Federal Register / Vol. 75, No. 225 / Tuesday, November 23, 2010 / Proposed Rules 71391 

1See 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. 

2Pursuant 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. 

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. 

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: 

• Agency Web site, via its Comments 

Online process at http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

• Hand Delivery/Courier: Same as 

mail above. 

• 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, 

sjosephson@cftc.gov, or Ward P. Griffin, 

Counsel, Office of General Counsel, 

(202) 418–5425, wgriffin@cftc.gov, 

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. 

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 DoddFrank 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 


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71392 Federal Register / Vol. 75, No. 225 / Tuesday, November 23, 2010 / Proposed Rules 

4Public Law 107–204, 116 Stat. 745 (2002) 

(codified at 15 U.S.C. 78o–6). 

5Use 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. 

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 * * *.’’ 

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 DoddFrank 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. 

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 DoddFrank 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 


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Federal Register / Vol. 75, No. 225 / Tuesday, November 23, 2010 / Proposed Rules 71393 

6 5 U.S.C. 601–611. 

7 47 FR 18618, Apr. 30, 1982. 

8 Id. at 18619. 

9 Id. at 18620. 

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 risktaking 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. 

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. 

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. 

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 


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71394 Federal Register / Vol. 75, No. 225 / Tuesday, November 23, 2010 / Proposed Rules 

10 44 U.S.C. 3501 et seq. 

11 5 U.S.C. 552a. 12 44 U.S.C. 3502(2). 13http://www.bls.gov/oes/current/oes131041.htm. 

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. 

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

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. 

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: 

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 × 1 response × 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 × 20 responses × 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 × 65 responses × 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 × $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 


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Federal Register / Vol. 75, No. 225 / Tuesday, November 23, 2010 / Proposed Rules 71395 

14 7 U.S.C. 19(a). 15To be codified at 7 U.S.C. 6s(j)(5). 

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 

OIRAsubmissions@omb.eop.gov. 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 CEA14 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. 

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 CEA15 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. 

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: 

§ 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 


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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 passwordprotected 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 previouslymade 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) Nonresearch 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 nonsubstantive 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 


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Federal Register / Vol. 75, No. 225 / Tuesday, November 23, 2010 / Proposed Rules 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 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 23 

RIN 3038–AC96 

Regulations Establishing and 

Governing the Duties of Swap Dealers 

and Major Swap Participants 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission is proposing 

regulations to implement new statutory 

provisions enacted by Title VII of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act. The proposed 

regulations set forth certain duties 

imposed upon swap dealers and major 

swap participants registered with the 

Commission with regard to: Risk 

management procedures; monitoring of 

trading to prevent violations of 

applicable position limits; diligent 

supervision; business continuity and 

disaster recovery; disclosure and the 

ability of regulators to obtain general 

information; and antitrust 

considerations. The proposed 

regulations would implement the new 

statutory framework of section 4s(j) of 

the Commodity Exchange Act, added by 

section 731 of the Dodd-Frank Act, 

excepting regulations related to conflicts 

of interest pursuant to section 4s(j)(5), 

which will be addressed in a separate 

rulemaking. These regulations set forth 

certain duties with which swap dealers 

and major swap participants must 

comply to maintain registration as a 

swap dealer or major swap participant. 

DATES: Submit comments on or before 

January 24, 2011. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AC96 

and Duties of Swap Dealers and Major 

Swap Participants, by any of the 

following methods: 


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