The National Futures Association ("NFA") submitted a comment letter in support of proposed CFTC amendments (see previous coverage) regarding the duties of Chief Compliance Officers ("CCOs") and narrowing CCO Annual Reporting requirements.
Specifically, the NFA expressed support for changes to (i) CFTC Regulation 3.3(e)(2), which would remove the requirement that futures commission merchants ("FCMs") and swap dealers ("SDs") review all applicable Commodity Exchange Act requirements and identify relevant policies and procedures designed to ensure compliance to the relevant requirement, (ii) Regulation 3.3(d)(1) to establish that the duties of CCOs are specific to activities related to the duties of a firm as an FCM or SD, and (iii) CFTC Regulation 3.3(e)(4), narrowing the CCO Annual Report requirement so that CCOs need to discuss compliance resources only for the FCM or SD rather than for all of the business activities of the firm.
The NFA recommended that the CFTC also adopt (i) a "materiality threshold" for the CCO Annual Report certification requirement and (ii) a clarification that CCO conflict of interest requirements apply only to FCM or SD duties. The NFA also encouraged the CFTC to consider comments from other industry participants that may promote greater harmonization with SEC regulations.
Commentary / Bob Zwirb
Among the notable issues raised by the NFA comment letter is one relating to the dividing line between supervision and the role of the chief compliance officer. As the NFA letter aptly observes, the CCO's role is that of "an independent advisor and not a supervisor over the business lines." But clearly defining that role, as the NFA urges the CFTC to do here, is easier said than done, precisely because the line between supervision and advice is somewhat murky.
Although the CCO of an FCM or swap dealer neither is a line supervisor nor is endowed with supervisory authority or controlling influence over firm personnel (other than with respect to the CCO's own staff), the CCO's duties inherently involve significant oversight of a firm's compliance program and, hence, intersect with supervisory issues. Moreover, CCOs in general are expected to perform a number of functions that implicate supervisory issues, such as ensuring compliance with the CEA and CFTC rules, establishing procedures for dealing with noncompliance, and resolving conflicts of interest. See, e.g., CEA Sec. 4s(k)(2) (duties of CCO of SDs and MSPs); CFTC Rule 5.18(j) (duties of CCO of retail forex dealers).
These obligations require the CCO to become aware of significant compliance problems in the firm and to make judgments about the adequacy of its compliance procedures. Further, the CCO may be subject to liability if he or she fails to take appropriate action after being put on notice of any problem (i.e., the failure to respond to red flags). In other words, whether he or she likes it or not, the CCO in the course of its duties is intimately intertwined with the firm's supervisory function.
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