CFTC Approves Final Regulations Governing Dual and Multiple Associations of Associated Persons of SDs and MSPs (with Lofchie Comment)

The CFTC has approved final regulations governing dual and multiple associations of associated persons ("APs") of swap dealers ("SDs"), major swap participants ("MSPs") and other CFTC registrants (e.g., FCMs, IBs, CPOs and CTAs). The regulations provided that each SD, MSP and other CFTC registrant with whom an AP is associated is required to supervise the AP and is jointly and is severally responsible for the activities of the AP with respect to customers common to it and any other SD, MSP or other CFTC registrant. This rule is based on the CFTC's current rule governing APs associated with more than one CFTC-registered firm.

Effective Date: [60 DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].

Lofchie Comment: The CFTC's new rule seems problematic. The CFTC asserts that imposing several liability is necessary to assure that improper sales practices do not escape responsibility, with each employer of a dual registrant disclaiming responsibility, but there are other ways to accomplish this same end. That is, each employer may enter into an agreement with the other as to which employer is responsible for which product. If it is clear that one employer, e.g., the "swap dealer," is responsible for the employee's activities in respect of the sale of swaps, there is no reason why the other employer, e.g., the FCM, should be responsible for the employee's violation of a rule related to swaps. This should be doubly the case because only the swaps dealer will have compliance procedures that relate to swaps and only the FCM will have compliance procedures relating to futures. This should be triply the case because the separation of various types of CFTC-regulated activities, e.g., swaps and futures, into different legal entities, is largely mandated by the government-established regulatory structure. Given that Congress in adopting the Dodd-Frank regulatory structure has effectively forced the separation of activities in regard to related products, it seems inappropriate for the CFTC to mandate joint liability of these separate entities. Notwithstanding the CFTC's rule, I would strongly suggest that affiliated firms that have dual employees enter into agreements among themselves establishing which is responsible for which activities conducted by an employee who is associated with more than one CFTC registrant.

See: Dual and Multiple Associates of Persons Associated with Swap Dealers, Major Swap Participants and other Commission Registrants; Final Rule (Pre Fed. Reg. Version).