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CFTC Proposes Amendments to Chief Compliance Officers and Annual Report Requirements for Certain CFTC Registrants

The U.S. Commodity Futures Trading Commission, CFTC, recently proposed amendments (the “Proposal”) to 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 and furnishing to the Commission an annual report containing an assessment of the Registrant’s compliance activities. The Proposal aims to increase efficiencies, reduce regulatory burden, and clarify the scope of CCO duties. In addition, the Proposal is designed to further harmonize the CFTC’s rules with the SEC’s counterpart CCO rules.

Proposed changes include:

  • Defining the term “Senior Officer”: Under CFTC Regulation 3.3(a)(1), a CCO must report to the board of directors or the “senior officer” of a Registrant. Current CFTC Regulation 3.3 does not define this term. The CFTC has proposed defining “senior officer” as “the chief executive officer or other equivalent officer of a registrant”, on the theory that creating a direct reporting line from the CCO to the board or to the highest executive officer will ensure the greatest CCO independence.

  • Duty to Resolve Conflicts of Interest: Under current CFTC Regulation 3.3(d)(2), a CCO must resolve “any conflicts of interest that may arise”. The Proposal adds a reasonableness qualifier such that a CCO is required to take “reasonable steps” to resolve conflicts. The CFTC stated in the Proposal that requiring the CCO to personally resolve any potential conflict of interest may be overly burdensome. The changes clarify that routinely encountered conflicts can be resolved in the normal course of business consistent with the CCO’s general administration.

  • CCO Annual Reporting: CFTC Regulation 3.3(e)-(f) currently require a CCO to deliver an annual report describing the Registrant’s compliance program, in order to promote periodic self-evaluation and inform the Commission of possible compliance weaknesses. Industry participants have indicated to the CFTC that producing such a report is burdensome given the value of the report, given that compliance policies and procedures do not change from year-to-year. As a result, the Commission is proposing–among other things–to eliminate the requirement of CFTC Regulation 3.3(e)(2) to review each obligation under the CEA and CFTC Regulations and to describe the policies and procedures that fulfill such obligations. The annual report would still include other components set out in current CFTC Regulation 3.3(e), such as descriptions of: the Registrant’s written policies and procedures, the effectiveness of such policies and procedures, areas for improvement of the current compliance program, Registrant resources for compliance, noncompliance issues, and recent changes to a Registrant’s policies and procedures. The Proposal also seeks to amend CFTC Regulation 3.3(f)(1) to require that CCOs deliver the annual report to the Registrant’s board of directors, senior officer, and the audit committee (or equivalent body). The current rule only requires that the annual report be furnished to a Registrant’s board of directors or senior officer.

The proposed amendments to CFTC Regulation 3.3 generally are in keeping with Acting Chairman Giancarlo’s regulatory approach of reducing burdensome regulations where possible and being sensitive to the concerns of industry participants. Industry participants should review the Proposal to determine the impact of the proposed changes and make comment to the agency if any aspects of the proposed amendments need to be revised. The comment period for the Proposal will be open through July 7, 2017. 

 

© 2017 Covington & Burling LLP

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About this Author

James Kwok, Covington Burling, Corporate Lawyer, Investment Banking
Associate

James Kwok is an associate in the Corporate Practice Group, resident in the New York office. In 2013 and 2014, he was seconded to the legal department of a major investment bank where he acted as internal counsel on capital markets, financial advisory and private funds advisory matters. He also has passed all three levels of the Chartered Financial Analyst exams.     

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