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Proposed § 3.3(a)(1) required that the CCO report to the board of directors or the senior officer of a registrant, that the board or senior officer approve the compensation of the CCO, and that the board or senior officer meet with the CCO at least once a year to discuss the effectiveness of compliance policies and their administration by the CCO.

Proposed § 3.3(a)(2) also prohibited the board or senior officer of a registrant from delegating its authority over the CCO, including the authority to remove the CCO.

The CCO NPRM requested comment on the degree of flexibility in the reporting structure, including whether it would be more appropriate for a CCO to report to the board or the senior officer; whether the board or the senior officer is a stronger advocate on compliance matters; whether the proposed reporting structure should address issues related to affiliates; and whether the rule should include a provision requiring a majority of the board to remove the CCO. The proposal also requested comment regarding whether it is necessary to adopt rules for the CCO regarding conflicts of interest between compliance interests, commercial interests, and ownership interests of a registrant.

Cargill recommended that the definition of board of directors be expanded to include a governing body of a division, such as a management committee, if the SD registration applies to activities within a division of a larger company, rather than the company as a whole. Cargill also recommended that the Commission add a definition of

“senior officer” and that it include a senior officer of a division, because a division might be more familiar with the swaps activities of an SD. Cargill and The Working Group

each argued that a requirement that a CCO can be removed only by a majority of the members of a governing body would be inflexible, and should not be added to the rules.

The Working Group argued that the CCO should be allowed to report to a board of an affiliated entity that controls both the affiliate and the registrant. The Working Group also argued that the CCO should be permitted to operate under the direction of other corporate officers, even middle level officers, so that the CCO is not an independent inspector general that operates outside the traditional reporting structure within a

corporate entity. EEI also argued that the proposal is overly prescriptive and

recommends that the reporting structure be left to each individual firm. Similarly, FIA and SIFMA commented that although the board is the ultimate supervisory authority, the CCO should not be required to directly report to it. Instead, firms should be free to determine the reporting structure as long as independence and authority as a control function is maintained. FIA and SIFMA recommended, for example, that the CCO be allowed to report to the chief legal officer or the chief risk officer.

On the other hand, Rosenthal commented that the CCO should report to the board or, if the registrant is not a corporation, to the senior officer. Rosenthal also commented that the CCO should be prohibited from receiving any transaction or customer-based compensation to insulate the CCO from potential conflicts. NSCP also agreed that CCOs should report to senior management and have compensation set by managers that are not influenced by the profitability of particular business units. NSCP noted that new

Organizational Sentencing Guidelines consider whether individuals with operational responsibility for compliance and ethics have direct reporting obligations to the governing authority or an appropriate subgroup thereof (like an audit committee of a

board), which the proposed rules would require. NSCP recommended that a provision be added to the proposed rules to make it illegal for a registrant to coerce a CCO improperly, similar to the one for CCOs of investment companies and independent public

accountants.

Better Markets and Chris Barnard recommended that decisions to designate or terminate a CCO, as well as compensation decisions, be prescribed as the sole

responsibility of independent members of the board of directors, or audit committee, acting by majority vote, and not the responsibility of the executive officer. Better

Markets also recommended that both the board and the senior officer be required to meet with the CCO to discuss the effectiveness of compliance policies, and that such meetings be held at least quarterly. Better Markets further recommended that the CCO’s duties be performed in consultation with both the board and the senior officer.

National Whistleblowers Center (NWC) recommended that the term “senior officer” be defined as the CEO or chairman of the board, and should not be the general counsel or a subordinate employee to the CEO. NWC believes that the rule should permit the CCO to report to the full board at any time with no interference from a board committee or a CEO. NWC also argued that the rule should prohibit termination of the CCO unless the CCO is presented the opportunity to address the board.

MetLife requested that the definition of board of directors include “(or committee of such board or governing body)” to permit it to continue its current practice of

delegating particular responsibilities to expert committees of the whole board (i.e., audit, finance, investments, risk, and compensation). NFA also sought additional flexibility in

the reporting structure for CCOs, provided that the firm’s business unit is not permitted to impose undue pressure on a CCO regarding compliance.

Newedge recommended that the CCO be required to meet at least quarterly with the board or senior officer to discuss the effectiveness of compliance policies.

The Working Group believes it is not necessary to address conflicts of interest between compliance interests and commercial interests in the rule because the

independent audit requirements imposed by the Sarbanes Oxley Act already address such conflicts.

Having considered these comments, the Commission will not permit CCOs to report to committees of a board of directors. Section 4s(k) of the CEA requires the CCO to “report directly” to the board or the senior officer of the SD or MSP. In other contexts (for example the risk management duties rules for SDs and MSPs discussed above), reporting to committees of the board is permitted. However, in this context, the Commission believes that the statutory requirement that the CCO report directly to the board or senior officer does not afford such discretion. The Commission is guided by the policy objectives of section 4s(k) in reaching the same conclusion with regard to FCMs, and observes that no currently registered FCM requested that the CCO report to a committee of the board. Indeed, Rosenthal, and FCM, agreed with the requirement that CCOs for FCMs report to a board of directors if the entity has one, or the senior officer, if the entity does not have a board.

In response to Cargill’s comments, the Commission notes that under the CEA and under the rules as adopted, a registrant may elect to have the CCO report to the senior officer of the registrant. Because, “senior officer” is not defined, if a division of a larger

company is a registered SD, then the CCO of such registrant could report to the senior officer of that division.

In order to preserve CCO independence, the Commission is not changing the requirement that only the board or the senior officer can hire, set compensation for, and remove the CCO. However, in order to promote consistency among the CCO rules for registrants and registered entities, the Commission is modifying proposed § 3.3(a)(1) and (2) to (i) require only that the CCO and board or senior officer meet once a year and at the election of the CCO, but not mandate the content of such meeting; and (ii) to clarify that only the board or senior officer may remove the CCO.

The Commission believes that additional requirements, such as providing the CCO an opportunity to address the board prior to removal, requiring more frequent meetings between the CCO and the board or senior officer, restricting the composition of CCO compensation, or mandating independent director approval, would be overly prescriptive and unnecessary to achieve the purposes of the rule. Similarly, the Commission believes that a provision prohibiting improper coercion is unnecessary because the rule adequately ensures CCO independence through a direct reporting line to the board or senior officer and by requiring compensation decisions to be made by the board or a senior officer.

8. Qualifications - § 3.3(b)

As proposed, § 3.3(b) required the CCO to have the background and skills appropriate for fulfilling the responsibilities of the position, and prohibited an individual

who is statutorily disqualified under sections 8a(2) or 8a(3) of the CEA from serving.³⁹ The proposal requested comments regarding whether additional limitations should be placed on CCOs, such as a prohibition on designating a registrant’s counsel as CCO.

NFA argued that the statement that no individual disqualified from registration under section 8a(2)-(3) of the CEA may serve as a CCO is redundant because an SD, MSP, or FCM’s registration could be denied or revoked under section 8a(2)-(3) of the CEA if any principal of the registrant is subject to a statutory disqualification. NFA argues that inclusion of this qualification in the proposed rule could appear to convey a different standard for CCOs than for other principals.

Cargill commented that the requirement for a CCO to have “the background and skills appropriate” is a commendable aspirational goal but is too vague a standard for federal law, and is best reserved as a business decision. Cargill agreed that the

requirement to be listed as a principal applies statutory disqualification standards that are clear and objective.

Newedge recommended that CCOs be required to pass a specific compliance examination and obtain a specific compliance license, as is the case in the securities world. On the other hand, NSCP does not believe that CCOs should have to pass a qualification exam or otherwise have a certain number of years in the industry, given the diversity of the registrant community. The Working Group also commented that wide latitude for qualifications of a CCO is necessary.

39 These CEA sections contain an extensive list of matters that constitute grounds pursuant to which the Commission may refuse to register a person, including, without limitation, felony convictions, commodities or securities law violations, and bars or other adverse actions taken by financial regulators.

EEI argues that the general counsel and other attorneys should be allowed to be the CCO because they are subject to ethics considerations and a prohibition on conflicts in their representation. NFA also recommended that the CCO be permitted to be an attorney who represents the registrant or its board as long as the conflict can be managed and duties discharged. Rosenthal and Hess felt that persons with legal training may be well-suited as CCOs, and that the rule requirement to demonstrate compliance

proficiency is reasonable. To the contrary, Better Markets argued that a CCO should not be permitted to be an attorney that represents the SD, MSP, or FCM, or its board because the potential conflict would disqualify such an attorney.

Having considered these comments, the Commission is adopting the rule substantially as proposed, with only a technical change to clarify the references to sections 8a(2) and 8a(3) of the CEA. The Commission believes it is important for the

“Qualifications” section of the rule to put registrants on notice of the possible disqualification of CCO candidates pursuant to the CEA. The benefit of such notice outweighs the concern of creating an appearance of a different standard for CCOs than for other principals. The Commission is retaining the “background and skills”

qualification in the final rule because the standard effectively will prohibit appointment of unqualified persons as CCO. However, the Commission does not believe that it is necessary to require a proficiency exam for CCOs at this time.

The Commission also agrees with Better Markets that there may be a potential conflict if a member of the legal department or the general counsel of a registrant also served as the registrant’s CCO. The Commission notes that the final rules for SDRs prohibited members of the legal department or the entity’s general counsel from serving

as CCO.⁴⁰ On the other hand, the final rules for derivative clearing organizations did not include the same prohibition.⁴¹ Given the diversity of FCMs and probable diversity of SDs and MSPs and cost considerations, the Commission is taking a flexible approach in these final rules and is not prohibiting a member of the legal department or general counsel from serving as CCO for an SD, MSP, or FCM. However, should a CCO be a member of the registrant’s legal department, the Commission expects the CCO and registrant to articulate clearly the segregation of that individual’s CCO and non-CCO responsibilities. All reports required under sections 4d(d) and 4s(k) of the CEA, as well as the rules promulgated pursuant thereto, are meant to be made available to the

Commission, and as such, they should not be subject to the attorney-client privilege, the work-product doctrine, or other similar protections.