NFA Notice: Chief Compliance Officer Requirements Become Effective for All FCMs on March 29, 2013
Commentary by Bob Zwirb
NFA has issued a notice to all FCMs that the Chief Compliance Officer ("CCO") requirements under CFTC Regulation 3.3 become effective on March 29, 2013.
Although the requirements became effective on October 1, 2012, they applied only to certain FCMs until now. In addition to complying with a comprehensive regulatory scheme for such officers, the Notice reminds FCMs that they (i) must designate a CCO by March 29th and (ii) file the CCO Annual Report as of the date of the firm's first fiscal year end after March 29, 2013. In addition, although IB, CPO and CTA members are not required by CFTC Regulation 3.3 to have a designated CCO, if such firms appoint a person as CCO, then that person must be a listed principal of the firm.
Among other things, the CCO is required to resolve conflicts of interest, administer policies and procedures and otherwise take "reasonable steps" to ensure compliance with the CEA and CFTC Rules, and prepare and sign an annual report to be submitted to the CFTC. Although all of these duties raise potential liability issues for both the CCO and the firm, including its board of directors, one requirement of particular concern involves the duty of the CCO or CEO under CFTC Rule 3.3(f)(3) to certify "to the best of his or her knowledge and reasonable belief, and under penalty of law [emphasis added]" the accuracy and completeness of the report. Responding to concerns that the certification raises "overbroad liability," the CFTC notes that the rule would not impose liability for compliance matters that are beyond the certifying officer's knowledge and reasonable belief at the time of certification. Further, if the certifying officer has complied in good faith with policies and procedures reasonably designed to confirm the accuracy and completeness of the information in the annual report, both the firm and certifying officer would have a basis for defending accusations of false, incomplete, or misleading statements or representations made in the annual report. Nevertheless, in interpreting the requirement that the certification be issued "under penalty of law," the CFTC has acknowledged that this could lead to "administrative, civil, and/or criminal liability . . . [being] imposed on the registrant [i.e., the firm] or the certifying officer or both, either directly or vicariously."
In addition, firms should be aware of other potential liability issues that the CCO requirement raises. For example, the CCO may be held liable for compliance failures (e.g., failure to submit required reports when due, or failure to supervise any compliance staff in the performance of their responsibilities). However, unless the CCO is given responsibility for supervision of business activities or otherwise assumes such responsibilities (in which case the individual would also be required to register as an "associated person"), the CCO should not be considered a supervisor and should thus not generally be held responsible for business-line supervisory failures. The CCO may, however, be subject to liability if the CCO fails to take appropriate action after being put on notice of any problem (i.e., failure to respond to red flags). Since CCOs generally report to the firm's board or senior officer, the latter must exercise care in responding to the CCO's findings.
View Notice in full here (links externally to NFA website).
Commentary
In all this, there is quite a lot of responsibility and potential liability for FCMs and other regulated firms to swallow. The CFTC itself acknowledged that the responsibilities of the CCO under Rule 3.3 go beyond the traditional role of a CCO. Even in the case of large FCMs, the responsibilities will be well beyond what can be accomplished by any single individual, even though the CFTC declined to permit firms to designate multiple CCOs on the basis that doing so would not comply with the statutory requirement that firms designate "an individual" to serve as CCO. The CFTC did, however, permit CCOs to rely on other experts for statements made in the annual report. Thus, it will be necessary for the CCO to establish a clear chain of command and to obtain appropriate certifications and representations from other FCM employees.