United States: CFTC Staff Issues CCO Annual Report Advisory And Related No-Action Relief

Last Updated: January 21 2015
Article by Julian E. Hammar

On December 22, 2014, the Division of Swap Dealer and Intermediary Oversight ("DSIO") of the Commodity Futures Trading Commission ("CFTC") issued an Advisory providing guidance regarding the contents of chief compliance officer ("CCO") annual reports required to be submitted to the CFTC by futures commission merchants ("FCMs"), swap dealers ("SDs"), and major swap participants ("MSPs") (collectively, "registrants"). CCO annual reports must be (i) furnished to a firm's Board of Directors ("Board") or senior officer prior to submission to the CFTC, (ii) certified by the CCO or the firm's chief executive officer, and (iii) contain information specified in CFTC Regulation 3.3(e), 17 C.F.R. 3.3(e). Based on CFTC staff review of CCO annual reports submitted in the first year, the Advisory provides guidance and recommendations for best practices with respect to future annual report filings and Reg. 3.3(e)'s content requirements. While DSIO emphasizes that the Advisory is not intended to create new regulatory requirements, and the recommendations and best practices in the Advisory need not be used if the CCO does not believe they will improve the annual report, DSIO will expect most FCMs, SDs, and MSPs to incorporate its recommendations into their CCO annual reports.

Among other recommendations, the Advisory suggests that the CCO annual report should include a summary chart to display information addressing various requirements and includes a sample chart. However, DSIO states that, while charts may be appropriate to efficiently display information, they are not a substitute for a complete and substantive discussion of the material issues that must be addressed in the annual report to fully inform the Board or senior officer regarding the registrant's compliance program. The extended discussion of such charts in the Advisory, though, suggests that staff prefers to see such charts in the annual report. CFTC staff uses regulatory charts in other contexts (e.g., Form DCM, Exhibit L requires a regulatory chart in a contract market designation application) because they assist staff in conducting their review, which appears to be the motivation here. Some information that DSIO suggests may be useful to be displayed in chart form includes:

  • An identification of applicable regulatory requirements to which the registrant is subject.
  • A description of the firm's written policies and procedures ("WPPs") that address each relevant regulatory requirement.
  • A cross-reference to the specific page number and section of the WPPs.
  • A concise summary assessment of the effectiveness of the firm's WPPs with respect to each requirement.
  • The method used to assess effectiveness (e.g., testing, routine monitoring, self-reports, certifications or attestations, and/or internal audits).

The Advisory also suggests that substantially more detail should be included in the narrative description of the CCO's annual report than was included in the first year's filings. A summary table containing the Advisory's specific recommendations and guidance is provided below.

The Advisory is available http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-153.pdfhere.

Concurrently with the issuance of the Advisory, DSIO issued a no-action letter that permits FCMs, SDs, and MSPs with fiscal years ending on or before January 31, 2015, to file their CCO annual reports within 90 days of their fiscal year end (as opposed to within 60 days as required by CFTC regulations). Firms that are unable to submit the annual reports within 90 days may submit them within 120 days of their fiscal year end, so long as they inform DSIO of any material noncompliance events that occurred during the period covered by the report. The additional time is to permit firms to make adjustments to their annual reports to incorporate information provided in the Advisory.

The no-action letter is available here.

To view the Advisory Guidance Regarding Compliance with CCO Annual Report Requirements click here.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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