The CFTC proposed amendments to Rules 3.1 and 3.3 that would (i) define the term "senior officer," (ii) clarify the responsibilities of a chief compliance officer ("CCO") employed by a futures commission merchant, swap dealer, or major swap participant, and (iii) modify the content and submission requirements of a CCO annual report.

The proposed rules would ensure, among other things, that the CCO is actively engaged in administering a firm's compliance activities. A number of the amendments introduce a "reasonableness" standard, rather than a strict liability standard, on the activities of the CCO.

As noted in certain background material accompanying the proposed amendments, the SEC and CFTC CCO rules are similar, but not identical. Exchange Act Rule 15Fk-1 differs from the CFTC Rules in several material respects. The CFTC explained that adopting some of the provisions chosen by the SEC would be "beneficial for market participants and regulatory oversight."

Comments on the proposal will be due 60 days after its publication in the Federal Register.

Commentary / Bob Zwirb

It is encouraging that the CFTC clarifies here that the CCO is not required by its rules "to personally resolve every potential conflict of interest that may arise or require consultation with the board of directors or senior office," and that routinely encountered conflicts should be resolved "in the normal course of business." As the CFTC observes, a strict interpretation would create "an undue burden" for CCOs, and otherwise take them away "from more important compliance activities." This clarification is prudent and reflects a welcome degree of common sense.

Commentary / Nihal Patel

Obviously, it is good that the CFTC is looking to harmonize its Title VII rulebook where possible with the SEC rules, as that will have beneficial effects, particularly for market participants that are dually-registered. (It's also worth noting that Section 871 of H.R. 10, 115th Cong. (2017) (a.k.a. the "Financial CHOICE Act") would require the CFTC and SEC to review and conform their rules under Title VII.)

The definition of "senior officer" is an interesting case of what it means to conform rules. Exchange Act Rule 15Fk-1(e)(2) provides that the term senior officer "shall include the [CEO] or other equivalent officer." The proposed CFTC rule indicates that the term "means the [CEO] or other equivalent officer." While the SEC adopting release provides little to indicate what else would be captured by the rule (see  81 FR 29960, 30054 & n. 1199 (May 3, 2016)), is there a reason for the basis between the two definitions? 

Beyond the details, there is also a question of whether the definition is the right one. In particular, consider a large and/or global bank that is registered as a swap dealer. Is it correct that the CCO should report to the most senior person of the entire bank rather than the most senior person of the [FCM/swap dealer/MSP] business, particularly when such activities may be a relatively small part of the business of the legal entity? While the statutory language limits the CFTC's ability to rewrite the requirement (see CEA Section 4s(k)(2)(A)), surely an interpretation that recognizes the policy aims of the regulation could be found? Elsewhere in the proposal, the CFTC would make clear that the actual responsibilities of the CCO relate to compliance with the CEA and the rules thereunder with respect to the [FCM/swap dealer/MSP] business of the bank, and not all of the registrant's business lines.

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