On July 25, 2016, the CFTC issued an advisory release responding to concerns of regulated entities regarding chief compliance officer (CCO) Dodd-Frank reporting obligations under CFTC Regulation 3.3.

The purpose of the advisory release is to:

Regulation 3.3 implements section 4d(d) and 4s(k) of the Commodity Exchange Act (CEA) by establishing reporting requirements for swap dealers (SDs), futures commission merchants (FCMs), and major swap participants (MSPs) (collectively, regulated entities). CCOs of regulated entities are required to prepare, certify, and furnish to their boards of directors or other senior officer an annual report addressing the entity's Dodd-Frank compliance activities for the most recently completed fiscal year (see Legal Update, Annual Dodd-Frank CCO Reports: CFTC Offers Guidance and More Time).

As the CFTC explained in previous releases, the goal of Regulation 3.3 is to:

The advisory release specifically addressed industry requests for guidance in the practical implementation of Regulation 3.3 in cases where there are additional CCO reporting lines. For example, a registered SD is a large financial institution in which swap dealing activities represent a small portion of overall activity. As such, while the board or senior officer is typically aware of compliance activities in the derivatives business line generally, they are supplemented by other senior management who are more directly involved in the daily activities of the derivatives business line. The CFTC advisory notes that additional supervisory reporting for the CCO to these other managers is consistent with Regulation 3.3 and the CEA, so long as the additional reporting lines do not supplant the reporting line requirements between the CCO and the board or other senior officer.

However, the advisory clarifies that Regulation 3.3(a)(1) only requires that the CCO meet with the board annually and additionally at the election of the CCO. Since additional meetings are at the CCO's discretion, the CFTC clarifies that Regulation 3.3 does not require the CCO to turn to the board or senior officer for guidance on every compliance matter. Instead, the additional meetings would provide the opportunity to escalate compliance issues as the CCO sees fit.

The CFTC warns, however, that the structuring of additional supervisory relationships could call into question the independence of the CCO. The advisory notes that regulated entities should consider the following when deciding whether additional supervisory relationships are appropriate:

Finally, the advisory notes that the regulation permits supervisory relationships between the CCO and:

An example of an impermissible CCO supervisory relationship includes the use of a senior swap trader or head of a swap trading desk as an additional supervisor.

For details on CCOs under Title VII of Dodd-Frank, see Practice Note, The Dodd-Frank Act: Internal Business Conduct (IBC) Rules for Swap Dealers and MSPs: February 2012 IBC Reporting and Recordkeeping Rules: Internal Compliance Duties for SDs and MSPs.