United States: CFTC Amends Rules Governing Chief Compliance Officer Duties

Last Updated: August 29 2018
Article by Nihal S. Patel

Most Read Contributor in United States, August 2018

The CFTC approved final amendments to clarify the duties of chief compliance officers of futures commission merchants ("FCMs"), swap dealers and major swap participants (together, "CCOs"). The final amendments also modify the content and submission requirements of a CCO annual report.

The amendments will, among other things:

  • adopt a definition of "senior officer" as "the chief executive officer or other equivalent officer of a registrant";
  • clarify that a CCO is required to "administer" the registrant's compliance program as to its business as an [FCM/SD/MSP], rather than more generally as to CEA/CFTC compliance;
  • clarify that a CCO's responsibility is to resolve material conflicts of interest as to the [FCM/SD/MSP] business;
  • remove a requirement that the CCO must consult with the board or senior officer to remediate noncompliance issues (instead, providing a more flexible "reasonable steps" approach);
  • remove an express requirement that the CCO annual report review the effectiveness of written policies and procedures ("WPPs") with respect to each applicable requirement under the CEA and CFTC regulations (while noting that the CCO still must conduct an "underlying assessment" of WPPs with respect to rule requirements);
  • clarify that a discussion of the firm's "financial, managerial, operational and staffing resources" in the CCO annual report need address only the [FCM/SD/MSP] business;
  • not require the CCO to provide the annual report to all board members, the senior officer and the audit committee before provision to the CFTC. Instead, the final amendments retain the current requirement to provide the report to the board or senior officer, while also adding a requirement that it be furnished to the audit committee (though not necessarily before provision to the CFTC);
  • add a materiality qualifier to the CCO certification that the annual report is accurate and complete;
  • add new provisions (not previously proposed) to (1) permit dual registrants to submit a single CCO annual report, subject to certain requirements, and (2) permit affiliated registrants to use incorporation-by-reference to address matters shared across registrants; and
  • adopt previous staff guidance (with modifications) previously granted in Letter 14-153 on the form and content of CCO annual reports as an appendix to the rules.

The amendments will become effective 30 days after publication in the Federal Register.

A comparison of the rule amendment against (i) the proposal is available here and (ii) the existing rules is available here.

Commentary / Nihal Patel

This rulemaking is a comprehensive rethinking of the existing CCO requirements. It is not, however, a rewrite of the requirements, and should not be viewed as a substantial loosening of the compliance requirements. Instead, what it accomplishes (within the confines of the statutory requirements) are a number of changes that limit the burdens of producing the CCO annual report without materially undermining the effect of the report that is produced (along with a number of less material cleanup changes). A few notable aspects of the rulemaking are highlighted below.

  • As previously noted, the definition of "senior officer" may not make sense in all cases, particularly for those types of entities where, as a practical matter, the CEO of the entity may not truly be the right person to oversee the CCO of the [FCM/swap dealer/MSP] business. Nevertheless, the CFTC seemed to indicate that it was constrained by the statutory text in Section 4s(k)(2)(A) of the CEA, which requires the CCO to "report directly to the board or to the senior officer."
  • In addition to the published guidance in the appendix to the rules, the adopting release provides useful information as to how the CFTC views the duties of the CCO. For example, the CFTC indicated that "reasonable steps to ensure compliance" is a facts-and-circumstances matter, but would "likely" include involvement in compliance monitoring, identification of (potential) noncompliance, advising on mitigation and correction, and escalation to senior management where necessary.
  • The adopted rules are a potential test case for how the potential "harmonization" of the CFTC rules works with the SEC security-based swap rules. While a number of matters are conformed (such as the definition of "senior officer" and the addition of a materiality qualifier to the CCO certification), the CFTC in some cases declined to adopt the SEC requirements. For example, the CFTC specifically declined to adopt the SEC requirement that the annual report be provided to the board, senior officer and audit committee before provision to the SEC. See SEA Rule 15FK-1 (c)(ii)(B). The CFTC reasoned, among other things, that security-based swap dealers are "likely to consist of a smaller number of large financial entities or affiliates thereof," and are thus more likely to have audit committees than CFTC registrants.
  • For non-U.S. registrants, it should be noted that the CFTC specifically indicated that "the proposed amendments will not have any impact on the current substituted compliance determinations that pertain to § 3.3."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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