Amendment to CFTC rule to reduce the burden for CCOs

28 September 2018


In an effort to create regulatory consistency across US markets, the Commodity Futures Exchange Commission – or CFTC – unanimously voted to amend CFTC Rule 3.3 to simplify Chief Compliance Officer duties and the annual reporting rules for Futures Commission Merchants, Swap Dealers and Major Swap Participants. This amendment, which doesn’t impact CCOs at Commodity Pool Operators or Commodity Trading Advisors, goes into effect September 26, 2018.

The aim of the amendments are to reduce the burden for CCOs who have responsibility for firms that are also registered with the SEC. While the CFTC regulates derivatives markets and the SEC regulates securities markets, many of the participants in these markets are the same.

The Dodd-Frank Act amended the Securities Exchange Act of 1934 by adding section 15F(k) to establish CCO requirements for SEC Registrants. In order to comply with sections 712(a)(1)–(2) of the Dodd-Frank Act, the CFTC and SEC staffs coordinated to develop the respective CCO rules for purposes of harmonizing regulation for dual registrants.

The changes to the Rule imposed by the CFTC, along with the implications are outlined below:

Amendment to CFTC Rule Summary What this means for your firm
3.1 changes the definition of ‘‘senior officer’’ as the “chief executive officer or other equivalent officer of a registrant” The CFTC had a long-standing interpretation that compliance with the statutory requirement to have the CCO ‘‘report directly to the board or to the senior officer’’ required that a CCO have a direct reporting line to the board of directors or the highest executive officer (CEO). This aligns the CTFC to the SEC’s definition of ‘‘senior officer’’ in pursuant to Rule 15Fk– 1(e)(2) Registrants now can determine the individual who would qualify as an ‘‘equivalent officer”. This is intended to ensure the CCO’s independence from “influence, interference, or retaliation”. Registrants should now be able to ensure that regardless of a firm’s chosen title, the CCO will have a direct reporting line to the highest executive level individual. This means the CCO may now use that reporting line to elevate any significant issues that have not been otherwise addressed satisfactorily.
3.3(d)(1) provides clarification around the CCO’s duty with respect to administering written policies and procedures specific to a firm’s business Under the Dodd-Frank Act, the role of the CCO was enhanced to go beyond what a customary and traditional advisory role of a CCO was previously, requiring more active engagement The CFTC expects the CCO to be more actively engaged in administering a firm’s compliance policies and procedures and puts more of an emphasis on the “reviewing, evaluating, and advising’’ on policies and procedures and compliance matters, while recognizing others in the organization are responsible for the daily implementation.
3.3(d)(2) has been amended to state that the CCO must take reasonable steps to resolve any ‘‘material’’ conflicts of interest The additional language is consistent with the SEC’s view, that firms 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. The amendment confirms the CFTC’s view that CCOs cannot reasonably be expected to personally resolve every potential conflict of interest that may arise The requirement to ‘‘take reasonable steps’’ requires an active role in the conflict resolution process, including: direct involvement of the CCO in developing and implementing active processes for conflict identification, evaluation, and resolution advising on the effectiveness of alternatives to mitigate or eliminate conflicts; and escalating conflict issues if the conflicts are not otherwise resolved or mitigated.
3.3(d)(4) and (5) clarifies that the policies and procedures should be ‘‘reasonably designed’’ to remediate noncompliance issues and allows for the remediation of matters identified ‘‘through any means’’ by the CCO, and also removes the existing requirement that the CCO consult with the board of directors or senior officer in connection with establishing procedures for addressing noncompliance issues Historically the CCO has had to consult with the board of directors or the senior officer when addressing issues or remediating noncompliance issues identified The CCO can now manage and remediate noncompliance issues with personnel affected, thus expediting the remediation of any issues of noncompliance. Noncompliance should be a focus for CCOs, and accordingly, all noncompliance complaints, whether written or verbal, should be investigated using reasonable means.

In addition to the above, firms can expect to be able to incorporate the following changes to the content of the CCO’s Annual Report:

  • Only the written policies and procedures that relate to a registrant’s business as a Futures Commission Merchant, Swap Dealer or Major Swap Participant must be described. CCOs previously had been required to describe their written policies and procedures, including the code of ethics and conflicts of interest policies;
  • Elimination of the requirement to identify and assess the effectiveness of each written policy and procedure for each regulatory requirement under Commodity Exchange Act and CTFC regulations in the report, but emphasis that a CCO must still conduct an underlying assessment of the written policies and procedures to meet the rule’s requirements;
  • Clarification that the discussion of resources only needs to address those resources set aside for compliance activities that relate to the business of the registrant;
  • Clarification that the annual report must be furnished to the board or senior officer prior to submission to the CFTC, as well as the audit committee (or equivalent body) if one exists not later than its next scheduled meeting after submission but no later than 90 days after the end of the fiscal year
  • Modification of the certification requirement such that the CCO must certify that the report is accurate and complete “in all material respects”;
  • Permits dual-registrants and affiliated registrants under certain conditions to incorporate by reference in their reports.

While the amended rule does provide substantial clarification and simplification of existing requirements, the coordination of the CFTCs efforts only extends to certain CTFC registrants and has no bearing on certain NFA members that would otherwise benefit from this harmonization with SEC rules.

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