E8-21114. Joint Audit Committee Operating Agreement

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Request for comment.

SUMMARY:

The Commodity Futures Trading Commission (“Commission” or “CFTC”) is publishing for public comment an agreement submitted by the Joint Audit Committee (“JAC”) for approval pursuant to Commission Regulation 1.52.^[1] The JAC is a voluntary, cooperative organization comprised of representatives of the financial surveillance staff of designated contract markets (“DCMs”) and the National Futures Association (“NFA”) and was formed for the purpose of coordinating the monitoring and examination of common futures commission merchant (“FCM”) members of such entities. The agreement governs the operation of the JAC and the manner by which the JAC will coordinate and cooperate in examining and monitoring FCMs for compliance with Commission and self-regulatory organization (“SRO”) minimum financial and related reporting requirements. The JAC is submitting the agreement to replace the current operating agreement, which has been in effect since 1984.

DATE:

Comments must be received on or before October 14, 2008.

ADDRESSES:

Interested persons should submit their views and comments to David Stawick, Secretary, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. In addition, comments may be sent by facsimile transmission to [phone], or by electronic mail to [e-mail]. Reference should be made to “Joint Audit Committee”. This document also will be available for comment at http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT:

Thomas J. Smith, Deputy Director and Chief Accountant, or Jennifer Bauer, Special Counsel, Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, [e-mail], Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone [phone].

SUPPLEMENTARY INFORMATION:

The Commodity Exchange Act ^[2] (“Act”) authorizes the Commission to adopt regulations imposing minimum financial and related reporting requirements upon FCMs. In this regard, Section 4f(b) of the Act authorizes the Commission to adopt regulations imposing minimum capital requirements upon FCMs. In addition, Section 4d of the Act requires FCMs to segregate from their own assets all money, securities, and property deposited by customers to margin, guarantee, or secure futures positions, and Section 4f(a)(1) of the Act authorizes the Commission to establish financial reporting requirements upon FCMs. Consistent with this authority, the Commission has adopted regulations addressing minimum financial and related reporting requirements for FCMs.^[3]

The Act further imposes obligations upon DCMs and NFA to monitor FCMs for compliance with the minimum financial and related reporting requirements. Specifically, DCM Core Principle 11 requires a board of trade to establish and to enforce rules addressing the financial integrity of FCMs.^[4] In addition, Section 17(p)(2) of the Act requires NFA to establish minimum capital, segregation, and other financial requirements for member FCMs and to implement a program to audit and to enforce compliance with such requirements. Minimum standards for an effective financial surveillance program are further set forth in interpretations issued by the Commission's Division of Trading and Markets.^[5]

In 1984, a number of futures exchanges (now, DCMs) and NFA (collectively referred to as SROs) entered into a Joint Audit Agreement (“1984 Agreement”). The 1984 Agreement generally provides that an FCM that is a member of more than one SRO would have a single designated SRO (“DSRO”). The DSRO is primarily responsible for conducting periodic financial examinations, the results of which are shared with the other SROs of which the FCM is a member. The DSRO process is intended to enhance the effectiveness and efficiency of the SROs' financial surveillance function by avoiding unnecessary duplicative financial examinations of FCMs that are members of more than one SRO. This regulatory approach was endorsed by the Commission when it adopted Regulation 1.52, which permits DSROs to enter into cooperative agreements sharing financial surveillance oversight responsibilities for FCMs that are members of more than one SRO, provided that the oversight agreement is approved by the Commission after public notice and comment.^[6]

In 2004, the SROs, through the JAC, submitted proposed amendments to the 1984 agreement to the Commission for approval. The Commission published the proposed amendments for public comment on April 12, 2004. The proposal, however, became linked to the Commission's study on the SRO process, which encompassed the topic of the general governance of SROs and the role of industry self-regulation.^[7] The Commission completed its SRO governance study in 2007 with the adoption of a regulation providing acceptable practices under core principles for the composition of boards of directors of SROs.^[8] However, the effectiveness of this regulation has been stayed,^[9] and no final action was taken by the Commission with respect to the amendments proposed in 2004. The 1984 Agreement has remained in effect, and the JAC has continued its role of enabling the cooperative examination of member firms in the intervening time period.

The Commission has now received from the JAC a revised series of proposed amendments to the 1984 Agreement (“Proposed Agreement”) for which approval has been requested. In accordance with Regulation 1.52(g), the Commission is publishing this notice to request public comment on the Proposed Agreement before taking action to approve or to deny approval of the Proposed Agreement.

The Proposed Agreement includes provisions addressing JAC governance procedures and voting rights, membership criteria, information sharing arrangements, and DSRO designation criteria. The Proposed Agreement differs in several material respects from the revisions published for comment in 2004, and many comments received in 2004 were related to provisions which are no longer applicable in the Proposed Agreement. In addition, in the intervening period of four years commenters may have changed their positions from those previously communicated. Therefore, the Commission will not consider the comments submitted in response to the 2004 request for comments in assessing whether the Proposed Agreement satisfies the requirements of Regulation 1.52(g). Accordingly, any person wishing to comment on the Proposed Agreement should submit a comment letter.

The Commission invites comment on the Proposed Agreement, particularly with respect to the ability of the DSRO system to continue to serve the public interest, reduce duplicative reporting and examination burdens on FCMs, strengthen customer protections, and foster cooperation and coordination among DCMs.

The 1984 Agreement, Commission letter approving the 1984 Agreement, and the Proposed Agreement are available on the Commission's Web site at http://www.cftc.gov upon the issuance of this notice by the Commission. Copies of these documents also may be obtained from the Office of the Secretariat, Commodity Futures Trading Commission, 1155 21st Street, NW., Washington, DC 20581.

Issued in Washington, DC on September 8, 2008, by the Commission.

David Stawick,

Secretary of the Commission.

Footnotes

1.  Commission regulations may be found at 17 CFR Ch. 1 (2008).

2.  7 U.S.C. 1 et seq.

3.  For example, see Commission Regulation 1.17 for the minimum financial requirements for FCMs and introducing brokers (“IBs”) adopted by the Commission, and Commission Regulations 1.10 and 1.12 for monthly and annual financial reporting requirements and notice requirements, respectively.

4.  7 U.S.C. 7(d)(11).

5.  See Division of Trading and Markets Financial and Segregation Interpretation No. 4-1—Advisory Interpretation for Self-Regulatory Organization Surveillance over Members' Compliance with Minimum Financial, Segregation, Reporting, and Related Recordkeeping Requirements, Comm. Fut. L. Rep. (CCH) ¶ 7114A (Jul. 29, 1985); and Division of Trading and Markets Financial and Segregation Interpretation No. 4-2—Risk-Based Auditing, Com. Fut. L. Rep. (CCH) ¶ 7114E (August 20, 1999).

6.  Regulation 1.52(g) states:

“After appropriate notice and opportunity for comment, the Commission may, by written notice, approve such a plan, or any part of the plan, if it finds that the plan, or any part of it: (1) Is necessary or appropriate to serve the public interest; (2) Is for the protection and in the interest of customers; (3) Reduces multiple monitoring and auditing for compliance with the minimum financial rules of the [SROs] submitting the plan for any [FCM or IB that] is a member of more than one [SRO]; (4) Reduces multiple reporting of the financial information necessitated by such minimum financial and related reporting requirements by any [FCM or IB that] is a member of more than one [SRO]; (5) Fosters cooperation and coordination among the contract markets; and (6) Does not hinder the development of a registered futures association under [S]ection 17 of the Act.”

7.  One of the comments received with respect to the proposed amendments published in 2004 was from the Futures Industry Association (“FIA”), dated June 18, 2004, which stated that the FIA's comments may change based on the results of the Commission's SRO study and that any action taken with respect to the proposed amendments to the JAC agreement should be deferred until the completion of the SRO study.

8.  72 FR 6936 (February 14, 2007).

9.  See 72 FR 65658 (November 23, 2007).