CFTC eyes greater board access to CCO reports

The top US derivatives regulator is planning to give greater exposure across boards to reports on their firms’ efforts to comply with post-financial crisis rules.

The Commodity Futures Trading Commission (CFTC) last week released plans designed to clarify the duties of chief compliance officers (CCOs) at futures commission merchants, swap dealers and major swap participants, and to modify the CCO annual report’s content and submission requirements.

The Dodd-Frank Act required all derivatives firms registered with the CFTC to appoint a CCO and required the agency to spell out their duties, including having to prepare and sign an annual compliance report. The law also ordered the SEC to develop parallel rules for security-based swap dealers and major security-based swap participants. The agencies worked together on these rulemaking in an effort to have consistent regimes.

The rules are intended to ensure CCOs are actively engaged in compliance activities with the appropriate authority, resources - and access to the board of directors or senior officers - to administer the firm’s compliance activities, officials write in a related filing.

The commission is proposing, in part, to revise and clarify its rules on annual reports to ‘further reduce burdens to registrants’ and further harmonize with the SEC’s parallel rules. For example, the CFTC’s regulations require that the annual CCO report include a certification that it is accurate and complete, and that it be submitted to the board of directors or the firm’s senior officer and to the agency. The commission now wants to require that the report also go its audit committee - or equivalent body - the board of directors and the senior officer before it is sent to the CFTC.

This amendment would align the CFTC rule with the SEC’s equivalent. ‘In requiring the SEC CCO annual report to be delivered to the audit committee, the SEC stated that requiring submission to the audit committee, in addition to the board and the senior officer, further ensures that all groups with overall responsibility for governance and internal controls remain informed of the SEC registrant’s compliance program,’ CFTC officials write. ‘The commission agrees with this policy goal and also believes that further aligning our rules provides for greater efficiency.’


POLICIES AND PROCEDURES
Among other things, the CFTC is taking aim at the content of CCOs’ reports, which must include a description of the firm’s written policies and procedures (WPPs), including the code of ethics and conflicts of interest policies.

Reports must identify the firm’s WPPs designed to reasonably comply with the Commodity Exchange Act and commission regulations, assess the effectiveness of those WPPs and discuss any areas of improvement. At present, the rule applies these requirements to every CFTC rule to which the firm is subject, officials note.

‘After adoption of the rule, commission staff received industry feedback indicating that the amount of time and resources needed for the review described above makes the process burdensome when compared to the intrinsic value of this portion of the report, particularly given that many of the WPPs do not change from year to year,’ they add.

The staff has also noticed that many CCO annual reports provide the detail required in a ‘rote manner,’ with limited substantive discussion regarding areas of improvement and recommended changes to the compliance program.

As a result, the CFTC wants to nix the requirement to address ‘each applicable requirement under the Act and commission regulations.’ Officials write: ‘The commission believes that…the purpose of the CCO annual report may be met where registrants provide summaries of their WPPs coupled with a detailed discussion of their annual assessment and recommended improvements.’