[Federal Register Volume 75, Number 225 (Tuesday, November 23, 2010)]
[Proposed Rules]
[Pages 71391-71397]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29006]



[[Page 71391]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 23

RIN 3038-AC96


Implementation of Conflicts of Interest Policies and Procedures 
by Swap Dealers and Major Swap Participants

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is proposing rules to implement new statutory provisions enacted by 
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (Dodd-Frank Act). The proposed regulations establish conflicts of 
interest requirements for swap dealers (SDs) and major swap 
participants (MSPs) for the purpose of ensuring that such persons 
implement adequate policies and procedures in compliance with the 
Commodity Exchange Act (CEA), as amended by the Dodd-Frank Act.

DATES: Comments must be received on or before January 24, 2011.

ADDRESSES: You may submit comments, identified by RIN number 3038-AC96 
and SD-MSP Conflicts of Interest, by any of the following methods:
    <bullet> Agency Web site, via its Comments Online process at http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
    <bullet> Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
    <bullet> Hand Delivery/Courier: Same as mail above.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.

Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act, a petition for confidential treatment of 
the exempt information may be submitted according to the procedures 
established in CFTC Regulation 145.9, 17 CFR 145.9.
    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Associate 
Director, Division of Clearing and Intermediary Oversight, (202) 418-
5684, <a href="/cdn-cgi/l/email-protection#3b485154485e4b534854557b585d4f58155c544d"><span class="__cf_email__" data-cfemail="5a293035293f2a322935341a393c2e39743d352c">[email protected]</span></a>, or Ward P. Griffin, Counsel, Office of 
General Counsel, (202) 418-5425, <a href="/cdn-cgi/l/email-protection#661101140f00000f08260500120548010910"><span class="__cf_email__" data-cfemail="0a7d6d78636c6c63644a696c7e69246d657c">[email protected]</span></a>, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\ 
Title VII of the Dodd-Frank Act \2\ amended the CEA \3\ to establish a 
comprehensive regulatory framework to reduce risk, increase 
transparency, and promote market integrity within the financial system 
by, among other things: (1) Providing for the registration and 
comprehensive regulation of swap dealers and major swap participants; 
(2) imposing clearing and trade execution requirements on standardized 
derivative products; (3) creating rigorous recordkeeping and real-time 
reporting regimes; and (4) enhancing the rulemaking and enforcement 
authorities of the Commission with respect to all registered entities 
and intermediaries subject to the Commission's oversight.
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov.
    \2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \3\ 7 U.S.C. 1 et seq.
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    This proposed rulemaking relates to the conflicts of interest 
provisions set forth in section 731 of the Dodd-Frank Act. Section 731 
of the Dodd-Frank Act, in relevant part, adds a new section 4s(j)(5) to 
the CEA to direct each SD and MSP to implement conflicts of interest 
systems and procedures that establish safeguards within the firm to 
ensure that any persons researching or analyzing the price or market 
for any commodity or swap are separated by ``appropriate informational 
partitions'' within the firm from review, pressure, or oversight of 
persons whose involvement in pricing, trading or clearing activities 
might potentially bias the judgment or supervision of the persons. 
Section 731 also requires additional partitions between persons 
``acting in a role of providing clearing activities or making 
determinations as to accepting clearing customers'' from persons 
involved in pricing, trading or clearing activities. Section 731 
emphasizes that pricing, trading and clearing activities should comply 
with open access and business conduct standards set forth elsewhere in 
the Act, and mandates that the required conflicts of interest systems 
and procedures ``address such other issues as the Commission determines 
to be appropriate.''
    Section 754 of the Dodd-Frank Act establishes that ``[u]nless 
otherwise provided in this title, the provisions of this subtitle shall 
take effect on the later of 360 days after the date of the enactment of 
this subtitle or, to the extent a provision of this subtitle requires a 
rulemaking, not less than 60 days after publication of the final rule 
or regulation implementing such provision of this subtitle.'' 
Consequently, the Commission will seek to promulgate rules--by July 15, 
2011--implementing the conflicts of interest provisions of section 731 
of the Dodd-Frank Act.
    Accordingly, pursuant to authority granted under sections 
4s(h)(1)(D), 4s(h)(3)(D), 4s(j)(7), and 8a(5) of the CEA, as amended by 
the Dodd-Frank Act, the Commission is proposing to adopt Rule 23.605 to 
address potential conflicts of interest in the preparation and release 
of research reports by SDs and MSPs; the establishment of ``appropriate 
informational partitions'' within such firms; and potential conflicts 
of interest that may arise concerning whether to accept customers for 
clearing. The proposed rule also will address other issues, such as 
enhanced disclosure requirements, in order to minimize the potential 
that conflicts of interest will arise within SDs and MSPs.
    The proposed rules reflect consultation with staff of the following 
agencies: (i) The Securities and Exchange Commission; (ii) the Board of 
Governors of the Federal Reserve System; (iii) the Office of the 
Comptroller of the Currency; and (iv) the Federal Deposit Insurance 
Corporation. Staff from each of these agencies has had the opportunity 
to provide oral and/or written comments to the proposal, and the 
proposed rules incorporate elements of the comments provided.
    The Commission requests comment on all aspects of the proposed 
rules, as

[[Page 71392]]

well as comment on the specific provisions and issues highlighted in 
the discussion below.

II. Proposed Regulations

A. Conflicts of Interest in Research or Analysis

    Section 731 of the Dodd-Frank Act requires, in relevant part, that 
SDs and MSPs ``establish structural and institutional safeguards to 
ensure that the activities of any person within the firm relating to 
research or analysis of the price or market for any commodity or swap * 
* * are separated by appropriate informational partitions within the 
firm from the review, pressure, or oversight of persons whose 
involvement in pricing, trading, or clearing activities might 
potentially bias their judgment or supervision.''
    Much of the relevant language in section 731 of the Dodd-Frank Act 
is similar to certain language contained in section 501(a) of the 
Sarbanes-Oxley Act of 2002,\4\ which amended the Securities Exchange 
Act of 1934 by creating a new section 15D. In relevant part, section 
15D(a) mandates that the Securities and Exchange Commission, or a 
registered securities association or national securities exchange, 
adopt ``rules reasonably designed to address conflicts of interest that 
can arise when securities analysts recommend equity securities in 
research reports and public appearances, in order to improve the 
objectivity of research and provide investors with more useful and 
reliable information, including rules designed * * * to establish 
structural and institutional safeguards within registered brokers or 
dealers to assure that securities analysts are separated by appropriate 
informational partitions within the firm from the review, pressure, or 
oversight of those whose involvement in investment banking activities 
might potentially bias their judgment or supervision * * *.''
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    \4\ Public Law 107-204, 116 Stat. 745 (2002) (codified at 15 
U.S.C. 78o-6).
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    Unlike section 15D of the Securities Exchange Act of 1934, section 
731 of the Dodd-Frank Act does not expressly limit the requirement for 
informational partitions to only those persons who are responsible for 
the preparation of the substance of research reports; rather, section 
731 could be read to require informational partitions between persons 
involved in pricing, trading or clearing activities and any person 
within a SD or MSP who engages in ``research or analysis of the price 
or market for any commodity or swap,'' whether or not such research or 
analysis is to be made part of a research report that may be publicly 
disseminated.
    However, the Commission believes that an untenable outcome could 
result from implementing informational partitions between persons 
involved in pricing, trading or clearing activities and all persons who 
may be engaged in ``research or analysis of the price or market for any 
commodity or swap,'' given that persons involved in pricing, trading or 
clearing activities are routinely--or even primarily--engaged in 
``research or analysis of the price or market for'' commodities or 
swaps. Sound pricing, trading and/or clearing activities necessarily 
require some form of pre-decisional research or analysis of the facts 
supporting such determinations.
    Therefore, given the untenable alternative, the proposed rules 
reflect the Commission's belief that the Congressional intent 
underlying section 731 with respect to ``research and analysis of the 
price or market of any commodity or swap'' is primarily intended to 
prevent undue influence by persons involved in pricing, trading or 
clearing activities over the substance of research reports that may be 
publicly disseminated, and to prevent pre-public dissemination of any 
material information in the possession of a person engaged in research 
and analysis, or of the research reports, to traders.
    Many elements of the proposed rule, particularly those provisions 
relating to potential conflicts of interest surrounding research and 
analysis, have been adapted from National Association of Securities 
Dealers (NASD) Rule 2711. To construct the ``structural and 
institutional safeguards'' mandated by Congress under section 731 of 
the Dodd-Frank Act, the proposed rule establishes specific restrictions 
on the interaction and communications between persons within a SD or 
MSP involved in research or analysis of the price or market for any 
derivative and persons involved in pricing, trading or clearing 
activities. The proposed rules also impose duties and constraints on 
persons involved in the research or analysis of the price or market for 
any derivative.\5\ For instance, such persons will be required to 
disclose conspicuously during public appearances any relevant personal 
financial interests relating to any derivative of a type that the 
person follows. SDs and MSPs similarly will be obligated to make 
certain disclosures clearly and prominently in research reports, 
including third-party research reports that are distributed or made 
available by the SD or MSP. Further, SDs and MSPs, as well as employees 
involved in pricing, trading or clearing activities, will be prohibited 
from retaliating against any person involved in the research or 
analysis of the price or market for any derivative who produces, in 
good faith, a research report that adversely impacts the current or 
prospective pricing, trading or clearing activities of the SD or MSP.
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    \5\ Use of the term ``derivative'' is based upon the products 
listed in the definitions of futures commission merchant and 
introducing broker in sections 1a(28) and 1a(29) of the CEA.
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    To address the possibility that the proposed rules could be evaded 
by employing research analysts in an affiliate of a SD or MSP, the 
proposed rules also will restrict communications with research analysts 
employed by an affiliate. An affiliate will be defined as an entity 
controlling, controlled by, or under common control with, a SD or MSP. 
Moreover, the exceptions to the definition of ``research report'' are 
designed to address issues typically found in smaller firms where 
individuals in the trading unit perform their own research to advise 
their clients or potential clients. These exceptions do not in any way 
impact or lessen the restrictions placed on firms that prepare research 
reports and release them for public consumption. Any attempt by such 
firms to move research personnel into a trading unit to attempt to 
avail themselves of the exception will result in insufficient 
``structural and institutional safeguards'' and will be a violation of 
Section 731 of the Dodd-Frank Act and these Regulations.

B. Conflicts of Interest of Swap Dealers and Major Swap Participants in 
Clearing Activities

    Section 4s(j)(5), as established by section 731 of the Dodd-Frank 
Act, requires SDs and MSPs to implement conflicts of interest systems 
and procedures that ``establish structural and institutional safeguards 
to ensure that the activities of any person within the firm * * * 
acting in a role of providing clearing activities or making 
determinations as to accepting clearing customers are separated by 
appropriate informational partitions within the firm from the review, 
pressure, or oversight of persons whose involvement in pricing, 
trading, or clearing activities might potentially bias their judgment 
or supervision and contravene the core principles of open access and 
the business conduct standards described in this Act.''
    The Commission interprets the conflicts of interest provision under 
section 4s(j)(5) to require informational

[[Page 71393]]

partitions between (1) persons making clearing determinations and (2) 
persons involved in pricing and trading swaps (i.e., risk-taking 
units). This interpretation would protect against potential bias or 
interference in relation to ``providing clearing activities.'' The 
provision of clearing activities includes, but is not limited to, acts 
relating to (i) Whether to offer clearing services and activities to 
customers; (ii) whether to accept a particular customer for the 
purposes of clearing derivatives; (iii) whether to submit a transaction 
to a particular derivatives clearing organization; (iv) setting risk 
tolerance levels for particular customers; (v) determining acceptable 
forms of collateral from particular customers; or (vi) setting fees for 
clearing services. However, the proposed rules are not intended to 
hinder the execution of sound risk management programs by SDs or MSPs, 
or by any affiliate of a SD or MSP.
    To prevent anti-competitive discrimination in providing access to 
central clearing, the Commission proposes rules that will subject SDs 
and MSPs to restrictions that prevent risk-taking units from 
interfering with decisions by any affiliated clearing member of a 
derivatives clearing organization regarding whether to accept a client 
for clearing services. Under the proposed restrictions, all such 
decisions regarding the acceptance of customers for clearing should be 
made in accordance with publicly disclosed, objective, written 
criteria. Risk-taking units (i.e., those persons involved in pricing 
and trading swaps) would also be prevented from interfering with the 
provision of clearing activities.
    An affiliate will be defined as an entity controlling, controlled 
by, or under common control with, a SD or MSP. Under the term 
``affiliate,'' in any situation where a person is dually registered as 
a SD or MSP, and as a futures commission merchant (FCM), the 
restrictions on clearing activities set forth in the proposed 
regulations are intended to apply to the relationship between the 
business trading unit of the SD or MSP and the clearing unit of the 
FCM, even though the business trading unit and clearing unit reside 
within the same entity.

C. Other Issues

    In addition to mandating the establishment of ``appropriate 
informational partitions'' within SDs and MSPs that focus on the 
activities of persons involved in the ``research or analysis of the 
price or market for any commodity or swap,'' section 731 of the Dodd-
Frank Act also requires SDs and MSPs to ``implement conflict-of-
interest systems and procedures that * * * address such other issues as 
the Commission determines to be appropriate.'' Having considered the 
potential conflicts of interest that may arise in a SD or MSP, the 
Commission is proposing rules that will address the potential for undue 
influence on customers. The intended cumulative effect of the proposed 
rules is to fulfill Congress's objective that SDs and MSPs construct 
``structural and institutional safeguards'' to minimize the potential 
conflicts of interest that could arise within such firms.
    The Commission recognizes the potential development of a complex 
web of incentives and relationships surrounding SDs and MSPs, 
particularly with respect to such questions as: (1) Whether to enter 
into a cleared or uncleared trade, (2) whether to refer a counterparty 
to a particular futures commission merchant for clearing, or (3) 
whether to send a cleared trade to a particular derivatives clearing 
organization. To address this issue, the Commission is proposing to 
require that each SD and MSP implement policies and procedures 
mandating the disclosure to its customers of any material incentives or 
any material conflicts of interest it has that relate to a customer's 
decision on the execution or clearing of a transaction. Such 
disclosures will enable customers to make fully-informed business 
decisions, thereby minimizing the potential influence of any incentives 
or conflicts of SDs and MSPs.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \6\ requires that agencies, in 
proposing rules, consider the impact of those rules on small 
businesses. The Commission previously has established certain 
definitions of ``small entities'' to be used by the Commission in 
evaluating the impact of its rules on such entities in accordance with 
the RFA.\7\ The proposed rules would affect SDs and MSPs.
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    \6\ 5 U.S.C. 601-611.
    \7\ 47 FR 18618, Apr. 30, 1982.
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    SDs and MSPs are new categories of Commission registrants. 
Accordingly, the Commission has not addressed previously the question 
of whether such persons are, in fact, small entities for the purposes 
of the RFA. However, the Commission previously has determined that 
futures commission merchants, an existing category of registrants, are 
not small entities for the purposes of the RFA. The Commission's 
determination was based, in part, upon the obligation of futures 
commission merchants to meet minimum financial requirements established 
by the Commission to enhance the protection of customers' segregated 
funds and protect the financial condition of FCMs generally.\8\ Like 
FCMs, SDs will be subject to minimum capital and margin requirements. 
SDs are expected to comprise the largest global financial firms, and 
the Commission is required to exempt from designation entities that 
engage in a de minimis level of swaps dealing in connection with 
transactions with or on behalf of customers. Accordingly, for purposes 
of the RFA for this rulemaking, the Commission is hereby proposing that 
SDs not be considered small entities for essentially the same reasons 
that FCMs previously have been determined not to be small entities and 
in light of the exemption from the definition of SD for those engaging 
in a de minimis level of swap dealing. The Commission anticipates that 
this exemption would tend to exclude small entities from registration.
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    \8\ Id. at 18619.
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    The Commission also has previously determined that large traders 
are not small entities for RFA purposes.\9\ In that determination, the 
Commission considered that a large trading position was indicative of 
the size of the business. MSPs, by statutory definition, maintain 
substantial positions in swaps or maintain outstanding swap positions 
that create substantial counterparty exposure that could have serious 
adverse effects on the financial stability of the United States banking 
system or financial markets. Accordingly, for purposes of the RFA for 
this rulemaking, the Commission is hereby proposing that MSPs not be 
considered small entities for the same reasons that large traders have 
previously been determined not to be small entities.
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    \9\ Id. at 18620.
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    The Commission is carrying out Congressional mandates by proposing 
this regulation. Specifically, the Commission is proposing these rules 
to comply with the Dodd-Frank Act, the aim of which is to reduce the 
systemic risks presented by SDs and MSPs through comprehensive 
regulation. The Commission does not believe that there are regulatory 
alternatives to those being proposed that would be consistent with the 
statutory mandate. Therefore, the Chairman, on behalf of the 
Commission, hereby certifies, pursuant to 5 U.S.C. 605(b), that these 
proposed rules will not have a significant economic impact

[[Page 71394]]

on a substantial number of small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \10\ imposes certain 
requirements on Federal agencies in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. Certain 
provisions of this proposed rulemaking would result in new collection 
of information requirements within the meaning of the PRA. The 
Commission therefore is submitting this proposal to the Office of 
Management and Budget (OMB) for review in accordance with 44 U.S.C. 
3507(d) and 5 CFR 1320.11. The title for this collection of information 
is ``Conflicts of Interest Policies and Procedures by Swap Dealers and 
Major Swap Participants.'' The OMB has not yet assigned this collection 
a control number. An agency may not conduct or sponsor, and a person is 
not required to respond to, a collection of information unless it 
displays a currently valid control number.
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    \10\ 44 U.S.C. 3501 et seq.
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    The collection of information under these proposed rules is 
necessary to implement certain provisions of the CEA, as amended by the 
Dodd-Frank Act. Specifically, it is essential to ensuring that SDs and 
MSPs develop and maintain the required conflicts of interest systems 
and procedures. The Commission's staff would use the information 
collected when conducting examination and oversight to evaluate the 
completeness and effectiveness of the conflicts of interest procedures 
and disclosures of SDs and MSPs.
    If the proposed regulations are adopted, responses to this new 
collection of information would be mandatory. The Commission will 
protect proprietary information according to the Freedom of Information 
Act and 17 CFR part 145, ``Commission Records and Information.'' In 
addition, section 8(a)(1) of the CEA strictly prohibits the Commission, 
unless specifically authorized by the CEA, from making public ``data 
and information that would separately disclose the business 
transactions or market positions of any person and trade secrets or 
names of customers.'' The Commission also is required to protect 
certain information contained in a government system of records 
according to the Privacy Act of 1974.\11\
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    \11\ 5 U.S.C. 552a.
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1. Information Provided by Reporting Entities/Persons
    The proposed rules will require SDs and MSPs to adopt conflicts of 
interest policies and procedures that may impose PRA burdens, 
particularly through the implementation of certain recordkeeping 
requirements. For purposes of the PRA, the term ``burden'' means the 
``time, effort, or financial resources expended by persons to generate, 
maintain, or provide information to or for a Federal agency.'' \12\ 
This burden will result from the recordkeeping obligations related to a 
SD and MSP's obligations to adopt and implement written policies and 
procedures reasonably designed to ensure compliance with the proposed 
regulation, document certain communications between non-research 
personnel and research department personnel, record the basis upon 
which a research analyst's compensation was determined, and provide 
certain disclosures. The burden relates solely to recordkeeping 
requirements; the proposed regulation does not contain any reporting 
requirements.
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    \12\ 44 U.S.C. 3502(2).
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    The burden for compliance per respondent is expected to be 44.5 
hours and $4,450. This estimate includes the time needed to review 
applicable laws and regulations; develop and update conflicts of 
interest policies and procedures and to maintain records of certain 
communications and disclosures periodically required by the proposed 
regulation. The Commission does not expect respondents to incur any 
start-up costs in connection with this proposed regulation as it 
anticipates that respondents already maintain personnel and systems for 
regulatory recordkeeping.
    It is not currently known how many SDs and MSPs will become subject 
to these rules, and this will not be known to the Commission until 
registration requirements for these entities become effective after 
July 16, 2011, the date on which the Dodd-Frank Act becomes effective. 
While the Commission believes that there may likely be approximately 
200 SDs and 50 MSPs, it has taken a conservative approach, for PRA 
purposes, in estimating that there will be a combined number of 300 SDs 
and MSPs who will be required to establish and implement conflicts of 
interest policies and procedures under the proposed rules. The 
Commission estimated the number of affected entities based on industry 
data.
    According to the Bureau of Labor Statistics, the mean hourly wage 
of an employee under occupation code 13-1041, ``Compliance Officers, 
Except Agriculture, Construction, Health and Safety, and 
Transportation,'' that is employed by the ``Securities and Commodity 
Contracts Intermediation and Brokerage'' industry is $38.77.\13\ 
Because SDs and MSPs include large financial institutions whose 
compliance employees' salaries may exceed the mean wage, the Commission 
has estimated the cost burden of these proposed regulations based upon 
an average salary of $100 per hour. Accordingly, the estimated burden 
was calculated as follows:
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    \13\ http://www.bls.gov/oes/current/oes131041.htm.
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Recordkeeping Related to Maintenance of Conflicts of Interest Policies 
and Procedures
    Number of registrants: 300.
    Average number of annual responses by each registrant: 1.
    Estimated average hours per response: 2.
    Frequency of collection: Annually.
    Aggregate annual burden: 300 registrants x 1 response x 2 hours = 
600 burden hours
Recordkeeping Related to Communications Between Certain Personnel
    Number of registrants: 300.
    Average number of annual responses by each registrant: 20.
    Estimated average hours per response: 0.5.
    Frequency of collection: As needed.
    Aggregate annual burden: 300 registrants x 20 responses x 0.5 hours 
= 3,000 burden hours.
Recordkeeping Related to Disclosure Requirements
    Number of registrants: 300.
    Average number of annual responses by each registrant: 65.
    Estimated average hours per response: 0.5.
    Frequency of collection: As needed.
    Aggregate annual burden: 300 registrants x 65 responses x 0.5 hours 
= 9,750 burden hours.
    Based upon the above, the aggregate cost for all registrants is 
13,350 burden hours and $1,335,000 [13,350 burden hours x $100 per 
hour].
2. Information Collection Comments
    The Commission invites the public and other federal agencies to 
comment on any aspect of the recordkeeping burdens discussed above. 
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments 
in order to: (i) Evaluate whether the proposed

[[Page 71395]]

collection of information is necessary for the proper performance of 
the functions of the Commission, including whether the information will 
have practical utility; (ii) evaluate the accuracy of the Commission's 
estimate of the burden of the proposed collection of information; (iii) 
determine whether there are ways to enhance the quality, utility, and 
clarity of the information to be collected; and (iv) minimize the 
burden of the collection of information on those who are to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at 
<a href="/cdn-cgi/l/email-protection#4d02041f0c3e382f20243e3e2422233e0d22202f6328223d632a223b"><span class="__cf_email__" data-cfemail="9fd0d6cddeeceafdf2f6ececf6f0f1ecdff0f2fdb1faf0efb1f8f0e9">[email protected]</span></a>. Please provide the Commission with a copy 
of submitted comments so that all comments can be summarized and 
addressed in the final rule preamble. Refer to the Addresses section of 
this notice of proposed rulemaking for comment submission instructions 
to the Commission. A copy of the supporting statements for the 
collections of information discussed above may be obtained by visiting 
http://www.RegInfo.gov. OMB is required to make a decision concerning 
the collection of information between 30 and 60 days after publication 
of this document in the Federal Register. Consequently, a comment to 
OMB is most assured of being fully effective if received by OMB (and 
the Commission) within 30 days after publication.

C. Cost-Benefit Analysis

    Section 15(a) of the CEA\14\ requires the Commission to consider 
the costs and benefits of its actions before issuing a rulemaking under 
the Act. By its terms, section 15(a) does not require the Commission to 
quantify the costs and benefits of the rule or to determine whether the 
benefits of the rulemaking outweigh its costs; rather, it requires that 
the Commission ``consider'' the costs and benefits of its actions.
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    \14\ 7 U.S.C. 19(a).
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    Section 15(a) further specifies that the costs and benefits of a 
proposed rulemaking shall be evaluated in light of five broad areas of 
market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. The Commission 
may, in its discretion, give greater weight to any one of the five 
enumerated areas and could, in its discretion, determine that, 
notwithstanding its costs, a particular rule is necessary or 
appropriate to protect the public interest or to effectuate any of the 
provisions or accomplish any of the purposes of the Act.
1. Summary of Proposed Requirements
    The proposed regulations would implement certain provisions of 
section 731 of the Dodd-Frank Act, which adds a new section 4s(j)(5) to 
the CEA\15\ to direct each SD and MSP to implement conflicts of 
interest systems and procedures that establish safeguards within the 
firm to ensure that any persons researching or analyzing the price or 
market for any commodity or swap, and any persons acting in a role of 
providing clearing activities or making determinations as to accepting 
clearing customers, are separated by ``appropriate informational 
partitions'' within the firm from review, pressure, or oversight of 
persons whose involvement in pricing, trading or clearing activities 
might potentially bias the judgment or supervision of the persons. Such 
conflicts of interest systems and procedures also must address any 
other issues that the Commission determines to be appropriate.
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    \15\ To be codified at 7 U.S.C. 6s(j)(5).
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2. Costs
    With respect to costs, the Commission has determined that costs to 
SDs and MSPs would be minimal because the anticipated implementation of 
the proposed rules would require little additional resources beyond 
internal organizational changes to prevent compliance violations.
3. Benefits
    With respect to benefits, the Commission has determined that formal 
conflicts of interest rules will enhance transparency, bolster 
confidence in markets, reduce risk and allow regulators to better 
monitor and manage risks to our financial system.
4. Public Comment
    The Commission invites public comment on its cost-benefit 
considerations. Commenters also are invited to submit any data or other 
information that they may have quantifying or qualifying the costs and 
benefits of the proposed regulations with their comment letters.

List of Subjects in 17 CFR Part 23

    Antitrust, Brokers, Commodity futures, Conduct standards, Conflicts 
of interest, Major swap participants, Reporting and recordkeeping 
requirements, Swap dealers, Swaps.

    For the reasons stated in this release, the Commission proposes to 
amend 17 CFR part 23 (as proposed in a separate proposed rule published 
elsewhere in this issue of the Federal Register) as follows:

PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS

    1. The authority citation for part 23 continues to read as follows:

    Authority:  7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6p, 6r, 6s, 6t, 
9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21.

    2. Section 23.605 is added in its entirety as follows:


Sec.  23.605  Implementation of conflicts of interest policies and 
procedures

    (a) Definitions. For purposes of this section, the following terms 
shall be defined as provided.
    (1) Affiliate. This term means, with respect to any person, a 
person controlling, controlled by, or under common control with, such 
person.
    (2) Business trading unit. This term means any department, 
division, group, or personnel of a swap dealer or major swap 
participant or any of its affiliates, whether or not identified as 
such, that performs or is involved in any pricing, trading, sales, 
marketing, advertising, solicitation, structuring, or brokerage 
activities on behalf of a swap dealer or major swap participant.
    (3) Clearing unit. This term means any department, division, group, 
or personnel of a swap dealer or major swap participant or any of its 
affiliates, whether or not identified as such, that performs or is 
involved in any proprietary or customer clearing activities on behalf 
of a swap dealer or major swap participant.
    (4) Derivative. This term means:
    (i) A contract for the purchase or sale of a commodity for future 
delivery;
    (ii) A security futures product;
    (iii) A swap;
    (iv) Any agreement, contract, or transaction described in section 
2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act;
    (v) Any commodity option authorized under section 4c of the Act; 
and (vi) any leverage transaction authorized under section 19 of the 
Act.
    (5) Non-research personnel. This term means any employee of the 
business trading unit or clearing unit, or any other employee of the 
swap dealer or

[[Page 71396]]

major swap participant who is not directly responsible for, or 
otherwise involved with, research concerning a derivative, other than 
legal or compliance personnel.
    (6) Public appearance. This term means any participation in a 
conference call, seminar, forum (including an interactive electronic 
forum) or other public speaking activity before 15 or more persons, or 
interview or appearance before one or more representatives of the 
media, radio, television or print media, or the writing of a print 
media article, in which a research analyst makes a recommendation or 
offers an opinion concerning a derivatives transaction. This term does 
not include a password-protected Webcast, conference call or similar 
event with 15 or more existing customers, provided that all of the 
event participants previously received the most current research report 
or other documentation that contains the required applicable 
disclosures, and that the research analyst appearing at the event 
corrects and updates during the public appearance any disclosures in 
the research report that are inaccurate, misleading, or no longer 
applicable.
    (7) Research analyst. This term means the employee of a swap dealer 
or major swap participant who is primarily responsible for, and any 
employee who reports directly or indirectly to such research analyst in 
connection with, preparation of the substance of a research report 
relating to any derivative, whether or not any such person has the job 
title of ``research analyst.''
    (8) Research department. This term means any department or division 
that is principally responsible for preparing the substance of a 
research report relating to any derivative on behalf of a swap dealer 
or major swap participant, including a department or division contained 
in an affiliate of a swap dealer or major swap participant.
    (9) Research report. This term means any written communication 
(including electronic) that includes an analysis of the price or market 
for any derivative, and that provides information reasonably sufficient 
upon which to base a decision to enter into a derivatives transaction. 
This term does not include:
    (i) Communications distributed to fewer than 15 persons;
    (ii) Periodic reports or other communications prepared for 
investment company shareholders or commodity pool participants that 
discuss individual derivatives positions in the context of a fund's 
past performance or the basis for previously-made discretionary 
decisions;
    (iii) Any communication generated by an employee of the business 
trading unit that is conveyed as a solicitation for entering into a 
derivatives transaction, and is conspicuously identified as such; and
    (iv) Internal communications that are not given to current or 
prospective customers.
    (b) Policies and Procedures. Each swap dealer and major swap 
participant subject to this rule must adopt and implement written 
policies and procedures reasonably designed to ensure that the swap 
dealer or major swap participant and its employees comply with the 
provisions of this rule.
    (c) Research Analysts and Research Reports. (1) Restrictions on 
Relationship with Research Department. (i) Non-research personnel shall 
not influence the content of a research report of the swap dealer or 
major swap participant.
    (ii) No research analyst may be subject to the supervision or 
control of any employee of the swap dealer's or major swap 
participant's business trading unit or clearing unit, and no personnel 
engaged in pricing, trading or clearing activities may have any 
influence or control over the evaluation or compensation of a research 
analyst.
    (iii) Except as provided in paragraph (c)(1)(iv) of this section, 
non-research personnel, other than the board of directors and any 
committee thereof, shall not review or approve a research report of the 
swap dealer or major swap participant before its publication.
    (iv) Non-research personnel may review a research report before its 
publication as necessary only to verify the factual accuracy of 
information in the research report, to provide for non-substantive 
editing, to format the layout or style of the research report, or to 
identify any potential conflicts of interest, provided that:
    (A) Any written communication between non-research personnel and 
research department personnel concerning the content of a research 
report must be made either through authorized legal or compliance 
personnel of the swap dealer or major swap participant or in a 
transmission copied to such personnel; and
    (B) Any oral communication between non-research personnel and 
research department personnel concerning the content of a research 
report must be documented and made either through authorized legal or 
compliance personnel acting as an intermediary or in a conversation 
conducted in the presence of such personnel.
    (2) Restrictions on Communications. Any written or oral 
communication by a research analyst to a current or prospective 
counterparty, or to any employee of the swap dealer or major swap 
participant, relating to any derivative must not omit any material fact 
or qualification that would cause the communication to be misleading to 
a reasonable person.
    (3) Restrictions on Research Analyst Compensation. A swap dealer or 
major swap participant may not consider as a factor in reviewing or 
approving a research analyst's compensation his or her contributions to 
the swap dealer's or major swap participant's trading or clearing 
business. No employee of the business trading unit or clearing unit of 
the swap dealer or major swap participant may influence the review or 
approval of a research analyst's compensation.
    (4) Prohibition of Promise of Favorable Research. No swap dealer or 
major swap participant may directly or indirectly offer favorable 
research, or threaten to change research, to an existing or prospective 
counterparty as consideration or inducement for the receipt of business 
or compensation.
    (5) Disclosure Requirements. (i) Ownership and Material Conflicts 
of Interest. A swap dealer or major swap participant must disclose in 
research reports and a research analyst must disclose in public 
appearances:
    (A) Whether the research analyst maintains, from time to time, a 
financial interest in any derivative of a type that the research 
analyst follows, and the general nature of the financial interest; and
    (B) any other actual, material conflicts of interest of the 
research analyst or swap dealer or major swap participant of which the 
research analyst has knowledge at the time of publication of the 
research report or at the time of the public appearance.
    (ii) Prominence of Disclosure. Disclosures and references to 
disclosures must be clear, comprehensive, and prominent. With respect 
to public appearances by research analysts, the disclosures required by 
paragraph (c)(5) of this section must be conspicuous.
    (iii) Records of Public Appearances. Each swap dealer and major 
swap participant must maintain records of public appearances by 
research analysts sufficient to demonstrate compliance by those 
research analysts with the applicable disclosure requirements under 
paragraph (c)(5) of this section.
    (iv) Third-Party Research Reports.
    (A) For the purposes of paragraph (c)(5)(iv) of this section, 
``independent

[[Page 71397]]

third-party research report'' shall mean a research report, in respect 
of which the person or entity producing the report:
    (1) Has no affiliation or business or contractual relationship with 
the distributing swap dealer or major swap participant, or that swap 
dealer's or major swap participant's affiliates, that is reasonably 
likely to inform the content of its research reports; and
    (2) makes content determinations without any input from the 
distributing swap dealer or major swap participant or that swap 
dealer's or major swap participant's affiliates.
    (B) Subject to paragraph (c)(5)(iv)(C) of this section, if a swap 
dealer or major swap participant distributes or makes available any 
independent third-party research report, the swap dealer or major swap 
participant must accompany the research report with, or provide a Web 
address that directs the recipient to, the current applicable 
disclosures, as they pertain to the swap dealer or major swap 
participant, required by this section. Each swap dealer and major swap 
participant must establish written policies and procedures reasonably 
designed to ensure the completeness and accuracy of all applicable 
disclosures.
    (C) The requirements of paragraph (c)(5)(iv)(B) of this section 
shall not apply to independent third-party research reports made 
available by a swap dealer or major swap participant to its customers:
    (1) Upon request; or
    (2) through a Web site maintained by the swap dealer or major swap 
participant.
    (6) Prohibition of Retaliation Against Research Analysts. No swap 
dealer or major swap participant, and no employee of a swap dealer or 
major swap participant who is involved with the swap dealer's or major 
swap participant's pricing, trading or clearing activities, may, 
directly or indirectly, retaliate against or threaten to retaliate 
against any research analyst employed by the swap dealer or major swap 
participant or its affiliates as a result of an adverse, negative, or 
otherwise unfavorable research report or public appearance written or 
made, in good faith, by the research analyst that may adversely affect 
the swap dealer's or major swap participant's present or prospective 
pricing, trading or clearing activities.
    (d) Clearing activities. (1) No swap dealer or major swap 
participant shall directly or indirectly interfere with or attempt to 
influence the decision of any affiliated clearing member of a 
derivatives clearing organization with regard to the provision of 
clearing services and activities, including but not limited to:
    (i) Whether to offer clearing services and activities to customers;
    (ii) Whether to accept a particular customer for the purposes of 
clearing derivatives;
    (iii) Whether to submit a transaction to a particular derivatives 
clearing organization;
    (iv) Setting risk tolerance levels for particular customers;
    (v) Determining acceptable forms of collateral from particular 
customers; or
    (vi) Setting fees for clearing services.
    (2) Each swap dealer and major swap participant shall create and 
maintain an appropriate informational partition, as specified in 
section 4s(j)(5)(A) of the Act, between business trading units of the 
swap dealer or major swap participant and clearing member personnel of 
any affiliated clearing member of a derivatives clearing organization. 
At a minimum, such informational partitions shall require that no 
employee of a business trading unit of a swap dealer or major swap 
participant shall supervise, control, or influence any employee of a 
clearing member of a derivatives clearing organization.
    (e) Undue Influence on Counterparties. Each swap dealer and major 
swap participant must adopt and implement written policies and 
procedures that mandate the disclosure to its counterparties of any 
material incentives and any material conflicts of interest regarding 
the decision of a counterparty:
    (1) Whether to execute a derivative on a swap execution facility or 
designated contract market, or
    (2) Whether to clear a derivative through a derivatives clearing 
organization.
    (f) All records that a swap dealer or major swap participant is 
required to maintain pursuant to this regulation shall be maintained in 
accordance with 17 CFR 1.31 and shall be made available promptly upon 
request to representatives of the Commission and to representatives of 
the applicable prudential regulator, as defined in 7 U.S.C. 1a(39).

    Issued in Washington, DC, on November 10, 2010, by the 
Commission.
David A. Stawick,
Secretary of the Commission.

Statement of Chairman Gary Gensler

Implementation of Conflicts of Interest Policies and Procedures by Swap 
Dealers and Major Swap Participants

    I support the proposed rulemakings that establish firewalls to 
ensure a separation between the research arm, the trading arm and 
the clearing activities of swap dealers, major swap participants, 
futures commission merchants and introducing brokers. This rule 
proposal relates to the conflicts-of-interest provisions of the 
Dodd-Frank Act that direct swap dealers and major swap participants 
to have appropriate informational partitions. The proposal builds 
upon similar protections in the securities markets as mandated in 
the Sarbanes-Oxley Act. The proposed rules will protect market 
participants and the public while also promoting the financial 
integrity of the marketplace.

[FR Doc. 2010-29006 Filed 11-22-10; 8:45 am]
BILLING CODE 6351-01-P


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