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Federal Register / Vol. 75, No. 225 / Tuesday, November 23, 2010 / Proposed Rules
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
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:

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,

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SUMMARY:

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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,
[email protected], or Ward P. Griffin,
Counsel, Office of General Counsel,
(202) 418–5425, [email protected],
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
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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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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well as comment on the specific
provisions and issues highlighted in the
discussion below.
II. Proposed Regulations

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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
4 Public Law 107–204, 116 Stat. 745 (2002)
(codified at 15 U.S.C. 78o–6).

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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
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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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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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

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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
65

U.S.C. 601–611.
FR 18618, Apr. 30, 1982.

7 47

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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
8 Id.
9 Id.

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on a substantial number of small
entities.

1. Information Provided by Reporting
Entities/Persons

B. Paperwork Reduction Act

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

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

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

10 44
11 5

U.S.C. 3501 et seq.
U.S.C. 552a.

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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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
[email protected]. 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
14 7

U.S.C. 19(a).

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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.
15 To

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

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

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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.

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(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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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

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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

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71397

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
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:

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:
SUMMARY:

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