Staff No-Action Relief for Certain Futures Commission Merchants Concerning Annual Reports of Chief Compliance Officers
On December 10, 2012, the U.S. Commodity Futures Trading Commission's ("CFTC") Division of Swap Dealer and Intermediary Oversight (the "Division") issued a time-limited no-action letter (the "No-Action Letter")1 providing temporary no-action relief with respect to compliance with certain requirements in CFTC Regulation 3.3 relating to the Annual Report (as defined below) for futures commission merchants ("FCMs") that (1) were registered with the CFTC as of June 4, 2012; and (2) are currently regulated by a U.S. prudential regulator or registered with the U.S. Securities and Exchange Commission ("Covered Firms").
Section 732 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") added Section 4d(d) of the Commodity Exchange Act (the "Act"), which requires each FCM to designate an individual to serve as its chief compliance officer ("CCO"), who must perform the duties and responsibilities required by CFTC Regulations. Pursuant to that authority, the CFTC promulgated CFTC Regulation 3.3, which, among other things, requires the designation of a CCO meeting certain qualifications and sets forth the duties and responsibilities of a CCO. One of the duties of a CCO of an FCM is to prepare and sign an annual report (the "Annual Report") required under paragraphs (e)2 and (f)3 of CFTC Regulation 3.3. The Annual Report must cover the most recently completed fiscal year of the FCM, and must meet certain minimum requirements.
The Annual Report generally must be furnished electronically to the CFTC not more than 90 days after the end of the fiscal year of the FCM, simultaneously with the submission of Form 1-FR-FCM, the Financial and Operational Combined Uniform Single Report ("FOCUS Report"), or the financial condition report, as required under section 4s(f) of the Act ("Financial Condition Report"), as applicable. However, the actual date on which the first Annual Report must be filed by an FCM may vary, depending on whether the FCM is registered with the CFTC as of June 4, 2012, currently regulated by a U.S. prudential regulator, or currently registered with the SEC. With respect to FCMs that (1) are registered with the CFTC as of June 4, 2012; and (2) were currently regulated by a U.S. prudential regulator or registered with the SEC, such FCMs must comply with CFTC Regulation 3.3 by September 30, 2012. Thus, as of September 30, 2012, such FCMs must electronically furnish the Annual Report to the CFTC within 90 days after the end of the fiscal year of such FCMs, simultaneously with the submission of Form 1-FR-FCM, the FOCUS Report, or the Financial Condition Report, as applicable.
The Futures Industry Association (the "FIA") requested limited no-action relief for Covered Firms, noting (1) that the CCOs of Covered Firms will have difficulty preparing and furnishing to the CFTC an Annual Report that meets the requirements of paragraphs (e) and (f) of CFTC Regulation 3.3 within the deadline, because many CCOs will have occupied that position for just a few months prior to the time they will be required to prepare the first Annual Report; (2) that many new requirements for Covered Firms have recently become effective, which will require Covered Firms to expend additional time to develop and test new procedures and controls to comply with such new requirements; (3) that the policies and procedures of Covered Firms will need to change in order to address the possible new mix of products and customers, as well as changes to clearinghouse rulebooks; (4) operational concerns in connection with the preparation of the Annual Report; and (5) that it would be more appropriate to require CCOs only to certify as to the accuracy and completeness of information pertaining to periods after when they took office.
Based on the foregoing, the Division will not recommend that the CFTC take an enforcement action against a Covered Firm that submits an Annual Report for the fiscal year that ends on or before March 31, 2013, that fails to satisfy the requirements of CFTC Regulation 3.3(e) and (f), if, at a minimum, the following conditions are satisfied:
The Annual Report contains the following information:
(1) An introduction and an executive summary that contains: (a) A description of the Covered Firm's business. (b) Identification of the CEO and CCO of the Covered Firm. (c) The time period covered by the Annual Report (i.e., the full fiscal year of the Covered Firm).
(2) A review of policies and procedures reasonably designed to ensure compliance with customer protection rules: (a) Identification and description of customer protection policies and procedures. (b) An assessment of effectiveness of such policies and procedures as of the Covered Firm's fiscal year end. (c) Discussion of areas for improvement of aforementioned policies and procedures.
(3) Description of material noncompliance issues and corresponding actions taken, including corrective actions, in relation to customer protection rules.
(4) CEO and/or CCO Certification(s) that states the following: "To the best of my knowledge and reasonable belief and under penalty of law, the information contained in the attached annual report pertaining to the period from October 1, 2012 through [fiscal year end] is accurate and complete."
The Annual Report covers the full fiscal year of the Covered Firm, but the CEO/CCO certification is limited to the period from the October 1, 2012, through the Covered Firm's fiscal year end.
The Annual Report is electronically furnished to the CFTC no later than 90 days after the Covered Firm's fiscal year end. With respect to Covered Firms that are also BDs registered with the SEC, there is no requirement that the Annual Report be furnished to the CFTC simultaneously with the submission of Form 1-FR-FCM, the FOCUS Report, or the Financial Condition Report.
The Covered Firm satisfies the requirements of subparagraphs (f)(1) – which requires that prior to furnishing the annual report to the CFTC, the CCO provides the report to the board of directors or senior officer – and (f)(4) – which requires the prompt amendment to any annual report if material errors or omissions are identified – of CFTC Regulation 3.3.
This no-action relief is limited only to the first Annual Report required to be furnished by a Covered Firm to the CFTC for the fiscal year that ends on or before March 31, 2013.
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1 — Available on the CFTC website at:
2 — § 3.3(e) (Annual Report) sets out the requirement that the CCO prepare annually a written report that covers the most recently completed fiscal year and provide the report to the board of directors or senior officer. Such section also requires that the report, at a minimum: (1) Contains a description of the written policies and procedures, including the code of ethics and conflicts of interest policies, of the futures commission merchant, swap dealer, or major swap participant; (2) Reviews each applicable requirement under the Act and CFTC regulations, and with respect to each: (i) Identifies the policies and procedures that are reasonably designed to ensure compliance with the requirement under the Act and CFTC regulations; (ii) Provides an assessment as to the effectiveness of these policies and procedures; and (iii) Discusses areas for improvement, and recommend potential or prospective changes or improvements to its compliance program and resources devoted to compliance; (3) Lists any material changes to compliance policies and procedures during the coverage period for the report;(4) Describes the financial, managerial, operational, and staffing resources set aside for compliance with respect to the Act and CFTC regulations, including any material deficiencies in such resources; and (5) Describes any material noncompliance issues identified, and the corresponding action taken.
3 — § 3.3(f) (Furnishing the Annual Report to the Commission) requires that: (1) Prior to furnishing the annual report to the CFTC, the chief compliance officer shall provide the annual report to the board of directors or the senior officer of the futures commission merchant, swap dealer, or major swap participant for its review. Furnishing the annual report to the board of directors or the senior officer shall be recorded in the board minutes or otherwise, as evidence of compliance with this requirement. (2) The annual report shall be furnished electronically to the CFTC not more than 90 days after the end of the fiscal year of the futures commission merchant, swap dealer, or major swap participant, simultaneously with the submission of Form 1-FR- FCM, as required under § 1.10(b)(2)(ii), simultaneously with the Financial and Operational Combined Uniform Single Report, as required under § 1.10(h), or simultaneously with the financial condition report, as required under section 4s(f) of the Act, as applicable. (3) The report shall include a certification by the chief compliance officer or chief executive officer of the registrant that, to the best of his or her knowledge and reasonable belief, and under penalty of law, the information contained in the annual report is accurate and complete. (4) The futures commission merchant, swap dealer, or major swap participant shall promptly furnish an amended annual report if material errors or omissions in the report are identified. An amendment must contain the certification required under paragraph (f)(3) of this section. (5) A futures commission merchant, swap dealer, or major swap participant may request from the CFTC an extension of time to furnish its annual report, provided the registrant's failure to timely furnish the report could not be eliminated by the registrant without unreasonable effort or expense. Extensions of the deadline will be granted at the discretion of the CFTC. (6) A futures commission merchant, swap dealer, or major swap participant may incorporate by reference sections of an annual report that has been furnished within the current or immediately preceding reporting period to the CFTC. If the futures commission merchant, swap dealer, or major swap participant is registered in more than one capacity with the CFTC, and must submit more than one annual report, an annual report submitted as one registrant may incorporate by reference sections in the annual report furnished within the current or immediately preceding reporting period as the other registrant.
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