovery methods listed 
in paragraph (d)(4), ISDA recommended that the Commission provide legal 
certainty to Registrants by clarifying that the term ``complaint that 
can be validated'' means ``a written complaint that can be supported 
upon a reasonable investigation.'' \52\ ISDA noted that this 
clarification would further harmonize the Commission's CCO Rules with 
the SEC's, and would provide legal certainty with respect to which 
kinds of noncompliance issues need to be escalated to the CCO.
---------------------------------------------------------------------------

    \52\ ISDA comment letter.
---------------------------------------------------------------------------

    In light of the comments received, the Commission is adopting 
proposed paragraphs (d)(4) and (5) with additional modifications to 
clarify the Commission's position that the CCO's duty with respect to 
establishing the Registrant's noncompliance remediation policies and 
procedures is to take reasonable steps to ensure that the registrant 
fulfills that responsibility. Accordingly, Sec.  3.3(d)(4) and (5), as 
adopted, require a CCO to take ``reasonable steps to ensure the 
registrant'' establishes, maintains and reviews the applicable policies 
and procedures. With respect to the other proposed amendments to 
paragraphs (d)(4) and (5), the Commission is adopting those amendments 
for the reasons discussed in the Proposal.
    In response to the concern raised by Better Markets that removing 
the consultation clause will diminish the board of directors and senior 
officer role, the Commission believes that there are two reasons to 
maintain the proposed changes to Sec.  3.3(d)(4) and (5). As discussed 
in the Proposal, the CCO should manage and remediate noncompliance 
issues in consultation, as appropriate, with personnel that are experts 
in these matters, including, if appropriate, senior management and the 
board of directors. Requiring further consultation with the board of 
directors or the senior officer on these procedures in the ordinary 
course would be an unnecessary burden on the Registrants. Furthermore, 
the Commission notes that, under Sec.  3.3(a)(1), the CCO must report 
to the board of directors or the senior officer. Accordingly, to the 
extent the CCO is of the view that the policies and procedures being 
established do not meet the requirements of the Commission's 
regulations and is unable to effect the necessary changes through other 
means, it would be appropriate for the CCO, as a reasonable step for 
ensuring that the appropriate policies and procedures are established, 
to elevate the issue to the board of directors or the senior officer to 
whom the CCO reports. Thus, an appropriate avenue for consultation with 
the board of directors or the senior officer is already part of the 
regulatory requirements in the CCO Rules.
    With respect to ISDA's recommendation that the Commission clarify 
the ``complaint that can be validated'' standard, the Commission 
declines to clarify the standard in the manner requested. The 
Commission believes that noncompliance should be a focus for CCOs, and 
accordingly, all noncompliance complaints, whether written or verbal, 
should be investigated using reasonable means. The Commission further 
notes that the CCO may identify noncompliance issues ``through any 
means'' and ``a complaint that can be validated'' is one of many ways 
in which a CCO may identify such issues.

C. Regulation 3.3(e)--CCO Annual Report

    Below is a subsection-by-subsection review of the comments received 
on the proposed changes to the CCO Annual Report requirements and a 
description of the changes being adopted.\53\ On December 22, 2014, 
CFTC staff issued Advisory No. 14-153 providing guidance to Registrants 
on the form and content requirements of the CCO Annual Reports (``CCO 
Annual Report Advisory''). In their comment letter, FIA/SIFMA requested 
that the Commission address the effect of the rule amendments on the 
guidance in the CCO Annual Report Advisory.
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    \53\ In connection with the proposed amendments, the Proposal 
also would renumber the paragraphs within Sec.  3.3(e) and make 
other non-substantive changes related to the renumbering. Those 
changes are being adopted for the reasons stated in the Proposal.
---------------------------------------------------------------------------

    The Commission believes that providing updated guidance in concert

[[Page 43516]]

with adopting the amendments to Sec.  3.3(e) will help to increase the 
final rule's efficiency and clarity. Accordingly, the Commission is 
providing guidance regarding the CCO Annual Report in new Appendix C to 
Part 3, ``Guidance on the Application of Rule 3.3(e), Chief Compliance 
Officer Annual Report Form and Content.'' The CCO Annual Report 
Advisory is hereby superseded by this final release including the new 
Appendix C to Part 3. The Commission or its staff may issue updated 
guidance regarding the CCO Annual Report in the future based on 
experience gained as Registrants implement the amended content 
requirements.
1. Regulation 3.3(e)(1)--Description of the Registrant's WPPs
    Section 3.3(e)(1) requires a CCO to describe the Registrant's WPPs, 
including its code of ethics and conflicts of interest (``COI'') 
policies. Proposed Sec.  3.3(e)(1) sought to clarify that only the WPPs 
that relate to a Registrant's business as an FCM, SD, or MSP must be 
described in the CCO Annual Report by adding text referring to the 
policies and procedures described in Sec.  3.3(d). The Commission did 
not receive any comments specific to proposed Sec.  3.3(e)(1),\54\ and 
is adopting amended Sec.  3.3(e)(1) as proposed.\55\
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    \54\ Three commenters expressed general support of the proposed 
amendments to Sec.  3.3(e). See TD Ameritrade, FIA/SIFMA, and ISDA 
comment letters.
    \55\ The Commission notes that Sec.  3.3(e)(1) retains the 
statutory requirement in CEA section 4s(k)(3)(A)(ii), 7 U.S.C. 
6s(k)(3)(A)(ii), to describe the Registrant's Conflict of Interest 
and Code of Ethics policies (if the Registrant had previously 
adopted a Code of Ethics).
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2. Regulation 3.3(e)(2)--Assessment of the Effectiveness of the 
Policies and Procedures
    Proposed Sec.  3.3(e)(2) would eliminate the express mandate to 
identify and assess the effectiveness of each WPP for each regulatory 
requirement under the CEA and Commission regulations in the CCO Annual 
Report. The Commission received six comments regarding this proposed 
amendment. FIA/SIFMA, ISDA, NFA, and TD Ameritrade generally supported 
the change. Specifically, ISDA noted that the proposed revisions 
``would strike a proper balance between providing the Commission with 
meaningful analyses of firms' compliance programs and conserving the 
time and resources of both the Commission and firms.'' \56\ Similarly, 
NFA stated, ``NFA believes it will improve the quality of the report by 
allowing firms to focus on providing meaningful summaries of their 
WPPs, together with a detailed discussion of the annual assessment and 
recommended improvements.'' \57\
---------------------------------------------------------------------------

    \56\ See ISDA comment letter.
    \57\ See NFA comment letter.
---------------------------------------------------------------------------

    Better Markets opposed the proposed amendment and expressed its 
belief that the ``detailed assessment of the policies and procedures, 
relative to each specific regulatory requirement, is a valuable 
exercise that brings rigor to the process.'' \58\ ACM explained that 
Registrants, using ACM's product, often obtain sub-certifications from 
subject matter experts within the firm for each applicable requirement. 
ACM sought clarification regarding whether the proposed amendment is 
intended to eliminate the requirement-by-requirement review.
---------------------------------------------------------------------------

    \58\ See Better Markets comment letter.
---------------------------------------------------------------------------

    The Commission has considered the comments and is adopting amended 
Sec.  3.3(e)(2) as proposed. As adopted, the rule requires the CCO 
Annual Report to contain, among other things, a description of the 
CCO's assessment of the effectiveness of the Registrant's WPPs relating 
to its business as an FCM, SD, or MSP. In response to Better Markets 
and ACM, the Commission affirms that the rule, as amended, does not 
require the CCO Annual Report to contain an assessment of the WPPs' 
effectiveness with respect to each applicable requirement under the Act 
and regulations. However, the CCO must still conduct an underlying 
assessment of the policies and procedures to meet the requirements of 
the rule. The Commission affirms that Registrants may still rely on the 
use of sub-certifications or any other methodology they have previously 
employed to conduct the assessment of their compliance programs 
pursuant to Sec.  3.3(d) and (e).
    In further response to Better Markets' concern that removing the 
requirement-by-requirement assessment from the CCO Annual Report would 
weaken the self-assessment process, the Commission notes that the final 
rule does not remove a CCO's duty to undertake the review. The 
Commission believes that a robust and meaningful self-assessment 
process is maintained through the affirmative CCO duties to ensure 
review of the WPPs and to describe the CCO's assessment in the CCO 
Annual Report. Furthermore, as described in the Proposal, the 
Commission believes that reducing the burden associated with preparing 
the CCO Annual Report will permit CCOs and Registrants to both improve 
their compliance assessment processes and allocate more time and 
resources to more critical areas within the firm.
3. Regulation 3.3(e)(4)--Resources Set Aside for Compliance
    Proposed Sec.  3.3(e)(4) would clarify that the discussion of 
resources only need address those resources set aside for compliance 
activities that relate to the Registrant's business as an FCM, SD, or 
MSP. The Commission received comments from FIA/SIFMA, NFA, and ISDA 
generally supporting the proposed amendment. ISDA suggested that the 
Commission rescind related guidance in the CCO Annual Report Advisory 
regarding quantification of resources and allow Registrants to provide 
a narrative assessment of the sufficiency of compliance resources.\59\ 
Similarly, FIA/SIFMA requested that the Commission state that Rule 
3.3(e)(4) does not require specific numerical estimates.\60\
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    \59\ See ISDA comment letter.
    \60\ See FIA/SIFMA comment letter.
---------------------------------------------------------------------------

    The Commission is adopting amended Sec.  3.3(e)(4) as proposed. 
Regarding the description of compliance resources, the Commission 
previously addressed the issues raised by ISDA, FIA, and SIFMA in the 
CCO Rules Adopting Release. At the outset, the Commission has 
recognized that a primary purpose of the CCO Annual Report is to 
provide ``an efficient means to focus the registrant's board and senior 
management on areas requiring additional compliance resources.'' \61\ A 
detailed discussion of the current state of compliance resources, 
including as appropriate, quantitative information, forms an integral 
part of a CCO Annual Report that, as the Commission stated, ``will help 
FCMs, SDs, MSPs and the Commission to assess whether the registrant has 
mechanisms in place to address adequately compliance problems that 
could lead to a failure of the registrant.'' \62\ In requiring a 
description of the compliance resources in the CCO Annual Report, but 
not prescribing the description's form or manner (which is left to the 
Registrant's reasonable discretion) the Commission is balancing the 
need for context and critical information, and the potential burdens on 
the CCO in performing the underlying resources identification and 
analysis.\63\
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    \61\ See CCO Rules Adopting Release, 77 FR at 20190.
    \62\ Id. at 20193.
    \63\ Id. at 20164.
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    The description of resources required by Sec.  3.3(e)(4) is 
intended to inform the Registrant and the Commission as to the 
sufficiency of resources dedicated to

[[Page 43517]]

compliance. Moreover, by requiring inclusion in the CCO Annual Report, 
the Commission recognizes that the usefulness of this information may 
lie in the trends and impacts of isolated events that can be observed 
over time regarding staffing levels, financial resources devoted to 
compliance, or the addition or subtraction of operational or 
technological resources. Some of the categories of resources CCOs are 
required to describe under Sec.  3.3(e)(4) are, by their nature, 
quantitative (e.g., number of compliance personnel and budgetary 
information). However, the Commission also recognizes that, depending 
on a Registrant's structure and the nature of its business, a 
quantitative description may include approximations and estimates. It 
is the Commission's view that, in complying with Sec.  3.3(e)(4), each 
Registrant should focus on whether its CCO Annual Report is effectively 
providing its senior leadership and the Commission with the ability to 
reasonably assess the state of the Registrant's compliance resources, 
irrespective of how it expresses the quantitative information.

D. Regulation 3.3(f)--Furnishing the CCO Annual Report and Related 
Matters

    In view of the comments received on proposed Sec.  3.3(f) and 
related matters, the Commission is making a number of changes described 
below. As a general matter, to provide the reader greater clarity, the 
Commission is adding descriptive paragraph headings to Sec.  3.3(f)(1) 
through (6) for the final rule.
1. Regulation 3.3(f)(1)--Furnishing the CCO Annual Report
    Proposed Sec.  3.3(f)(1) would harmonize the requirements under the 
SEC and CFTC CCO Rules to require that the CCO Annual Report be 
furnished to all members of the board of directors, senior officer, and 
audit committee (or equivalent body) prior to being furnished to the 
Commission.
    The Commission received three comments addressing the proposed 
amendment. Better Markets supported the proposed amendment as a means 
to strengthen the CCO framework. ISDA and FIA/SIFMA opposed the 
amendment and asserted that it is burdensome and unnecessary in light 
of the variability among Registrants. Specifically, ISDA and FIA/SIFMA 
commented that the proposed amendment would add burdens and costs given 
that the audit committees and boards of directors do not necessarily 
meet prior to the deadline to file the CCO Annual Report with the 
Commission.\64\ FIA/SIFMA also contended that harmonization with the 
SEC is not appropriate for this rule because there is greater variety 
of corporate forms and organizational structures among FCMs, SDs, and 
MSPs than SEC-regulated entities and the change may raise questions for 
those Registrants that do not have a board of directors or audit 
committee. Additionally, FIA/SIFMA asserted the board of directors of 
an SD that is part of a large, diversified commercial bank may already 
have full meeting agendas that do not warrant the addition of another 
board obligation. Alternatively, ISDA and FIA/SIFMA commented that if 
the Commission decided to adopt the proposed amendment, it should make 
appropriate modifications to accommodate existing board and audit 
committee meeting schedules. FIA/SIFMA also sought further 
clarification that the rule would not require a Registrant to establish 
a board of directors or audit committee, and that it could be satisfied 
through submission to certain other equivalent personnel.
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    \64\ See ISDA and FIA/SIFMA comment letters.
---------------------------------------------------------------------------

    After considering commenters' concerns, the Commission has 
determined to retain the current approach in Sec.  3.3(f)(1) to require 
the CCO to provide the annual report to the board of directors or the 
senior officer prior to furnishing it to the Commission.\65\ The 
Commission, however, is also adopting a modified version of proposed 
Sec.  3.3(f)(1) with respect to furnishing the CCO Annual Report to the 
audit committee (or equivalent body). In response to comments, Sec.  
3.3(f)(1)(ii), as adopted, requires that the CCO Annual Report must be 
furnished to the audit committee (or equivalent body), if the 
Registrant has such a committee. In addition, if the Registrant has an 
audit committee (or equivalent body), then the CCO Annual Report must 
be furnished to that committee not later than its next scheduled 
meeting after the date on which the CCO Annual Report is furnished to 
the Commission, but in no event more than 90 days after the 
Registrant's CCO Annual Report is furnished to the Commission. The 
Commission is adding the 90 day time frame to ensure that the audit 
committee receives the report in a timely manner in furtherance of this 
provision, but without causing unnecessary disruption to its operation.
---------------------------------------------------------------------------

    \65\ A conforming change was made to Sec.  3.3(f)(1)(iii) 
regarding making and maintaining a record of furnishing the report 
to the board of directors or the senior officer, and the audit 
committee.
---------------------------------------------------------------------------

    The Commission believes that a flexible approach to the timing of 
furnishing the CCO Annual Report to the audit committee (or equivalent 
body) addresses commenters' concerns about meeting schedules and the 
CCO Annual Report submission deadline and better serves the underlying 
purpose of furnishing the report to the appropriate representatives of 
senior management at a time that allows for appropriate review by them. 
The Commission further believes that although the rule as adopted is 
not identical to the SEC's approach, the two approaches both preserve 
the goal of ensuring that management with overall responsibility for 
governance and internal controls is informed of the Registrant's state 
of compliance in a timely manner while recognizing the inherent 
differences between CFTC and SEC Registrants. The SEC's CCO rules apply 
to security-based swap dealers and major security-based swap 
participants, which are likely to consist of a smaller number of large 
financial entities or affiliates thereof, most of which are likely 
required by regulation to have audit committees.\66\ By contrast, the 
CFTC's CCO Rules apply to SDs that range from large financial 
enterprises to regional banks to commodity dealers to limited purpose 
affiliates, as well as FCMs. In light of this greater variety of firms 
subject to the CFTC CCO Rules, the Commission believes a more flexible 
approach is appropriate.
---------------------------------------------------------------------------

    \66\ See SEC Adopting Release, 81 FR at 30105 (estimating that 
approximately 55 entities might register as security-based swap 
dealers or major security-based swap participants).
---------------------------------------------------------------------------

    Similarly, in response to FIA/SIFMA's comment that some Registrants 
may not have a board of directors or audit committee, the Commission 
acknowledges that some types of entities that are Registrants are not 
required to have such bodies, particularly audit committees, and 
therefor may not have established such a body. The Commission affirms 
that the rule was not intended to require Registrants to establish 
either type of body. Accordingly, the final rule text provides that 
furnishment to the audit committee or equivalent body is required only 
if such a committee or body has been established. If not, compliance 
with Sec.  3.3(f)(1) may be met by furnishing the CCO Annual Report to 
the senior officer or board members only, as applicable.
2. Regulation 3.3(f)(3)--Certification
    In response to the Commission's request for comment on additional 
changes to further harmonize with the

[[Page 43518]]

SEC regulations that correspond to Sec.  3.3(f), the Commission 
received four comments regarding the CCO Annual Report certification 
language in Sec.  3.3(f)(3). Citing the Commission's stated goal of 
harmonizing Sec.  3.3 with SEC rule 15Fk-1(c)(2)(ii)(D) and concerns 
regarding potential excess CCO liability, NFA, FIA/SIFMA, and ISDA 
urged the Commission to include a materiality qualifier. FIA/SIFMA and 
ISDA recommended that the phrase ``in all material respects'' be added. 
TD Ameritrade requested that the Commission assess whether the ``under 
the penalty of law'' standard is the correct standard for CCOs.
    The Commission is adopting Sec.  3.3(f) as proposed with one 
change. The Commission is adding qualifying language, ``in all material 
respects'' to the requirement to certify that the information contained 
in the CCO Annual Report is accurate and complete. Consistent with the 
SEC's approach, this modification provides a reasonable standard and 
additional clarity regarding the obligations and potential liability of 
the certifying official. When the Commission adopted the CCO Rules in 
2012, it was of the view that limiting the certification language with 
the qualification ``to the best of his or her knowledge and reasonable 
belief'' would address concerns of overbroad liability.\67\ The rule, 
the Commission reasoned, ``would not impose liability for compliance 
matters that are beyond the certifying officer's knowledge and 
reasonable belief at the time of the certification.'' \68\ This 
language, however, as noted by FIA/SIFMA, ISDA, and TD Ameritrade, may 
not completely address concerns regarding immaterial inaccuracies or 
omissions in the CCO Annual Report, notwithstanding the certifying 
official's good faith efforts to exercise appropriate due diligence.
---------------------------------------------------------------------------

    \67\ CCO Rules Adopting Release, 77 FR at 20163.
    \68\ Id.
---------------------------------------------------------------------------

    As noted in the CCO Rules Adopting Release, the Commission 
appreciates that, for many Registrants, the breadth and complexity of 
the information contained in the CCO Annual Report inherently requires 
reliance on many individuals to gather the information for, and 
prepare, the report.\69\ The Commission understands that immaterial 
inaccuracies or omissions rarely undermine the compliance information 
contained in the CCO Annual Report. Accordingly, it is reasonable and 
appropriate to expect that the CCO or chief executive officer would, 
``to the best of his or her knowledge and reasonable belief'' certify 
that ``the information in in the annual report is accurate and complete 
in all material respects'' (emphasis added).\70\
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    \69\ Id. at 20162-3.
    \70\ The Commission also notes that adding ``in all material 
respects'' to Sec.  3.3(f)(3) is consistent with the related duty 
under Sec.  3.3(f)(4) to promptly amend and recertify the CCO Annual 
Report if ``material errors or omissions'' in the report are 
identified (emphasis added).
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3. Regulation 3.3(f)(6)--Incorporation by Reference and Treatment of 
Affiliated Registrants
    FIA/SIFMA commented that, because affiliated SDs often share a 
common SD compliance program, much of the information in the CCO Annual 
Reports is the same. FIA/SIFMA therefore requested that the Commission 
permit flexibility in how reports from affiliated registrants address 
common matters.
    The Commission believes that, as a procedural matter within the 
scope of this rulemaking, it is appropriate to provide the requested 
flexibility. Permitting the consolidation of all relevant information 
concerning Registrants that control, are controlled by, or are under 
common control with, other Registrants (``Affiliated Registrants'') 
into one cohesive report could lead to greater efficiency for those 
Registrants and improved regulatory oversight. In addition, the request 
is consistent with provisions in Sec.  3.3(f)(6) permitting individual 
Registrants and Registrants that are registered in more than one 
capacity, e.g., as an SD and FCM (``Dual Registrants''), to incorporate 
by reference sections of a CCO Annual Report furnished to the 
Commission within the current or immediately preceding reporting 
period. Accordingly, the Commission is amending Sec.  3.3(f)(6) to 
permit Affiliated Registrants to incorporate within their CCO Annual 
Reports information shared across related Registrants.
    More broadly, the Commission believes that the annual compliance 
reporting requirement should not be subject to restrictive formatting 
requirements that do not serve the purpose of the reports. To the 
extent that the same information can be presented once for multiple 
reporting requirements (e.g., for a Dual Registrant or Affiliated 
Registrants) thereby creating efficiencies without undermining the 
purpose and utility of the CCO Annual Report, the Commission believes 
it is appropriate to permit the practice. In view of the foregoing, the 
Commission is reorganizing Sec.  3.3(f)(6) into three subparagraphs to 
more clearly set forth the different scenarios in which Affiliated 
Registrants or Dual Registrants can present the same information used 
in multiple reports or file one combined report addressing multiple 
reporting requirements.
    New subparagraph (i) incorporates without modification the current 
language in Sec.  3.3(f)(6). Subparagraph (i) permits an individual 
Registrant to incorporate by reference sections in a CCO Annual Report 
that it furnished to the Commission within the current or immediately 
preceding reporting period.
    Like Sec.  3.3(f)(6) as originally adopted, new subparagraph (ii) 
permits Dual Registrants to cross-reference sections in CCO Annual 
Reports submitted on behalf of either of its registrations within the 
current or immediately preceding reporting period. To address ambiguity 
regarding whether incorporation by reference can be achieved through 
the annual preparation and submission of a single CCO Annual Report by 
a Dual Registrant, the Commission is adding clarifying language to 
Sec.  3.3(f)(6)(ii). Under new Sec.  3.3(f)(6)(ii), a Dual Registrant 
may submit a single CCO Annual Report covering the annual reporting 
requirements relevant to each registration category, provided that: (1) 
The requirements of Sec.  3.3(e) are clearly addressed and identifiable 
as they apply to the Dual Registrant in each of its registration 
capacities; (2) to the extent a section of the CCO Annual Report 
addresses shared compliance programs, resources, or other elements 
related to compliance, there is a clear description of the commonality 
and delineation of any differences; and (3) the Registrant complies 
with the requirements of Sec.  3.3(f)(1) and (3) to certify and furnish 
the CCO Annual Report for each of its registrations. Regarding this 
last requirement, the Commission would expect the Dual Registrant to 
separately certify the CCO Annual Report with respect to each 
registration category, even if the same CCO or CEO serves as the 
certifying officer for each registration.
    Subparagraph 3.3(f)(6)(iii) permits Affiliated Registrants to use 
incorporation by reference within their individually required CCO 
Annual Reports to address matters shared across related registered 
legal entities. The Commission believes that providing greater 
flexibility to Affiliated Registrants may provide a more efficient 
process in achieving the goals of the CCO Annual Report by leveraging 
current structures and expertise. Regarding the extent of incorporation 
by reference, consistent with the Commission's view that a flexible 
approach as to form is warranted, the

[[Page 43519]]

Commission is not prescribing a strict requirement. For example, 
Affiliated Registrants could submit two separate reports, one of which 
incorporates by reference listed sections of the other. As another 
example, Affiliated Registrants could create a master report covering 
multiple affiliates in a manner similar to that described above for 
Dual Registrants in which information common to the affiliates is 
provided once in the report and identified as such and then other 
sections or appendices provide information specific to each affiliate 
separately. To the extent Affiliated Registrants choose to combine the 
contents of their individual CCO Annual Reports, the Commission would 
require the CCO or CEO for each Registrant to certify the applicable 
contents of the report consistent with Sec.  3.3(f)(3).
    The Commission expects that CCOs of Affiliated Registrants who 
share common compliance program elements be actively engaged in 
evaluating, assessing, and advising senior management with regard to 
those elements within their respective duties to a particular 
Registrant. Accordingly, how a CCO determines to address such common 
compliance program elements should not undermine the content or 
representations made in the CCO Annual Report so long as the references 
are clear and the information is fully accessible to senior management 
and the Commission.

E. Other Comments

1. Volcker Rule
    The Commission received two comments regarding the compliance 
requirements of subpart D of part 75 of the Commission's regulations 
and their relation to Sec.  3.3. Specifically, FIA/SIFMA requested that 
the Commission revisit the footnote in the part 75 adopting release 
that includes the compliance requirements under subpart D of part 75 
among the regulations covered by Sec.  3.3(d) and (e).\71\ Similarly, 
ISDA requested that the Commission remove the requirement for an 
applicable FCM or SD to address Volcker compliance program requirements 
in its CCO Annual Report.
---------------------------------------------------------------------------

    \71\ See Prohibitions and Restrictions on Proprietary Trading 
and Certain Interests in, and Relationships with, Hedge Funds and 
Private Equity Funds, 79 FR 5808, 6020 n. 2521 (Jan. 31, 2014).
---------------------------------------------------------------------------

    At this time, the Commission is declining to address the Volcker 
Rule compliance program requirements issue, as it was not considered in 
the Proposal. However, the Commission notes that the issue that 
commenters are raising requires serious consideration, and it may 
address the issue in future guidance or rulemakings.
2. Substituted Compliance
    The Commission received three comments regarding the applicability 
of the Proposal to its outstanding comparability determinations for 
non-U.S. SDs and MSPs. ISDA, the JBA, and Allen & Overy requested 
clarification from the Commission that the proposed amendments will not 
have any impact on the current substituted compliance determinations 
that pertain to Sec.  3.3. The Commission confirms that any existing 
substituted compliance determinations with respect to Sec.  3.3 are not 
affected by this rulemaking.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \72\ requires that 
agencies consider whether a proposed rule will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis of the impact. As noted in 
the Proposal, the regulations adopted herein would affect FCMs, SDs, 
and MSPs that are required to be registered with the Commission. The 
Commission has previously determined that FCMs, SDs, and MSPs are not 
small entities for purposes of the RFA. The Commission received no 
comments on the Proposal's RFA discussion. Accordingly, the Chairman, 
on behalf of the Commission, certifies, pursuant to 5 U.S.C. 605(b), 
that these regulations will not have a significant economic impact on a 
substantial number of small entities.
---------------------------------------------------------------------------

    \72\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \73\ 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''). As discussed in the Proposal, the final rules contain 
a collection of information for which the Commission has previously 
received a control number from OMB. The title for this collection of 
information is OMB control number 3038-0080--Annual Report for Chief 
Compliance Officer of Registrants. As a general matter, the rules, as 
adopted: (1) Define the term ``senior officer''; (2) clarify the scope 
of the CCO duties and the content requirements of the CCO Annual 
Report; (3) add the Registrant's audit committee as a party that must 
receive the CCO Annual Report; (4) add a materiality qualifier to the 
CCO Annual Report certification language; and (5) provide procedural 
instruction for Dual and Affiliated Registrants in the preparation and 
submission of CCO Annual Reports that address common information across 
the same or related legal entities. As discussed in the Proposal and 
herein, the Commission believes that these regulations, as adopted, 
will not impose any new information collection requirements that 
require approval of OMB under the PRA. As such, the final rules do not 
impose any new burden or any new information collection requirements in 
addition to those that already exist in connection with the preparation 
and delivery of the CCO Annual Report pursuant to the Commission's 
regulations.
---------------------------------------------------------------------------

    \73\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

C. Cost-Benefit Considerations

1. General Considerations
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders. Section 15(a) 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 Commission considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
section 15(a) factors relative to the status quo baseline--that is 
existing Sec.  3.3--and how various regulated entities comply with 
existing Sec.  3.3 today.
    The Commission notes that the consideration of costs and benefits 
below is based on the understanding that the markets function 
internationally, with many transactions involving U.S. firms taking 
place across international boundaries; with some Commission registrants 
being organized outside of the United States; with leading industry 
members typically conducting operations both within and outside the 
United States; and with industry members commonly following 
substantially similar business practices wherever located. While the 
Commission does not specifically refer to matters of location, the 
below discussion of costs and benefits refers to

[[Page 43520]]

the effects of the final rule on all activity subject to the final 
regulation, whether by virtue of the activity's physical location in 
the United States or by virtue of the activity's connection with or 
effect on U.S. commerce under CEA section 2(i).\74\ In particular, the 
Commission notes that some registrants subject to Sec.  3.3 are located 
outside of the United States.
---------------------------------------------------------------------------

    \74\ 7 U.S.C. 2(i).
---------------------------------------------------------------------------

    The Commission is adopting amendments to the CCO Rules that: (1) 
Define the term ``senior officer''; (2) clarify the scope of the CCO 
duties and the content requirements of the CCO Annual Report; (3) add 
the Registrant's audit committee as a party that must receive the CCO 
Annual Report; (4) add a materiality qualifier to the CCO Annual Report 
certification language; and (5) clarify and permit additional 
procedural methods for Dual and Affiliated Registrants in the 
preparation and submission of CCO Annual Reports that address common 
information across the same or related legal entities.
    The Proposal requested public comment on the costs and benefits of 
the proposed regulations, and specifically invited comments on: (1) The 
extent to which the proposed amendments reduce burdens and costs for 
Registrants, if at all; (2) whether any of the proposed amendments 
create any additional burdens or costs for Registrants; (3) whether the 
nature of, and the extent to which, costs associated with the CCO 
duties described in Sec.  3.3(d) could change as a result of the 
adoption of the Proposal, including monetary estimates; (4) what, if 
any, transition or ongoing costs or savings would result from the 
adoption of the proposed amendments; (5) whether the proposed 
amendments to the CCO Annual Report's submission requirements in Sec.  
3.3(f)(1) would cause undue burden; and (6) the Commission's 
preliminary consideration of the costs and benefits associated with the 
proposed amendments.
    Several commenters indirectly addressed the qualitative costs and 
benefits of the Proposal; however, none included quantitative data or 
other information in support of a measurable analysis. As such, the 
Commission is unable to quantify reliably the costs and benefits of 
this rulemaking. Instead, the Commission gives a qualitative 
discussion.
    As described in the sections above, in support of their comments, 
several commenters proposed alternative rule text and suggested the 
Commission provide additional clarification or guidance. In response to 
certain comments, the Commission adopted alternatives--particularly 
with respect to the furnishing and certification requirements of the 
CCO Annual Report--that the Commission believes will further reduce 
costs and burdens to Registrants while still providing the Commission 
with the information it needs to monitor the state of compliance by 
Registrants.
    Informed by commenters, the discussion below considers the rule's 
costs and benefits generally and in light of the five factors specified 
in section 15(a) of the CEA.\75\
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    \75\ The final rules add a definition of ``senior officer'' to 
Sec.  3.1. As stated in the Proposal, the Commission believes this 
addition in and of itself had no impact for purposes of determining 
the costs and benefits of the proposal. Nevertheless, the Commission 
sought public comment on whether the definition of ``senior 
officer'' has any cost and benefit considerations. The Commission 
received no comments on any cost and benefit considerations of the 
proposed definition, and, therefore, the analysis of the costs and 
benefits of the final rules is restricted to the amendments to Sec.  
3.3.
---------------------------------------------------------------------------

2. Regulation 3.3(d)--Chief Compliance Officer Duties
    As discussed above, the Commission amended Sec.  3.3(d) to clarify 
certain CCO duties. Specifically, the Commission added language to 
Sec.  3.3(d)(1) to clarify that the CCO's duty with respect to 
administering policies and procedures is specific to the Registrant's 
business as an FCM, SD, or MSP, as applicable. As amended, Sec.  
3.3(d)(2) incorporates an implied reasonableness standard regarding the 
duty to resolve conflicts of interest and limits the duty to material 
conflicts that relate to the Registrant's business as an FCM, SD, or 
MSP. The Commission amended Sec.  3.3(d)(4) to include the remediation 
of matters identified ``through any means'' by the CCO, including the 
specific discovery methods listed in Sec.  3.3(d)(4). Lastly, the 
Commission amended Sec.  3.3(d)(4) and (5) to remove the requirement in 
each provision that the CCO consult with the board of directors or 
senior officer in connection with resolving noncompliance issues and to 
clarify that the CCO's duty is to take ``reasonable steps to ensure 
that the registrant'' establishes policies and procedures for the 
remediation and resolution by management of noncompliance issues.
    The Commission did not receive any specific comments regarding 
whether any costs associated with CCO duties would change as a result 
of the amendments to Sec.  3.3(d). Better Markets opposed several of 
the proposed amendments to Sec.  3.3(d) that it viewed as ``likely to 
weaken the CCO regime.'' \76\ The Commission considered Better Markets 
views and does not believe that the final rules will reduce CCO 
accountability or marginalize the CCO role. Because the amendments to 
Sec.  3.3(d) provide greater specificity regarding the role of the CCO 
and the scope of the CCO's duties while further harmonizing with 
parallel SEC rules, the Commission believes that the final rule does 
not impose any additional costs to Registrants, market participants, 
the markets, or the general public.
---------------------------------------------------------------------------

    \76\ Better Markets comment letter.
---------------------------------------------------------------------------

    The Commission expects the greater clarity provided in the amended 
rule will reduce burdens on CCOs and improve overall compliance by 
applying a reasonableness standard to CCO responsibilities rather than 
deterring effective CCO activities due to concerns of uncertain 
liability. This greater clarity should also encourage a greater 
willingness of potential CCOs to vie for and take positions with 
Registrants. As noted by one commenter, clarifying the CCO's role 
within a Registrant's overall organization fosters accountability for 
senior business management and supervisors, and reduces obstacles in 
attracting and retaining highly qualified professionals to serve as 
CCOs.\77\ Additionally, by further harmonizing the CFTC's and SEC's CCO 
duties, CCOs of dual SEC-CFTC registrants should be able to fulfill 
their duties more efficiently and cost effectively.
---------------------------------------------------------------------------

    \77\ See FIA/SIFMA comment letter.
---------------------------------------------------------------------------

3. Regulation 3.3(e)--Annual Report
    In adopting amendments to Sec.  3.3(e), the Commission eliminated 
the requirement to address ``each'' applicable CFTC regulatory 
requirement to which a Registrant is subject in the assessment of the 
WPPs, since the CCO must still conduct an underlying assessment of the 
effectiveness of the policies and procedures to meet the requirements 
of the rule. The Commission further removed the requirement to identify 
each WPP with respect to each applicable requirement, given that the 
WPPs are already required to be described in Sec.  3.3(e)(1). Lastly, 
the Commission clarified that the scope of the resources devoted to 
compliance that need to be described under Sec.  3.3(e)(4) should be 
limited to a discussion of resources for the specific activities for 
which the Registrant is registered.
    The comments received for these proposed amendments were generally 
supportive. For example, one commenter stated that ``this Proposal will 
increase efficiencies by

[[Page 43521]]

streamlining the obligations for market participants that are regulated 
by both the CFTC and SEC and eliminate unnecessary duplicative policies 
related to the CCO Annual Report.'' \78\ One commenter stated that the 
removal of the requirement-by-requirement assessment from the rule will 
``allow for more effective conversations to occur between its business 
partners and the Compliance Department, creating for a more holistic 
assessment of the Firm's compliance.'' \79\ Similarly, another 
commenter highlighted the benefit to overall compliance of focusing the 
CCO and compliance personnel on WPPs holistically.\80\ Only one 
commenter expressed a concern that the proposed changes equated to a 
weakening of the process.\81\
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    \78\ See NGSA comment letter.
    \79\ See TD Ameritrade comment letter. See also NFA comment 
letter.
    \80\ See FIA/SIFMA comment letter.
    \81\ See Better Markets comment letter.
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    As discussed in the Proposal, in implementing Sec.  3.3(e), the 
Commission received consistent feedback from Registrants that the 
exercise of documenting their assessment on a requirement-by-
requirement basis was creating a significant economic burden in time 
and resources. Eliminating the requirement-by-requirement assessment is 
intended to reduce the burdens on Registrants of producing the CCO 
Annual Report while maintaining its primary purpose. It is the 
Commission's view, supported by commenters, that by reducing the burden 
associated with this aspect of the CCO Annual Report, CCO and other 
compliance resources may be better focused on other compliance 
functions. As discussed in section II.C.2, the final rule does not 
remove or lessen the CCO's duties to, among other things, ensure the 
Registrant is reviewing and assessing the continued soundness of its 
WPPs. In addition, the amendments harmonize certain CFTC and SEC CCO 
Annual Report content requirements in an effort to reduce the costs to 
dual registrants of complying with two regulatory regimes. The 
Commission believes that the final rule also provides relief for 
Registrants from resource and time pressures in preparing their CCO 
Annual Reports.
4. Regulation 3.3(f)--Furnishing the Annual Report and Related Matters
    The Commission amended Sec.  3.3(f)(1) to require the CCO to 
provide the CCO Annual Report to the audit committee or a functionally 
equivalent body not later than the committee's next scheduled meeting, 
but in no event more than 90 days following the furnishing of the 
report to the Commission. The Commission also amended the CCO Annual 
Report's certification requirement by adding a materiality qualifier to 
the certification language in Sec.  3.3(f)(3). Lastly, the Commission 
amended Sec.  3.3(f)(6) to provide procedures for Dual and Affiliated 
Registrants in the preparation and submission of CCO Annual Reports 
that address common information across the same or related legal 
entities.
    As discussed above, the Commission received comments from ISDA and 
FIA/SIFMA asserting that the proposal requiring the senior officer, 
board of directors, and audit committee to receive the CCO Annual 
Report would increase operational and regulatory burdens. FIA/SIFMA 
noted that requiring the boards of directors of SDs that are large, 
diversified commercial banks to receive the CCO Annual Report would 
exacerbate current problems associated with the volume of review they 
must already undertake, further reducing the amount of time they should 
be allocating to overseeing enterprise risk and strategy. Both 
commenters believed that the Proposal would add costs, complexities, 
and possibly, conflicts for Registrants because the deadline to submit 
the CCO Annual Report to the Commission may not align with board of 
directors and audit committee meetings, impeding their ability to 
ensure proper review.
    Advocates of adding a materiality qualifier to the CCO Annual 
Report certification language identified several benefits, including 
reducing burdens by further harmonizing the Commission's rule with the 
SEC's parallel rule, providing a measure of clarity to CCOs and 
potential CCOs regarding their own personal liability, and reducing 
deterrence of highly qualified people from taking or staying in the CCO 
role.\82\ In support of its request for greater flexibility in the 
preparation of CCO Annual Reports by Affiliated Registrants, FIA/SIFMA 
noted the benefits of streamlining the overall process.
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    \82\ See FIA/SIFMA, ISDA, and NFA comment letters.
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    In response to concerns regarding the proposed CCO Annual Report 
submission requirements, the Commission has modified Sec.  3.3(f)(1) to 
accommodate the practicality of audit committee and board meeting 
schedules. Because the final rule maintains the requirement that either 
the senior officer or the board of directors receive the CCO Annual 
Report prior to its submission to the Commission, Registrants should 
not have to change existing internal document submission processes for 
board meetings to comply. As adopted, the final rule adds the audit 
committee (or equivalent body) as a recipient of the report, but allows 
for the report to be furnished to the audit committee not later than 
the next scheduled meeting, but in no event more than 90 days after 
submission of the report to the Commission is required. Since the rule 
does not set a timeline for the review of the CCO Annual Report by any 
of its internal recipients--leaving such matters to the discretion of 
each Registrant, the Commission believes that any additional costs 
arising out of the requirement to submit the report to the audit 
committee should be minimal. The Commission does not believe the final 
amendments to Sec.  3.3(f)(1), (3) and (6) impose any new costs or 
burdens since they do not require Registrants to affirmatively 
undertake new duties or requirements.
    As described above and in the Proposal, the Commission believes 
that the amendments to Sec.  3.3(f) will ensure that the CCO's findings 
and recommendations will be distributed to the groups within each 
Registrant with responsibility for governance and internal controls. 
Further, the Commission believes the amendments provide greater 
flexibility and opportunity for Dual and Affiliated Registrants to 
streamline their CCO Annual Report preparation processes, which may 
result in a less costly CCO Annual Report.

D. Section 15(a) Factors

    As noted above, section 15(a) of the CEA 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.
1. Protection of Market Participants and the Public
    The final rules will continue to protect market participants and 
the public because they do not fundamentally alter the CCO duties or 
the annual compliance reporting requirements of Sec.  3.3. While the 
amendment removing the requirement-by-requirement reporting may reduce 
the extent of reporting detail, the Commission believes that change 
will allow the CCO to focus more directly on identifying and describing 
in the CCO Annual Report material compliance

[[Page 43522]]

issues and other related matters deserving of greater attention. 
Accordingly, the Commission believes that the reduction in content 
requirements will not affect the protection of market participants and 
the public.
2. Efficiency, Competitiveness, and Financial Integrity of Markets
    The Commission believes that the amended CCO Rules will not 
negatively impact market efficiency, competitiveness, or integrity 
because each CCO Annual Report addresses internal compliance programs 
of each Registrant and are not publicly available. The amendments 
affecting CCO duties only clarify those duties and do not affect the 
performance of derivatives markets.
3. Price Discovery
    The Commission did not identify a specific effect on price 
discovery as a result of the Proposal because the Proposal did not 
address any pricing issues. The Commission did not receive any comments 
on this issue. Thus, the Commission continues to believe that this 
rulemaking will not have an impact on price discovery.
4. Sound Risk Management Practices
    The Commission believes that the final amendments to the CCO duties 
and CCO Annual Report requirements will not have a meaningful effect on 
Registrants' risk management practices. The final rules do not directly 
impact a Registrant's risk management practices because they clarify 
the scope of the CCO's duties and CCO Annual Report contents, and do 
not require changes to a Registrant's risk management program.\83\ 
Furthermore, the final amendments to the CCO Annual Report content 
requirements do not affect the Registrant's obligation to address 
material noncompliance issues relating to its risk management program 
in the CCO Annual Report. The Commission believes that including the 
audit committee and either the board of directors or the senior officer 
as recipients of the CCO Annual Report may benefit Registrants' overall 
risk management practices by ensuring that those with overall 
responsibility for governance and internal controls are informed of the 
report contents. Finally, the Commission does not believe that the 
addition of the materiality qualifier to the CCO Annual Report 
certification language, or the additional procedural mechanisms for 
addressing common matter across Dual and Affiliated Registrants impacts 
Registrants' risk management practices, as they do not impact the CCO 
Annual Report's content and underlying assessment.
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    \83\ See, e.g., 17 CFR 23.600.
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5. Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations for this rulemaking.

E. Antitrust Considerations

    Section 15(b) of the Act requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
purposes of the Act, in issuing any order or adopting any Commission 
rule or regulation (including any exemption under section 4(c) or 
4c(b)), or in requiring or approving any bylaw, rule, or regulation of 
a contract market or registered futures association established 
pursuant to section 17 of the Act.\84\ The Commission believes that the 
public interest to be protected by the antitrust laws is generally to 
protect competition.
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    \84\ 7 U.S.C. 19(b).
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    The Commission has reflected on the final rule to determine whether 
it is anticompetitive and has identified no anticompetitive effects. 
Because the Commission has determined that the final rulemaking has no 
anticompetitive effects, the Commission has not identified any less 
anticompetitive means of achieving the purposes of the Act.

List of Subjects in 17 CFR Part 3

    Administrative practice and procedure, Chief compliance officer, 
Commodity futures, Futures commission merchants, Major swap 
participants, Registration, Swap dealers, Reporting and recordkeeping 
requirements.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission amends 17 CFR chapter I as follows:

PART 3--REGISTRATION

0
1. The authority citation for part 3 continues to read as follows:

    Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1, 6c, 
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 
13b, 13c, 16a, 18, 19, 21, and 23.


0
2. In Sec.  3.1, add paragraph (j) to read as follows:


Sec.  3.1  Definitions.

* * * * *
    (j) Senior officer. Senior officer means the chief executive 
officer or other equivalent officer of a registrant.

0
3. In Sec.  3.3, revise paragraphs (d), (e), and (f) to read as 
follows:


Sec.  3.3  Chief compliance officer.

* * * * *
    (d) Chief compliance officer duties. The chief compliance officer's 
duties shall include, but are not limited to:
    (1) Administering each of the registrant's policies and procedures 
relating to its business as a futures commission merchant, swap dealer, 
or major swap participant that are required to be established pursuant 
to the Act and Commission regulations;
    (2) In consultation with the board of directors or the senior 
officer, taking reasonable steps to resolve material conflicts of 
interest relating to the registrant's business as a futures commission 
merchant, swap dealer, or major swap participant that may arise;
    (3) Taking reasonable steps to ensure compliance with the Act and 
Commission regulations relating to the registrant's business as a 
futures commission merchant, swap dealer or major swap participant;
    (4) Taking reasonable steps to ensure the registrant establishes, 
maintains, and reviews written policies and procedures reasonably 
designed to remediate noncompliance issues identified by the chief 
compliance officer through any means, including any compliance office 
review, look-back, internal or external audit finding, self-reporting 
to the Commission and other appropriate authorities, or complaint that 
can be validated;
    (5) Taking reasonable steps to ensure the registrant establishes 
written procedures reasonably designed for the handling, management 
response, remediation, retesting, and resolution of noncompliance 
issues; and
    (6) Preparing and signing the annual report required under 
paragraphs (e) and (f) of this section.
    (e) Annual report. The chief compliance officer annually shall 
prepare a written report that covers the most recently completed fiscal 
year of the futures commission merchant, swap dealer, or major swap 
participant. The annual report shall, at a minimum, contain a 
description of:
    (1) The written policies and procedures of the futures commission 
merchant, swap dealer, or major swap participant described in paragraph 
(d) of this section, including the code of ethics and conflicts of 
interest policies;
    (2) The futures commission merchant's, swap dealer's, or major swap 
participant's assessment of the

[[Page 43523]]

effectiveness of its policies and procedures relating to its business 
as a futures commission merchant, swap dealer or major swap 
participant;
    (3) Areas for improvement, and recommended potential or prospective 
changes or improvements to its compliance program and resources devoted 
to compliance;
    (4) The financial, managerial, operational, and staffing resources 
set aside for compliance with respect to the Act and Commission 
regulations relating to its business as a futures commission merchant, 
swap dealer or major swap participant, including any material 
deficiencies in such resources;
    (5) Any material noncompliance issues identified and the 
corresponding action taken; and
    (6) Any material changes to compliance policies and procedures 
during the coverage period for the report.
    (f) Furnishing the annual report and related matters--(1) 
Furnishing the annual report. (i) Prior to furnishing the annual report 
to the Commission, the chief compliance officer shall provide the 
annual report to the board of directors or senior officer of the 
futures commission merchant, swap dealer, or major swap participant for 
its review.
    (ii) If the futures commission merchant, swap dealer, or major swap 
participant has established an audit committee (or an equivalent body), 
then the chief compliance officer shall furnish the annual report to 
the audit committee (or equivalent body) not later than its next 
scheduled meeting after the annual report is furnished to the 
Commission, but in no event more than 90 days after the applicable date 
specified in paragraph (f)(2) of this section for furnishing the annual 
report to the Commission.
    (iii) A written record of transmittal of the annual report to the 
board of directors or the senior officer, and audit committee, if 
applicable, shall be made and maintained in accordance with Sec.  1.31 
of this chapter.
    (2) Furnishing the annual report to the Commission. (i) Except as 
provided in paragraph (f)(2)(ii) of this section, the annual report 
shall be furnished electronically to the Commission not more than 90 
days after the end of the fiscal year of the futures commission 
merchant, swap dealer, or major swap participant.
    (ii) The annual report of a swap dealer or major swap participant 
that is eligible to comply with a substituted compliance regime for 
paragraph (e) of this section pursuant to a comparability determination 
of the Commission may be furnished to the Commission electronically up 
to 15 days after the date on which the comparable annual report must be 
completed under the requirements of the applicable substituted 
compliance regime. If the substituted compliance regime does not 
specify a date by which the comparable annual report must be completed, 
then the annual report shall be furnished to the Commission by the date 
specified in paragraph (f)(2)(i) of this section.
    (3) Certification. The report shall include a certification by the 
chief compliance officer or chief executive officer of the registrant 
that, to the best of his or her knowledge and reasonable belief, and 
under penalty of law, the information contained in the annual report is 
accurate and complete in all material respects.
    (4) Amending the annual report. The futures commission merchant, 
swap dealer, or major swap participant shall promptly furnish an 
amended annual report if material errors or omissions in the report are 
identified. An amendment must contain the certification required under 
paragraph (f)(3) of this section.
    (5) Extensions. A futures commission merchant, swap dealer, or 
major swap participant may request from the Commission an extension of 
time to furnish its annual report, provided the registrant's failure to 
timely furnish the report could not be eliminated by the registrant 
without unreasonable effort or expense. Extensions of the deadline will 
be granted at the discretion of the Commission.
    (6) Incorporation by reference and related registrants--(i) Prior 
reports. A futures commission merchant, swap dealer, or major swap 
participant may incorporate by reference sections of an annual report 
that has been furnished within the current or immediately preceding 
reporting period to the Commission.
    (ii) Dual registrants. If a futures commission merchant, swap 
dealer, or major swap participant is registered in more than one 
capacity with the Commission, an annual report submitted as one 
registrant may incorporate by reference sections in the annual report 
furnished within the current or immediately preceding reporting period 
as the other registrant. A dual registrant may submit one annual report 
that addresses the requirements set forth in paragraphs (e), (f)(1) and 
(f)(3) of this section with respect to each registration capacity.
    (iii) Affiliated registrants. If a futures commission merchant, 
swap dealer, or major swap participant controls, is controlled by, or 
is under common control with, one or more other futures commission 
merchants, swap dealers, or major swap participants, and each of the 
affiliated registrants must submit an annual report, an affiliated 
registrant may incorporate by reference in its annual report sections 
from an annual report prepared by any of its affiliated registrants 
furnished within the current or immediately preceding reporting period. 
Affiliated registrants may submit one annual report that addresses the 
requirements set forth in paragraphs (e), (f)(1) and (f)(3) of this 
section with respect to each affiliated registrant.
* * * * *

0
4. Add appendix C to part 3 to read as follows:

Appendix C to Part 3--Guidance on the Application of Sec.  3.3(e), 
Chief Compliance Officer Annual Report Form and Content

A. Description of the Registrant's WPPs (Sec.  3.3(e)(1))

    In acknowledgment of the large number of WPPs that a Registrant 
implements to comply with CFTC regulations, the Commission 
understands that for purposes of the CCO Annual Report, specific WPP 
descriptions may be appropriately brief while still identifying the 
basic purpose of the policy or procedure and how the policy or 
procedure operates to achieve that purpose. The CCO Annual Report 
should include a summary overview that describes the general forms 
and types of WPPs the Registrant has, such as a compliance manual 
specific to the Registrant, global corporate manuals or policies, 
and/or business-unit-specific WPPs that support the applicable 
regulatory requirements. This summary overview would provide a 
narrative of the Registrant's system or program of WPPs, how they 
work as a whole, and how the Registrant generally puts the WPPs into 
practice as part of its compliance activities. With respect to the 
COI policy, it is the Commission's view that the CCO should describe 
the COI policy specific to the Registrant, addressing the specific 
requirements of Sec.  1.71 or Sec.  23.605 of this chapter, as 
applicable.

B. Assessment of the Effectiveness of the Policies and Procedures 
(Sec.  3.3(e)(2))

    The Commission expects a CCO Annual Report to contain a 
comprehensive discussion of: the assessment process; and the results 
of the effectiveness assessment. The regulation does not dictate the 
form or manner for the effectiveness assessment. Rather, the 
Commission would expect each Registrant to follow a process and 
present the resulting assessment in a form and manner that is 
appropriate for the size and complexity of the Registrant's 
applicable business activities and structure. While Sec.  3.3(e)(2) 
no longer has a ``requirement-by-requirement'' standard, the CCO 
Annual Report should address all of the general areas of regulation 
applicable to the Registrant.

C. Areas for Improvement and Recommended Changes (Sec.  3.3(e)(3))

    1. Section 3.3(e)(3) requires two components in the CCO Annual 
Report: an

[[Page 43524]]

identification and discussion of each area that needs improvement; 
and a discussion of what changes are recommended to address each 
area needing improvement. In addressing these two elements, the CCO 
Annual Report should include, as applicable: A discussion of why the 
particular area needs improvement; a discussion of the proposed 
improvements and the time frame for their implementation; and a 
cross-reference to the regulation that a recommended change would 
address.
    2. In general, identifying areas in need of improvement and 
recommending steps to effect those improvements should be a core 
function of compliance. Accordingly, a CCO Annual Report that makes 
no recommendations for changes or improvements to the compliance 
program may raise concerns about the adequacy of the compliance 
program review intended by the CCO Annual Report process. Moreover, 
there should be continuity from one reporting cycle to the next, 
such that where a previous CCO Annual Report discussed future 
changes or improvements that were being considered or planned, 
subsequent CCO Annual Reports should discuss the outcomes of the 
changes that were implemented during the most recent scope period, 
any monitoring or testing of those changes, whether any compliance 
issues arose from the changes and, if there were any issues, how 
those issues were handled. While this section may address 
improvements to the compliance program that have already been 
completed, the Commission believes that this section primarily 
should discuss recommended improvements in process and/or future 
plans to improve the Registrant's compliance program or resources 
devoted to compliance.

D. Resources Set Aside for Compliance (Sec.  3.3(e)(4))

    1. The resources description required by Sec.  3.3(e)(4) should 
be appropriate for assisting the Registrant's senior management and 
the CFTC in assessing whether sufficient resources are dedicated to 
compliance. Accordingly, the description should include the 
following types of information: the budget allocated to the 
compliance department of the Registrant for compliance with the CEA 
and Commission regulations; full-time compliance staffing levels for 
such compliance activities; partially allocated staff counts (if 
applicable), with information on how much of such employees' time is 
devoted to the Registrant's compliance matters that are subject to 
CFTC oversight; an explanation of managerial resources (the 
explanation should clearly identify the division between staffing 
resources and management resources devoted to compliance); general 
infrastructure information (e.g., computers, compliance-oriented 
software, technology infrastructure, etc.); and if applicable, a 
description of the use of third party vendors or outsourcing for 
compliance activities. In most cases, to effectively inform the 
board of directors or senior officer and the Commission, the 
description should include quantifiable information for the 
financial, managerial, operational, and staffing resources allocated 
to compliance with the CEA and Commission regulations.
    2. The Commission understands that a discussion of specific 
compliance budget allocations may not be as straightforward as 
described above depending on the size and complexity of the 
Registrant's compliance program and the extent to which the 
Registrant's compliance resources may be shared for other non-CFTC 
regulated business activities. The purpose of the CCO Annual Report 
requirement is to convey to senior management and the CFTC a clear 
understanding of the resources the Registrant has set aside for 
compliance with the CEA and Commission regulations. While some of 
the compliance resources used in a Registrant's CFTC compliance-
related program may be used for compliance activities in other parts 
of a larger corporate enterprise, this sharing of resources does not 
negate the Registrant's obligation to discuss how the Registrant's 
compliance program is being resourced. For those instances where 
compliance resources are shared, it is recognized that the 
description of the shared resources may reasonably be more general 
in nature, providing approximations and estimates based on expected 
needs. However, the Commission expects that the CCO Annual Report 
will still address shared resources in as much detail as is 
necessary to convey the information needed to assess the overall 
compliance activities of the Registrant.
    3. Section 3.3(e)(4) also requires that the CCO Annual Report 
include a discussion of any material deficiencies in compliance 
resources. If there have been reductions in the compliance program 
of the Registrant since the prior reporting period, for example, if 
there has been a reduction in compliance staff, a significant 
compliance budget decrease, or the Registrant initiated significant 
new business activities without a corresponding increase in 
compliance resources, the CCO Annual Report should include an 
explanation of why the compliance resources are not deficient in 
light of the changes. If there are no material deficiencies in the 
resources devoted to compliance, the Commission recommends that the 
CCO Annual Report contain an express statement to that effect so 
that the recipients of the report can see that the requirement was 
assessed.

E. Material Noncompliance Issues (Sec.  3.3(e)(5))

    The CCO Annual Report should include an explanation of the 
standard the Registrant used to determine a non-compliance event's 
materiality. In addition, this section of the CCO Annual Report 
should contain a description of each material non-compliance issue 
identified either through self-assessment procedures conducted 
within the Registrant, or noted by any external entities which 
conducted a review of the Registrant (such as a designated self-
regulatory organization). The description should also include the 
corresponding actions taken, described in reasonable detail, as well 
as specific references to the Commission regulation or regulations 
that are implicated by the non-compliance event. Specifically, the 
Commission recommends that the CCO Annual Report include a 
discussion of the Registrant's deliberations on a course of 
remediation, how the implementation of the remediation is being or 
was executed, any follow-up testing of the remediation, and any 
noteworthy results from such testing. Additionally, the Commission 
recommends that CCOs consider including an overview of how the CCO 
or compliance department handles and tracks non-compliance events in 
general.

F. Material Changes to WPPs (Sec.  3.3(e)(6))

    When describing any material changes to the WPPs, a description 
of the standard of materiality used should be provided. This 
description will provide meaningful context for any reported changes 
to the WPPs.

    Issued in Washington, DC, on August 21, 2018, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Chief Compliance Officer Duties and Annual Report 
Requirements for Futures Commission Merchants, Swap Dealers, and Major 
Swap Participants; Amendments--Commission Voting Summary and Chairman's 
Statement

Appendix 1--Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz 
and Behnam voted in the affirmative. No Commissioner voted in the 
negative.

Appendix 2--Statement of Chairman J. Christopher Giancarlo

    As part of the CFTC's Project KISS efforts, this final rule will 
streamline and clarify a Chief Compliance Officer's (CCO) 
obligations, as well as harmonize certain provisions with the 
Securities and Exchange Commission's (SEC) rules. Clarifying the 
role and responsibilities of the CCO should enable greater 
accountability and improve overall compliance, as well as reduce 
burdens on CCOs and uncertainty for registrants. The rule continues 
to impose a duty on CCOs to resolve matters but within the practical 
limits of their position at the CFTC-registered entity. The rule 
also continues to impose a duty for the CCO to undertake an annual 
review but reduces the burdens associated with the review, which 
will allow the CCO to devote more time and resources to compliance 
activities at the registrant. In addition, further harmonizing 
definitions and CCO duties of dual CFTC-SEC registrants should 
improve efficiency and further reduce the burdens on CCOs.
    I would like to thank CFTC staff for their efforts. I would also 
like to thank Commissioners Quintenz and Behnam for their support.

[FR Doc. 2018-18432 Filed 8-24-18; 8:45 am]
 BILLING CODE 6351-01-P

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