CFTC Adopts Internal Business Conduct Rules - Sullivan & Cromwell

product reports could cause significant problems as securities analysts often assist in preparing these
reports and the regulatory scheme for securities research analysts differs from the scheme set forth in the
Final Rules. For example, securities analysts are not subject to reporting line rules similar to Final
Rule 1.71(c)(1)(ii) and Final Rule 23.605(c)(1)(ii). The Commission clarified in the Adopting Release that
research analysts subject to both the Internal Business Conduct Rules and securities regulations are
required to comply with the Internal Business Conduct Rules only when acting as a “research analyst” for
an SD, MSP, FCM or IB.
An IB that has generated less than $5 million in gross revenues from its activities as an IB over the past
three years (a “Small IB”) will be exempt from the requirements of Final Rule 1.71(c). That is, a Small IB
will not have to comply with the requirements under the Internal Business Conduct Rules relating to
influencing and controlling research analysts and research reports. A Small IB will still have to establish
“structural and institutional safeguards reasonably designed” to erect informational barriers between
research and non-research personnel but this is a different standard than the standard imposed on large
IBs, MSPs, SDs and FCMs. These Small IBs would still be required to implement policies and
procedures mandating disclosure of material incentives and conflicts of interest in a customer’s decision
as to the trade execution and/or clearing of a derivatives transaction.
THE CHIEF COMPLIANCE OFFICERS OF FUTURES COMMISSION MERCHANTS, SWAP DEALERS
AND MAJOR SWAP PARTICIPANTS
Section 4d(d) of the CEA requires an FCM to designate an individual as its CCO and Section 4s(k) of the
CEA imposes the same requirement on SDs and MSPs. Section 4s(k) provides a list of enumerated
duties of a CCO at an SD or MSP whereas Section 4d(d) only requires that the CCO of an FCM “perform
such duties and responsibilities as set forth in regulations to be adopted by the Commission or rules to be
adopted by a futures association.” 19 Even though the Commission has the statutory authority to delegate
the regulation of CCOs of FCMs, the Commission determined to adopt duties and requirements for CCOs
of FCMs that are identical to the duties and requirements of CCOs of SDs or MSPs. As required by the
CEA, the Commission adopted Final Rule 3.3, which provides the duties and requirements of FCMs, SDs
and MSPs to designate a CCO and provides the duties and qualifications of such a CCO.
Under the Final Rules, an FCM, SD or MSP must designate a CCO and provide the CCO with the
responsibility and authority to develop appropriate policies and procedures reasonably designed to
ensure compliance with the obligations set forth in the CEA and CFTC Regulations that relate to the
swaps activities of an SD or MSP or the business of an FCM. The CCO must report directly to the board
of directors (not a committee) or, if the entity is not a corporation, the CCO must report directly to the
senior officer, and only the board or senior officer (as the case may be) has the authority to remove the
CCO. The CCO and the board of directors or senior officer must meet at least annually. The FCM, SD or
MSP may only designate a person as CCO who has the appropriate background and skills necessary to
CFTC Adopts Internal Business Conduct Rules
March 8, 2012
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