Commodity Futures Trading Commission Finalizes Amendments to Rules Governing Chief Compliance Officer Duties and Annual Reporting Requirements for Certain Registrants08/21/2018The Commodity Futures Trading Commission has unanimously approved final amendments to clarify and simplify its regulations governing the duties and annual reporting requirements for chief compliance officers at futures commission merchants, swap dealers and major swap participants. The amendments, first proposed in May 2017, are designed to clarify certain requirements (including as to the annual report) as well as harmonize the CFTC's requirements with similar Securities and Exchange Commission rules that will be applicable to security-based swap dealers.
The final amendments update and clarify the following duties of the CCO under CFTC Regulations 3.3(d)(1)-(5):
- Duty to administer compliance policies and procedures. The amendments clarify that a CCO is responsible for administering each of the registrant's policies and procedures relating to the registrant's business as an FCM, SD or MSP that are required pursuant to the Commodity Exchange Act and CFTC regulations (and not those related to other business activities).
- Duty to resolve conflicts of interest. The amendments limit the CCO's obligation, in consultation with the board of directors or the senior officer (defined as "the chief executive officer or other equivalent officer of a registrant"), to take reasonable steps to resolve conflicts of interest to "material" conflicts. The CFTC did not specifically define "material" for this purpose, but expects registrants to determine what is a "material" conflict based on relevant facts and circumstances.
- Duty to ensure compliance. The CFTC declined to adopt proposed clarifications regarding a CCO's duty to ensure compliance and has left the existing rule unchanged. In its discussion in the adopting release, the CFTC reiterated that the COO's duty of "taking reasonable steps to ensure compliance" includes active engagement in the day-to-day implementation of compliance policies and procedures, a reasonable level of involvement in compliance monitoring, identifying non-compliance events, advising on mitigation and correction of compliance activities and, where necessary, escalating significant matters that require senior management attention. The CFTC also acknowledged that the cannot reasonably be expected to have sole and complete responsibility for ensuring compliance, and may reasonably rely on other personnel that are expert in relevant matters to implement many policies and procedures.
- Duty to remediate noncompliance issues. The amendments revise the CCO's duty to remediate noncompliance issues by requiring that the CCO take "reasonable steps to ensure the registrant" i) establishes, maintains and reviews the applicable procedures reasonably designed to remediate noncompliance issues identified by the CCO, through any means; and (ii) establish written procedures reasonably designed for the handling, management response, remediation, retesting and resolution of noncompliance issues. The amendments also remove a specific requirement that the CCO consult with the registrant's board of directors or senior officer with respect to these matters.
The final amendments also update the CFTC's CCO annual report requirements. Specifically, the amendments clarify that only the written policies and procedures (WPPs) related to the registrant's business as an FCM, SD or MSP must be described in the annual report. The CFTC also removed a requirement that the annual report contain an assessment of the WPPs' effectiveness with respect to each applicable requirement. However, the CCO must still perform an underlying assessment of the WPPs generally in the report. The amendments also clarify that the CCO must include a description of resources set aside for compliance activities related to its business as an FCM, SD or MSP, but do not prescribe the description's form or manner. The amendments add qualifying language to the CCO's certification such that the CCO need only certify that the information contained in the report is accurate and complete "in all material respects." The amendments also adopt certain formal guidance with respect to the annual report.
In addition, the amendments retain the requirement that the CCO provide the annual report to the registrant's board of directors or the senior officer prior to furnishing it to the CFTC and add a requirement to further provide the report to the audit committee (or equivalent body), if the registrant has such a committee, by its next meeting, but in any event within 90 days of providing it to the CFTC. The amendments also permit registrants that are registered in more than one capacity (e.g. as an SD and FCM) to cross-reference sections in the annual reports submitted for each registration and allow registrants to incorporate by reference information from CCO annual reports of their affiliates.
The final amendments are effective beginning September 26, 2018.
View the final amendments.
View the CFTC's press release.
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