[Federal Register Volume 83, Number 128 (Tuesday, July 3, 2018)]
[Proposed Rules]
[Pages 31078-31086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-14272]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 83, No. 128 / Tuesday, July 3, 2018 / 
Proposed Rules  

[[Page 31078]]



COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AE73


Financial Surveillance Examination Program Requirements for Self-
Regulatory Organizations

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is proposing to amend its regulations governing the minimum 
standards for a self-regulatory organization's (``SRO'') financial 
surveillance examination program of futures commission merchants 
(``FCMs''). The proposed amendments would revise the scope of a third-
party expert's evaluation of the SRO's financial surveillance program 
to cover only the examination standards used by SRO staff in conducting 
FCM examinations. The proposed amendments also would revise the minimum 
timeframes between when an SRO must engage a third-party expert to 
evaluate its FCM examination standards.

DATES: Comments must be received on or before September 4, 2018.

ADDRESSES: You may submit comments, identified by RIN 3038-AE73, by any 
of the following methods:
     CFTC Comments Portal: https://comments.cftc.gov. Select 
the ``Submit Comments'' link for this rulemaking and follow the 
instructions on the Public Comment Form.
     Mail: Send to Christopher Kirkpatrick, Secretary of the 
Commission, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Follow the same instructions as for 
Mail, above. Please submit your comments using only one of these 
methods. To avoid possible delays with mail or in-person deliveries, 
submissions through the CFTC Comments Portal are encouraged.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://comments.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 (``FOIA''), a petition for confidential 
treatment of the exempt information may be submitted according to the 
procedures established in Sec.  145.9 of the Commission's 
regulations.\1\
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    \1\ Regulation 145.9. Commission regulations referred to herein 
are found at 17 CFR chapter I.
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    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 https://comments.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 FOIA.

FOR FURTHER INFORMATION CONTACT: Matthew B. Kulkin, Director, 202-418-
5213, [email protected]; Thomas Smith, Deputy Director, 202-418-5495, 
[email protected]; Jennifer Bauer, Special Counsel, 202-418-5472, 
[email protected]; or Joshua Beale, Special Counsel, 202-418-5446, 
[email protected], Division of Swap Dealer and Intermediary Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

A. Commission Initiative to Simplify and Modernize Regulations

    In March of 2017, Commission staff initiated an agency-wide 
internal review of CFTC regulations and practices to identify those 
areas that could be simplified to make them less burdensome and 
costly.\2\ The Commission subsequently published in the Federal 
Register on May 9, 2017 a Request for Information soliciting 
suggestions from the public regarding how the Commission's existing 
rules, regulations, or practices could be applied in a simpler, less 
burdensome, and costly manner.\3\
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    \2\ See Remarks of Acting Chairman J. Christopher Giancarlo 
before the 42nd Annual International Futures Industry Conference in 
Boca Raton, FL, dated March 15, 2017. The remarks are available at 
the Commission's website: https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20.
    \3\ Project KISS, 82 FR 21494 (May 9, 2017); amended on May 24, 
2017, 82 FR 23765 (May 24, 2017). The Federal Register Request for 
Information, and the suggestion letters filed by the public are 
available at the Commission's website: https://comments.cftc.gov/KISS/KissInitiative.aspx.
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    The CME Group (``CME'') submitted suggestions on a variety of 
rules, regulations, and practices in responses to the Commission's 
Request for Information.\4\ One area identified by CME for 
simplification and the reduction of regulatory burden was Regulation 
1.52, which imposes an obligation on SROs \5\ to conduct periodic 
examinations of member FCMs \6\ for compliance with both SRO and 
Commission minimum capital and other financial and related reporting 
requirements. Specifically, the CME suggested that Regulation 1.52 
should be amended to eliminate a requirement that a third-party public 
accounting firm perform periodic evaluations and assessments of the 
CME's surveillance program to oversee its member FCMs compliance with 
Commission and CME financial and related reporting requirements.\7\
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    \4\ See Letter from Kathleen Cronin, Senior Managing Director, 
General Counsel and Corporate Secretary, CME Group, dated September 
29, 2017. The CME's letter is available at the Commission's website: 
https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=61395&SearchText=.
    \5\ The term ``self-regulatory organization'' is defined in 
Regulation 1.52 to include a contract market (as defined in 
Regulation 1.3) or an RFA under section 17 of the Commodity Exchange 
Act (``Act'') (7 U.S.C. 1 et seq.), but the term as defined in 
Regulation 1.52 does not include a swap execution facility (as 
defined in Regulation 1.3). See Regulation 1.52(a)(2).
    \6\ The term ``futures commission merchant'' is generally 
defined in Regulation 1.3 as (1) an entity that is engaged in 
soliciting or accepting orders for the purchase or sale of any 
commodity for future delivery or a swap and, in connection with the 
solicitation and acceptance of such orders, accepts money, 
securities or property (or extends credit in lieu thereof) to 
margin, guarantee or secure futures or swaps transactions, or (2) an 
entity registered as an FCM.
    \7\ CME Letter, pp. 13-14.

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[[Page 31079]]

B. Statutory and Regulatory Background

    FCMs perform critical functions to facilitate the efficient 
operation of Commission-regulated exchange-traded derivatives markets. 
In addition to trading for their own accounts and carrying the accounts 
of their affiliates, FCMs are market intermediaries, standing between 
customers trading futures and swaps transactions on one side and 
designated contract markets (``DCMs'') and derivatives clearing 
organizations (``DCOs'') on the other side. As part of their role as 
market intermediaries, FCMs carry customer accounts and hold customer 
funds to margin futures and cleared swap transactions. FCMs also 
fulfill daily settlement obligations on behalf of customers by posting 
sufficient funds to DCOs to support their customers' futures and swap 
positions, including paying mark-to-market losses associated with such 
positions. FCMs also are essential to the efficient operation of 
Commission-regulated markets in that they guarantee each customer's 
financial performance for futures and swap positions to DCOs by 
agreeing to use their own financial resources to cover any shortfall 
resulting from a customer default.\8\
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    \8\ See Regulation 39.16.
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    The Act acknowledges the critical role performed by FCMs. Section 
4f(b) of the Act authorizes the Commission to adopt regulations 
imposing minimum capital and financial reporting requirements on FCMs 
to help ensure that they maintain adequate financial resources to meet 
their obligations.\9\ Under this statutory authorization, the 
Commission adopted regulations requiring FCMs, among other 
requirements, to maintain a minimum level of regulatory capital,\10\ to 
segregate customer funds from their own funds in specially designated 
customer accounts,\11\ and to maintain appropriate risk management 
programs to monitor and manage the risks associated with their 
activities as FCMs.\12\
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    \9\ Section 4f(b) of the Act authorizes the Commission to adopt 
FCM minimum financial and related reporting requirements. Section 
4f(b) provides, in relevant part, that no person shall be registered 
as an FCM unless such person meets the minimum financial 
requirements that the Commission may prescribe by regulation as 
necessary to insure such person meets its obligations as a 
registrant, and each person registered as an FCM shall at all times 
continue to meet such prescribed minimum financial requirements.
    \10\ See Regulation 1.17 for FCM minimum capital requirements.
    \11\ See Regulations 1.20, 22.2, and 30.7 for FCM segregation 
requirements for customer accounts containing futures positions, 
swap positions, and foreign futures positions, respectively.
    \12\ See Regulation 1.11 for FCM risk management requirements.
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    The Commission also has adopted, under the authority granted by 
section 4f(b), regulations imposing periodic financial reporting 
requirements on FCMs that are intended to provide the Commission with 
information regarding their financial condition. The financial 
reporting requirements include daily statements demonstrating 
compliance with the segregation of customer funds requirements,\13\ 
monthly unaudited and annual audited financial statements,\14\ and 
regulatory notices upon the occurrence of specified events including 
failing to meet minimum capital requirements, failing to comply with 
segregation requirements, and failing to maintain current books and 
records.\15\
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    \13\ See Regulations 1.32, 22.2 and 30.7 for FCM requirements to 
prepare and to submit to the Commission daily segregation 
computations and schedules for customer futures, cleared swaps and 
foreign futures accounts, respectively.
    \14\ See Regulation 1.10 for FCM requirements to file unaudited 
monthly financial statements and annual audited financial 
statements.
    \15\ See Regulation 1.12.
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    In addition to authorizing the Commission to adopt regulations 
imposing direct financial and related reporting requirements, the Act 
further establishes a regulatory oversight structure that imposes an 
obligation on DCMs and registered futures associations (``RFAs''),\16\ 
as SROs, to perform frontline regulatory oversight of market 
intermediaries, including FCMs.\17\ In 2000, Congress affirmed this 
regulatory structure of industry self-regulation by amending section 3 
of the Act to state, in pertinent part, that it is the purpose of the 
Act to serve the public interests through a system of effective self-
regulation of trading facilities, clearing systems, market participants 
and market professionals under the oversight of the Commission.\18\
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    \16\ The National Futures Association (``NFA'') is the only 
registered RFA. NFA's financial requirements for FCMs are available 
at its website, www.nfa.futures.org.
    \17\ Section 3(b) of the Act.
    \18\ Section 108 of the Commodity Futures Modernization Act of 
2000, Public Law 106-554, 114 Stat. 2763 (Dec. 21, 2000).
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    To achieve the objective of a self-regulatory structure, the Act 
and Commission regulations require RFAs and DCMs to adopt financial and 
related reporting requirements for member FCMs, and to periodically 
examine FCMs for compliance with such requirements. Section 17(p) of 
the Act requires an RFA to establish and submit for Commission approval 
rules imposing minimum capital, segregation and other financial 
requirements applicable to its members for which such requirements are 
imposed by the Commission. The RFA's financial requirements for its 
members must be at least as stringent as those set by the Act or 
Commission regulations.\19\ Section 17(p) further provides that the RFA 
must implement a program to audit and enforce compliance by its members 
with the RFA's minimum financial requirements.\20\
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    \19\ See section 17(p)(2) of the Act.
    \20\ Id.
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    With respect to DCMs, section 5(d)(11)(B) of the Act and Regulation 
38.600 require, in relevant part, each DCM to implement rules to ensure 
the financial integrity of any member FCM and the protection of 
customer funds.\21\ DCMs also are required to monitor an FCM member's 
compliance with the DCM's minimum financial requirements by reviewing 
financial information filed with the DCM and by conducting periodic 
examinations of the FCM.\22\
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    \21\ See also, Regulation 38.602 which provides that a DCM must 
provide for the financial integrity of its transactions by 
establishing and maintaining appropriate minimum financial standards 
for its members and non-intermediated market participants, and 
Regulation 38.603 which requires a DCM to have rules concerning the 
protection of customer funds.
    \22\ See Regulations 38.600 through 38.605.
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    The Commission's and SRO's minimum financial requirements for 
member FCMs are intended to help ensure that FCMs can continue to meet 
their financial and operational obligations to both customers and DCOs, 
which is necessary in order for the Commission-regulated markets to 
operate efficiently and effectively.

C. Current Commission Regulation 1.52

    As noted in section I.B., above, the Act and Commission regulations 
establish SROs (i.e., DCMs and NFA) as frontline regulators for FCMs. 
Commission Regulation 1.52 establishes the minimum standards that the 
Commission requires of an SRO oversight program, and includes an 
explicit requirement that each SRO must adopt rules prescribing minimum 
financial and related reporting requirements for member FCMs that are 
the same as, or more stringent than, the requirements imposed by the 
Commission.\23\ Consistent with the requirements of Regulation 1.52, 
SROs have adopted rules imposing FCM capital and financial reporting 
requirements that are at least as stringent as the FCM capital and 
financial reporting requirements set

[[Page 31080]]

forth in applicable Commission regulations.\24\
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    \23\ See Regulation 1.52(b)(1).
    \24\ For example, CME Rule 970 imposes capital and financial 
reporting requirements on member FCMs that are at least as stringent 
as the Commission's capital and financial reporting requirements. 
CME rules may be accessed via the CME's website: http://www.cmegroup.com/rulebook/CME/I/9/9.pdf.
    NFA FCM capital and financial reporting requirements are set 
forth in Section 1 of the NFA's Financial Requirements section of 
its rulebook and may be accessed at NFA's website: https://www.nfa.futures.org/rulebook/index.aspx.
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    In 2013, the Commission adopted new rules and rule amendments to 
comprehensively enhance customer protections.\25\ As part of the 2013 
Customer Protection Rulemaking, the Commission amended Regulation 1.52 
to impose several additional obligations on SROs with respect to the 
oversight of FCMs. Amended Regulation 1.52 requires each SRO to 
establish and operate a supervisory program that includes written 
policies and procedures concerning the application of the supervisory 
program in the examination of its member registrants (including FCMs) 
for the purpose of assessing whether each member registrant is in 
compliance with applicable SRO and Commission regulations governing net 
capital and related financial requirements, the obligations to 
segregate customer funds, risk management requirements, financial 
reporting requirements, recordkeeping requirements, and sales practices 
and other compliance requirements. The supervisory program also must 
adequately address the following elements: (1) The level, training, and 
independence of SRO examination staff; (2) The SRO's ongoing 
surveillance of member FCMs, including the review and analysis of 
financial reports and regulatory notices received; (3) The SRO's 
procedures for identifying and monitoring FCMs that are deemed to pose 
a high degree of financial risk; (4) The SRO's conduct of on-site 
examination of FCMs by SRO staff at least once every 18 months; and (5) 
The documentation of all aspects of the SRO's operation of its 
supervisory program.
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    \25\ Enhancing Protections Afforded Customers and Customer Funds 
Held by Futures Commission Merchants and Derivatives Clearing 
Organizations, 78 FR 68506 (Nov. 14, 2013) (the ``2013 Customer 
Protection Rulemaking'').
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    The supervisory program also must, at a minimum, incorporate FCM 
examination standards addressing: (1) The ethics of an SRO examiner; 
(2) The independence of an SRO examiner; (3) The supervision, review, 
and quality control of an SRO examiner's work product; (4) The evidence 
and documentation to be reviewed and retained in connection with an 
examination; (5) The examination planning process; (6) Materiality 
assessment; (7) Quality control procedures to ensure that the SRO 
examinations maintain the level of quality expected; (8) Communications 
between an SRO examiner and the regulatory oversight committee, or the 
functional equivalent of the regulatory oversight committee, of the SRO 
of which the FCM is a member; (9) Communications between an SRO 
examiner and an FCM's audit committee of the board of directors or 
similar governing body; (10) Analytical review procedures; (11) Record 
retention; and (12) Required items for inclusion in the SRO's 
examination report, such as repeat violations, material items, and high 
risk issues.\26\ Regulation 1.52 further provides that all aspects of 
an SRO's supervisory program, including the FCM examination standards, 
must conform to auditing standards issued by the Public Company 
Accounting Oversight Board (``PCAOB'') as such PCAOB standards would 
apply to a non-financial statement audit.\27\
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    \26\ Regulation 1.52(c) and (d).
    \27\ The PCAOB is a nonprofit corporation established by 
Congress to oversee the audits of public companies in order to 
protect investors and the public interest by promoting informative, 
accurate, and independent audit reports. The PCAOB also oversees the 
audits of brokers and dealers registered with the Securities and 
Exchange Commission. The PCAOB was not, however, vested with the 
authority to oversee the audits of FCMs.
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    Regulation 1.52 also requires each SRO to engage an ``examinations 
expert'' to evaluate its supervisory program prior to its initial use, 
and to evaluate the SRO's application of the supervisory program at 
least once every three years after its initial use.\28\ For each 
evaluation, the SRO is required to obtain from the examinations expert 
a written report on findings and recommendations issued under the 
consulting services standards of the American Institute of Certified 
Public Accountants (``AICPA'') that includes: (1) A statement that the 
examinations expert has evaluated the supervisory program (including 
its design to detect material weaknesses in an FCM's system of internal 
controls), including any comments and recommendations regarding such 
evaluation; (2) A statement that the examinations expert has evaluated 
the application of the supervisory program by the SRO, including any 
comments and recommendations in connection with such evaluation; and, 
(3) A discussion and recommendations of any new or best practices as 
prescribed by industry sources, including the AICPA and PCAOB.
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    \28\ An ``examinations expert'' is defined in Regulation 1.52(a) 
as an accounting and auditing firm with substantial expertise in the 
audits of FCMs, risk assessment, and internal control reviews, and 
is an accounting and auditing firm that is acceptable to the 
Commission.
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II. Proposed Amendments to Regulation 1.52

A. Response To Request for Information

    The CME stated in its response to the Commission's Request for 
Information that it fully supported the Commission's objective of 
strengthening and enhancing SRO oversight programs for FCMs as set 
forth in the 2013 Customer Protection Rulemaking. CME further stated 
that it expended significant resources revising the FCM supervisory 
program to address the enhanced requirements of Regulation 1.52 that 
were imposed by the 2013 Customer Protection Rulemaking. In this 
regard, CME stated that it and NFA jointly engaged a public accounting 
firm as a consultant during the development of the FCM examination 
standards, and that the public accounting firm's expertise was 
extremely beneficial in drafting the initial FCM examination standards 
and revising its supervisory program to address such standards.
    The CME, however, also suggested that the Commission should 
eliminate the requirement for an SRO to engage an examinations expert 
once every three years to evaluate the SRO's supervisory program. The 
CME expressed its view that the engagement of an examinations expert at 
least once every three years does not provide any meaningful regulatory 
benefit. The CME noted that under the current regulatory framework, 
staff of the Commission's Division of Swap Dealer and Intermediary 
Oversight (``DSIO'') provides effective oversight of the SRO FCM 
examination programs through the conduct of its SRO rule enforcement 
reviews. The CME noted that it revises the FCM examinations programs to 
incorporate any regulatory changes adopted by the Commission or SROs, 
and provides the actual FCM examination programs, with the revisions, 
to DSIO staff for review at least once each year.
    Based upon the CME's response to the Commission's Request for 
Information, and Commission staff's firsthand experience in the CME's 
and NFA's implementation of their initial supervisory program,\29\ the 
Commission

[[Page 31081]]

is proposing several amendments to Regulation 1.52 to revise the time 
interval between mandatory examinations expert evaluations of the SRO 
supervisory program, and to amend the scope of the examinations 
expert's evaluation to focus on changes to auditing standards adopted 
by the PCAOB since the last examinations expert's evaluation. The 
Commission also is proposing several technical amendments to eliminate 
redundancies in the rule text.
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    \29\ Since adoption of the amendments to Regulation 1.52 
resulting from the 2013 Customer Protection Rulemaking, Commission 
staff has participated in several meetings with the CME, NFA, and 
their examinations expert to address issues and questions arising 
during the drafting of the initial examination standards and 
programs. In 2015, Commission staff, through delegated authority, 
approved the initial FCM examination standards, and in 2017 approved 
the CME's and NFA's examination programs. The examination standards 
and programs are now fully implemented and are used in each DSRO 
examination of an FCM.
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B. Scope of the Examinations Expert's Evaluation

    The examinations expert is currently required to evaluate, at least 
once every three years, (1) the supervisory program of an SRO or a 
Joint Audit Committee (``JAC''),\30\ and (2) the SRO's or JAC's 
application of its supervisory program.\31\ The SRO or JAC also is 
required to obtain from the examinations expert a written report on 
finding and recommendations issued under the consulting services 
standards of the AICPA that includes statements that the examinations 
expert has evaluated the supervisory program and the SRO's or JAC's 
application of the supervisory program, and an analysis of the 
supervisory program's design to detect material weaknesses in internal 
controls.
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    \30\ As many FCMs are members of more than one SRO, Regulation 
1.52 provides a permissive system that allows SROs to enter into 
agreements allocating primary, but not exclusive, financial 
oversight and examination responsibilities of FCMs that are members 
of two or more SROs to one of the SROs, which is termed the 
``designated self-regulatory organization'' (``DSRO''). The term 
``designated self-regulatory organization'' is generally defined in 
Regulation 1.3 to mean the SRO delegated the primary responsibility 
to monitor and exam registrants that are subject to oversight by 
more than one SRO for compliance with minimum financial and related 
reporting requirements, and for receiving financial reports from 
such registrants. SROs that agree to participate in a plan to 
allocate common members to a DSRO are referred to as JAC members 
under Regulation 1.52. The examination requirements proposed to be 
amended are effectively identical for SROs and JACs, and the 
Commission's proposed amendments would revise the examination 
requirements for both the SROs and JACs.
    \31\ Regulation 1.52(c)(2)(iv).
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    The Commission is proposing to amend Regulations 1.52(c)(2)(iv) and 
(d)(2)(ii)(I) to remove from the scope of the examinations expert's 
evaluation the SRO's or JAC's application of its supervisory program 
during periodic reviews and the analysis of the supervisory program's 
design to detect material weaknesses in internal controls during both 
periodic reviews and the initial review prior to the programs' initial 
use. The Commission initially adopted in 2013 the requirement that the 
examinations expert issue a written report on its findings and 
recommendations of the SRO's application of its supervisory program, 
including its internal controls, due to concerns that a third-party 
assessment was necessary due to limited Commission resources and 
expertise to perform a comparable periodic assessment.\32\ Since 2013, 
however, Commission staff has been actively involved with the NFA, CME, 
and their examinations expert in the development of a revised 
supervisory program that meets the requirements of Regulation 1.52, 
including the development of FCM examinations standards that are 
consistent with PCAOB auditing standards. Commission staff also has 
reviewed the detailed FCM examination programs, including several 
programs designed to assess the adequacy of an FCM's internal controls 
that were developed by the NFA and CME, for compliance with Regulation 
1.52. Commission staff also has been performing scheduled oversight 
reviews of NFA's and CME's execution of its revised supervisory 
program, including its implementation and execution of programs 
designed to assess the FCM's internal controls.
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    \32\ Customer Protection Rulemaking, 78 FR 65506, 68562.
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    Accordingly, following the adoption of the examination standards, 
the Commission believes that the scope of the examinations expert's 
review should be limited to the area of its expertise--auditing 
standards--and that engaging an independent third-party to review the 
entire program involves additional cost, but results only in a small, 
incremental benefit. Having assessed the implementation of the revised 
supervisory program, Commission staff has determined that it has 
adequate resources and expertise in the application of CFTC regulations 
to the operations of FCMs, and is appropriately situated to assess 
whether SRO and JAC staff are accurately and properly applying 
Commission requirements to FCMs in their execution of the examination 
programs. Commission staff's review of SRO and JAC supervisory programs 
includes detailed assessments of whether SRO or JAC staff complied with 
their respective FCM examination standards, including internal control 
testing and assessment, in the performance of FCM examinations. In this 
regard, Commission staff generally review, based on a risk-based 
approach, the most significant areas of an SRO's or JAC's FCM 
examination program during a review, including: (1) The staffing levels 
and adequate training and qualification of SRO or JAC staff members; 
(2) The detailed testing performed by SRO or JAC staff in each 
examination area (e.g., segregation of customer funds, capital 
compliance, and recordkeeping); (3) The timeliness and effectiveness of 
the SRO's or JAC's review of FCM financial reporting, including FCM 
daily segregation computations, monthly unaudited and annual audited 
financial statements, periodic reporting of customer investments, and 
periodic regulatory notices; and (4) The effectiveness of the SRO's or 
JAC's disciplinary program. Accordingly, the Commission believes that a 
more efficient balance of oversight can be achieved by focusing the 
examinations expert's evaluation on the SRO's or JAC's examination 
standards, which is an area of the examinations expert's particular 
expertise. While the Commission still notes that it has limited 
resources to perform a holistic review of the SRO's or JAC's 
examination program, covering both the design of the standards and the 
effectiveness of the audit program, the Commission believes, as noted 
above, that the proposed amendments strike a reasoned balance between 
the Commission's expertise and that of the examinations expert.
    The proposed amendments would continue to require an examinations 
expert to provide the SRO or JAC with a written report on the 
examinations expert's findings and recommendations. The Commission, 
however, is not mandating the form and content of the written report, 
other than that the report must accurately reflect the extent of the 
examinations expert's evaluation, and include any findings and 
recommendations resulting from its evaluation. The Commission is also 
proposing that the written report will be provided to the Director of 
the Division of Swap Dealer and Intermediary Oversight with the 
understanding that the report will be shared with the Commission.

C. Frequency of the Examinations Expert's Evaluation of an SRO's 
Supervisory Program

    Regulations 1.52(c)(2)(iv) and (d)(2)(ii)(I) require an SRO and 
JAC, respectively, to engage an examinations expert to evaluate their 
FCM supervisory programs prior to the initiation of the programs, and 
at least once every three years thereafter. The Commission believes 
that an

[[Page 31082]]

examinations expert's evaluation provides important oversight of the 
SRO FCM examination standards by an independent third-party that is an 
expert in the understanding and application of the auditing standards 
issued by the PCAOB. Accordingly, the Commission is not proposing to 
eliminate the requirement in Regulation 1.52 for an SRO or JAC to 
engage an examinations expert at the initiation of the development of 
its supervisory program, or at different periods of time after the 
initial evaluation.
    The Commission, however, further believes that the frequency of an 
examinations expert's evaluation of an SRO's or JAC's FCM examination 
standards should not be based upon a fixed timeframe of once every 
three years and is therefore proposing amendments that provide for 
flexibility dependent upon changes in auditing standards issued by the 
PCAOB.
    Accordingly, the Commission is proposing that SROs and JACs must 
review and revise their respective FCM examination standards promptly 
after the issuance of new or amended auditing standards by the PCAOB 
that have an impact on the FCM examination standards. The SRO or JAC 
also must engage an examinations expert to evaluate the consistency of 
the revised FCM examination standards with the PCAOB auditing standards 
whenever the SRO or JAC adopts material amendments to their respective 
FCM examination standards.\33\ The proposal would further provide the 
DSIO Director with the authority to direct an SRO or JAC to engage an 
examinations expert. This will address cases where DSIO staff believes 
that new or amended PCAOB audit standards have a material impact on FCM 
examinations standards, when an SRO of JAC has not otherwise engaged an 
examinations expert.\34\
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    \33\ The purpose of the proposal is for an SRO or JAC to 
promptly amend their respective FCM examination standards whenever 
the PCAOB issues new or revised auditing standards that are relevant 
to the SRO's or JAC's examinations of member FCMs. The SRO or JAC 
would further be required to engage an examinations expert to 
evaluate the consistency of any material amendments to the FCM 
examination standards with the PCAOB new or revised auditing 
standards. However, the Commission would not expect an SRO or JAC to 
engage an examinations expert if the amendments to the FCM 
examination standards are not material. The Commission also would 
not expect an SRO or JAC to engage an examinations expert more 
frequently than once every 12 months.
    In the context of the JAC, the annual JAC meeting required by 
Regulation 1.52(d) may serve as the appropriate forum for discussing 
amendments to the FCM examination standards, and if necessary, a 
vote of JAC members could determine that engagement of the 
examinations expert to more fully assess the supervisory program 
standards in the context of a non-financial statement audit is 
warranted.
    \34\ The Commission also notes that proposal does not prescribe 
a specific timeframe for which the SRO or JAC should implement any 
revised examination standards, but only that the adoption must occur 
``promptly.'' This is because the time needed to comport the newly 
adopted auditing standard into a newly adopted examination standard 
may vary depending on the complexity of the standard and whether the 
examinations expert has been engaged. For avoidance of any doubt, 
the Commission expects ``promptly'' adoption to occur within a 
reasonable amount of time under the circumstances. In the event that 
the adoption should take longer than one year from the time a PCAOB 
auditing standard is made effective, the SRO or JAC may petition the 
Director of the Division of Swap Dealer and Intermediary Oversight 
for a longer permitted adoption timeframe.
---------------------------------------------------------------------------

    The proposal would also set a requirement that an SRO or JAC must 
engage an examinations expert at least once every five years to address 
situations where the SRO or JAC have not considered any new or amended 
PCAOB auditing standards issued during the preceding five years to be 
material to the FCM examination standards. The Commission is proposing 
this five-year limit based upon the importance of the FCM examination 
process by SROs and JACs and its belief that third-party experts should 
evaluate the FCM examination standards at least once every five years 
to ensure that they are consistent with PCAOB auditing standards. The 
Commission requests specific comment on whether the amended timeframe 
of five years is appropriate, or whether a different timeframe would be 
more appropriate.
    In proposing the amendment to revise the FCM examination standards, 
the Commission is intending to limit the examinations expert's 
evaluation to those FCM examination standards that are new or revised 
since the last examinations expert's review or assessment. The 
Commission does not expect the examinations expert to re-assess each 
examination standard each time an evaluation is performed, but only 
those standards that may be susceptible to change based on the 
examinations expert's opinion, auditing standards adopted or amended by 
the PCAOB, and the examinations expert's understanding of the CFTC 
regulatory requirements in consultation with SRO or JAC.

D. Technical Amendments to Regulation 1.52

    The Commission is proposing several technical amendments to 
Regulation 1.52 which eliminate redundancies and simplify the intent of 
the rule. Specifically, the Commission is consolidating the FCM 
examination standards listed in paragraphs (c)(2)(ii) and (iii) of 
Regulation 1.52 governing SROs into a single revised Regulation 
1.52(c)(2)(ii).\35\ The Commission also is proposing to amend paragraph 
(d)(2)(ii)(F) to reflect the consolidation of the FCM examination 
standards in revised Regulation 1.52(c)(2)(ii).
---------------------------------------------------------------------------

    \35\ The Commission notes that current paragraphs (c)(2)(ii) and 
(d)(2)(ii)(F) both contain an explanatory sentence of what topics 
within PCAOB auditing standards should be used in order to conform 
the examination standards. The Commission reads paragraph 
(c)(2)(iii), and by cross-reference (d)(2)(ii)(G), to already 
include each of these topics. Moreover, paragraph (c)(2)(iii) more 
appropriately uses in this context the term ``examination,'' as 
opposed to ``audit'' to articulate this construction.
---------------------------------------------------------------------------

III. Cost-Benefit Considerations

A. Introduction

    Section 15(a) of the Act requires the CFTC to consider the costs 
and benefits of its actions before promulgating a regulation under the 
Act or issuing certain orders.\36\ Section 15(a) of the Act further 
specifies that the costs and benefits 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 CFTC considers the costs and benefits resulting 
from its discretionary determinations with respect to the section 15(a) 
factors below.
---------------------------------------------------------------------------

    \36\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    Where reasonably feasible, the CFTC endeavors to estimate 
quantifiable costs and benefits. Where quantification is not feasible, 
the CFTC identifies and describes costs and benefits qualitatively.
    The CFTC requests comment on the costs and benefits associated with 
the proposed rule amendments. In particular, the CFTC requests that 
commenters provide data and any other information or statistics that 
the commenters relied on to reach any conclusions regarding the CFTC's 
proposed considerations of costs and benefits.

B. Economic Baseline

    The CFTC's economic baseline for this proposed rule amendment 
analysis is the requirements of Regulation 1.52 that exist today. 
Specifically, current Regulation 1.52 requires an SRO or a JAC to 
engage an examinations expert to evaluate its supervisory program prior 
to its initial use, and to evaluate the SRO's application of the 
supervisory

[[Page 31083]]

program at least once every three years after its initial use.
    The Commission's proposal would not alter the requirement for an 
SRO or JAC to engage an examinations expert to evaluate its supervisory 
program prior to the initial use of the supervisory program. The 
Commission is proposing, however, to eliminate the requirement that the 
examinations expert must review the SRO's or JAC's ongoing application 
of its supervisory program during periodic reviews and the analysis of 
the supervisory program's design to detect material weaknesses in 
internal controls during both periodic reviews and the initial review 
prior to the program's initial use. The Commission also is proposing to 
revise the frequency of when an SRO or JAC must engage an examinations 
expert, as discussed below.
    The Commission's proposal to eliminate the requirement that an 
examinations expert evaluate an SRO's or JAC's application of its 
supervisory program and the program's design to detect material 
weaknesses in internal controls will reduce costs to the SROs and JACs. 
The proposal, however, would not substantially reduce the benefits 
obtained from an evaluation of the SROs' and JACs' supervisory program, 
including internal controls, as such reviews are performed by 
Commission staff on a routine basis. Commission staff evaluates the 
SRO's or JAC's execution of its supervisory program, including 
performing detailed reviews of SRO and JAC examination work papers, to 
assess the scope of the work performed by SRO and JAC staff members and 
to determine whether the conclusions reached by SRO and JAC staff 
members are supported by the work performed. Commission staff also 
reviews all SRO and JAC examination programs for conducting 
examinations of FCMs to assess the completeness of such programs and to 
determine that such programs properly reflect any regulatory updates, 
including rule amendments, adopted since the Commission staff's 
previous review of the examination programs. Reviews of execution and 
completeness of supervisory programs for FCMs occur no less frequently 
than annually. Commission staff has a particular expertise in 
determining whether registrants are in compliance with Commission 
regulatory requirements that makes a third-party review redundant.
    The Commission proposes to continue to require that an examinations 
expert review the FCM examination standards contained in the 
supervisory program for consistency with PCAOB auditing standards, but 
is proposing to revise the timeframe for such reviews. Currently, 
Regulation 1.52 requires an SRO or JAC to engage an examinations expert 
at least once every three years to perform such a review. The 
Commission is proposing to amend Regulation 1.52 to require an SRO or 
JAC to engage an examinations expert if the PCAOB issued new or revised 
auditing standards that are material to the SRO's or JAC's examination 
of member FCMs.
    The examinations expert's review, however, would be limited to only 
the new or revised PCAOB auditing standards that are applicable to the 
SRO's or JAC's examination of FCMs. Accordingly, the examinations 
expert would not have to review all of the SRO's or JAC's FCM 
examination standards for consistency with PCAOB audit standards. The 
proposal would further require an SRO or JAC to engage an examinations 
expert at least once every five years even if the SRO or JAC determined 
that the PCAOB did not issue new or revised auditing standards during 
the previous five-year period that are material to its examinations of 
member FCMs. Based on past experience, the Commission anticipates that 
the adoption of new or revised auditing standards that are material to 
examination standards applicable to FCMs will be infrequent, and 
therefore the triggering of an examinations expert review will also 
likely be an infrequent event.\37\ Finally, the proposal would provide 
that an SRO or JAC must engage an examinations expert if directed to by 
the Director of the Division of Swap Dealer and Intermediary 
Oversight.\38\
---------------------------------------------------------------------------

    \37\ Since 2016 PCAOB has adopted approximately two new 
standards, neither of which had a significant impact on the 
examination standards applicable to FCMs. See PCAOB website 
available at: https://pcaobus.org/Standards/Pages/Current_Activities_Related_to_Standards.aspx.
    \38\ For example, in circumstances where an SRO or JAC has not 
engaged an examination expert yet DSIO staff believes a material 
change to PCAOB auditing standards warrants such engagement.
---------------------------------------------------------------------------

    The proposed amendments to Regulation 1.52 are intended to 
streamline the process under which examinations experts conduct their 
reviews and the time period between those reviews. The Commission 
believes that these amendments will make conducting the reviews more 
efficient and less costly, while still balancing the importance of 
having an independent third-party examinations expert in auditing 
standards evaluating the examination standards used by SROs and the 
JAC.
    The Commission does not anticipate that there will be any 
significant increased costs associated with the proposed amendments. By 
narrowing the intended scope of examination reviews from an evaluation 
of the supervisory program to an assessment of the examinations 
standards for conformity with auditing standards established by the 
PCAOB as they apply to examinations, the Commission is purposely 
limiting the scope of the examinations expert's review. The Commission 
anticipates that this limitation, coupled with extending the time 
period between expert examiner reviews, will significantly limit the 
costs associated with engaging and hiring an examinations expert.\39\ 
Nonetheless, the Commission believes that these amendments 
appropriately balance the integrity of the examination program with its 
costs while continuing to ensure that there is sufficient oversight 
over the minimum financial requirements at FCMs. As noted, Commission 
staff reviews no less frequently than annually all SRO and JAC 
examination programs and anticipates that it will continue to do so. 
These Commission staff reviews will continue to provide the benefits 
that have been associated with the examinations experts' reviews.
---------------------------------------------------------------------------

    \39\ In the 2013 Customer Protection Rulemaking, the Commission 
found that it was not feasible to quantify any costs associated with 
utilizing an examinations expert, largely because several nationally 
recognized accounting firms expressed their reluctance to provide 
such information. While it is likely not feasible to quantify such 
costs for the use of an examinations expert under the proposed 
amendments, such costs are likely much less than the costs under the 
existing rule. See, 2013 Customer Protection Rulemaking at 68605.
---------------------------------------------------------------------------

C. CEA Section 15(a) Factors

i. Protection of Market Participants and the Public
    The Commission preliminarily believes that this proposal maintains 
the protection of market participants and the public provided by the 
current regulation. The proposal will continue to protect market 
participants and the public by ensuring that there is sufficient 
oversight over the minimum financial requirements at FCMs. As noted, 
the Commission believes that Commission staff is well-equipped to 
provide reviews that, under the proposal, would no longer be provided 
by outside examinations experts and Commission staff intends to 
continue to conduct such reviews.
ii. Efficiency, Competitiveness, and Financial Integrity of Markets
    The Commission preliminarily believes that Regulation 1.52 as 
amended will continue to help ensure that FCMs can meet their financial 
and

[[Page 31084]]

operational obligations to both customers and DCOs, which, along with 
the Commission's ongoing reviews, will continue to foster the 
efficiency and financial integrity of markets. The Commission has not 
identified any effect of Regulation 1.52 on the competitiveness of 
derivatives markets.
iii. Price Discovery
    The Commission has not identified any material effect of the 
proposed amendments on the price discovery process in futures and swap 
markets.
iv. Sound Risk Management Practices
    The Commission preliminarily believes that Regulation 1.52 as 
amended, along with the Commission's ongoing reviews, will continue to 
help ensure that FCMs can meet their financial and operational 
obligations to both customers and DCOs, which should continue to foster 
sound risk management practices.
v. Other Public Interest Considerations
    The Commission has not identified any additional public interest 
considerations associated with the proposal.

D. Consideration of Alternatives

    The Commission considered adopting the CME's suggestion to fully 
eliminate the requirement that a third-party public accounting firm 
perform periodic evaluations and assessments of an SRO's program to 
oversee its member FCMs' compliance with financial and related 
reporting requirements. The Commission determined instead to eliminate 
the requirement that the examinations expert must periodically review 
the SRO's or JAC's ongoing application of its supervisory program, 
while maintaining reviews of an FCM's examinations standards at a 
modified interval. The Commission preliminarily believes that there are 
significant benefits associated with having an outside auditor 
performing evaluations of examination standards at least every five 
years (and also when there are material and relevant changes in PCAOB 
auditing standards) as required by the proposed amendments. While, as 
noted, Commission staff is well-equipped to review the ongoing 
application of SRO and JAC supervisory programs and intends to continue 
to do so at least annually, the Commission believes that third-party 
public accounting firms are best equipped to perform evaluations of 
examination standards for conformity with auditing standards 
established by the PCAOB as they apply to examinations.
    The Commission also considered maintaining the current rule, but 
the Commission anticipates that the proposal will significantly reduce 
costs to SROs and JACs without materially impacting benefits.
    The CFTC requests comment on these alternatives as well as any 
other alternatives that commenters believe would present a superior 
cost-benefit profile to the proposal.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \40\ requires Federal 
agencies, in promulgating regulations, to consider the impact of those 
regulations on small entities. The Commission has previously 
established certain definitions of ``small entities'' to be used by the 
Commission in evaluating the impact of its rules on small entities in 
accordance with the RFA.\41\ The proposed regulations would affect 
designated contract markets.
---------------------------------------------------------------------------

    \40\ 5 U.S.C. 601 et seq.
    \41\ 47 FR 18618 (Apr. 30, 1982).
---------------------------------------------------------------------------

    The Commission has previously determined that designated contract 
markets are not small entities for purposes of the RFA, and, thus, the 
requirements of the RFA do not apply to designated contract 
markets.\42\ Accordingly, the Chairman, on behalf of the Commission, 
certifies pursuant to 5 U.S.C. 605(b) that the proposed regulations 
would not have a significant economic impact on a substantial number of 
small entities.
---------------------------------------------------------------------------

    \42\ Id. at 18619.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    This proposed rulemaking does not amend existing information 
collection requirements. The Paperwork Reduction Act (``PRA'') provides 
that a federal 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 issued by the Office of Management and 
Budget (``OMB'').\43\ The Commission is proposing amendments to rules 
that have previously identified collections of information under a pre-
existing collection 3038-0052. The proposed amendments, however, only 
increase the respondents permitted time to file required information 
and reduce the requirements of review contained therein. As such, the 
previously identified response hours in collection 3038-0052 remain a 
reasonable burden hour estimate.
---------------------------------------------------------------------------

    \43\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The collections contained in this rulemaking are mandatory 
collections. In formulating burden estimates for the collections in 
this rulemaking, to avoid double accounting of information collections 
that already have been assigned control numbers by OMB, or are covered 
as burden hours in collections of information pending before OMB, the 
PRA analysis provided in the proposed rulemaking, along with the 
information collection request (``ICR'') with burden estimates that 
were incorporated into the rulemaking by reference and submitted to 
OMB, accounted only burden estimates for collections of information 
that have not previously been submitted to OMB. The Commission invites 
comment on the collections of information contained in the proposed 
rulemaking only to the extent that the collections in the proposed 
rulemaking would increase the burden hours contained with respect to 
each of the related currently valid or proposed collections.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 1 as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9, 
10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012).

0
2. Amend Sec.  1.52 as follows:
0
a. Revise paragraphs (c)(2)(ii), (iii), (iv), and (v);
0
b. Remove paragraphs (c)(2)(vi) and (vii);
0
c. Revise paragraphs (d)(2)(ii)(F), (G), (H), and (I);
0
d. Remove paragraphs (d)(2)(ii)(J) and (K); and
0
e. Revise paragraph (d)(2)(iii).
    The revisions read as follows:


Sec.  1.52   Self-regulatory organization adoption and surveillance of 
minimum financial requirements.

* * * * *
    (c) * * *
    (2) * * *
    (ii) The supervisory program must, at a minimum, have examination 
standards addressing the following:
    (A) The ethics of an examiner;

[[Page 31085]]

    (B) The independence of an examiner;
    (C) The supervision, review, and quality control of an examiner's 
work product;
    (D) The evidence and documentation to be reviewed and retained in 
connection with an examination;
    (E) The sampling size and techniques used in an examination;
    (F) The examination risk assessment process;
    (G) The examination planning process;
    (H) Materiality assessment;
    (I) Quality control procedures to ensure that the examinations 
maintain the level of quality expected;
    (J) Communications between an examiner and the regulatory oversight 
committee, or the functional equivalent of the regulatory oversight 
committee, of the self-regulatory organization of which the futures 
commission merchant is a member;
    (K) Communications between an examiner and a futures commission 
merchant's audit committee of the board of directors or other similar 
governing body;
    (L) Analytical review procedures;
    (M) Record retention; and
    (N) Required items for inclusion in the examination report, such as 
repeat violations, material items, and high risk issues. The 
examination report is intended solely for the information and use of 
the self-regulatory organizations and the Commission, and is not 
intended to be and should not be used by any other person or entity.
    (iii)(A) Prior to the initial implementation of the supervisory 
program, a self-regulatory organization must engage an examinations 
expert to evaluate the examination standards for consistency with 
auditing standards issued by the Public Company Accounting Oversight 
Board as such auditing standards are applicable in the context of the 
self-regulatory organization's examination of its futures commission 
merchant members. At least once every five years after the initial 
implementation of the supervisory program, a self-regulatory 
organization must engage an examinations expert to evaluate the 
examination standards for consistency with any new or amended auditing 
standards issued by the Public Company Accounting Oversight Board since 
the previous review performed by the examinations expert. At the 
conclusion of each evaluation, a self-regulatory organization must 
obtain a written report from the examinations expert in accordance with 
paragraph (c)(2)(iii)(C) of this section.
    (B) Notwithstanding paragraph (c)(2)(iii)(A) of this section, a 
self-regulatory organization must review any new or amended auditing 
standards issued by the Public Company Accounting Oversight Board, and 
must revise its examination standards promptly to reflect any changes 
in such auditing standards that are applicable in the context of the 
self-regulatory organization's examination of its futures commission 
merchant members. A self-regulatory organization must engage an 
examinations expert to evaluate any material revisions that the self-
regulatory organization makes to the examination standards to conform 
such standards with the Public Company Accounting Oversight Board's 
auditing standards, or if directed to engage an examinations expert by 
the Director of the Division of Swap Dealer and Intermediary Oversight. 
At the conclusion of each review, a self-regulatory organization must 
obtain a written report from the examinations expert in accordance with 
paragraph (c)(2)(iii)(C) of this section.
    (C) At the conclusion of the examinations expert's engagement 
pursuant to paragraph (c)(2)(iii)(A) or (B) of this section, the self-
regulatory organization must obtain from the examinations expert a 
written report on findings and recommendations issued under the 
consulting services standards of the American Institute of Certified 
Public Accountants. The self-regulatory organization must provide the 
Director of the Division of Swap Dealer and Intermediary Oversight with 
a copy of the examinations expert's written report, and the self-
regulatory organization's written responses to any of the examinations 
expert's findings and recommendations, within thirty days of the 
receipt thereof. Upon resolution of any questions or comments raised by 
the Division of Swap Dealer and Intermediary Oversight, and upon 
written notice from the Division of Swap Dealer and Intermediary 
Oversight that it has no further comments or questions on the 
examinations standards as amended (by reason of the examinations 
expert's proposals, consideration of the Division of Swap Dealer and 
Intermediary Oversight's questions or comments, or otherwise), the 
self-regulatory organization shall commence applying such examinations 
standards for examining its registered futures commission merchant 
members for all examinations conducted with an ``as of'' date later 
than the date of the Division of Swap Dealer and Intermediary's written 
notification.
    (iv) The supervisory program must require the self-regulatory 
organization to report to its risk and/or audit committee of the board 
of directors, or a functional equivalent committee, with timely reports 
of the activities and findings of the supervisory program to assist the 
risk and/or audit committee of the board of directors, or a functional 
equivalent committee, to fulfill its responsibility of overseeing the 
examination function.
    (v) The examinations expert's written report, the self-regulatory 
organization's response, if any, as well as any information concerning 
the supervisory program is confidential.
    (d) * * *
    (2) * * *
    (ii) * * *
    (F) The Joint Audit Program must include examination standards 
addressing the items listed in paragraph (c)(2)(ii) of this section.
    (G)(1) Prior to the initial implementation of the Joint Audit 
Program, the Joint Audit Committee must engage an examinations expert 
to evaluate the examination standards for consistency with auditing 
standards issued by the Public Company Accounting Oversight Board as 
such auditing standards are applicable in the context of the Joint 
Audit Committee's examination of its futures commission merchant 
members. At least once every five years after the initial 
implementation of the Joint Audit Program, the Joint Audit Committee 
must engage an examinations expert to evaluate the examination 
standards for consistency with any new or amended auditing standards 
issued by the Public Company Accounting Oversight Board since the 
previous review performed by the examinations expert. At the conclusion 
of each review, the Joint Audit Committee must obtain a written report 
from the examinations expert in accordance with paragraph 
(d)(2)(ii)(G)(3) of this section.
    (2) Notwithstanding paragraph (d)(2)(ii)(G)(1) of this section, the 
Joint Audit Committee must review any new or amended auditing standards 
issued by the Public Company Accounting Oversight Board, and must 
revise its examination standards promptly to reflect any changes in 
such auditing standards that are applicable in the context of the Joint 
Audit Committee's examination of its futures commission merchant 
members. The Joint Audit Committee must engage an examinations expert 
to evaluate any material revisions that the Joint Audit Committee makes 
to the examination standards to conform such standards with the Public 
Company Accounting Oversight Board's auditing standards, or if directed 
to engage an examinations expert by the Director of the Division of

[[Page 31086]]

Swap Dealer and Intermediary Oversight. The Joint Audit Committee must 
obtain a written report from the examinations expert in accordance with 
paragraph (d)(2)(ii)(G)(3) of this section.
    (3) At the conclusion of the examinations expert's engagement 
pursuant to paragraph (d)(2)(ii)(G)(1) or (2) of this section, the 
Joint Audit Committee must obtain from the examinations expert a 
written report on findings and recommendations issued under the 
consulting services standards of the American Institute of Certified 
Public Accountants. The Joint Audit Committee must provide the Director 
of the Division of Swap Dealer and Intermediary Oversight with a copy 
of the examinations expert's written report, and the Joint Audit 
Committee's written responses to any of the examinations expert's 
findings and recommendations, within thirty days of the receipt 
thereof. Upon resolution of any questions or comments raised by the 
Division of Swap Dealer and Intermediary Oversight, and upon written 
notice from the Division of Swap Dealer and Intermediary Oversight that 
it has no further comments or questions on the examinations standards 
as amended (by reason of the examinations expert's proposals, 
consideration of the Division of Swap Dealer and Intermediary 
Oversight's questions or comments, or otherwise), the Joint Audit 
Committee shall commence applying such examinations standards for 
examining its registered futures commission merchant members for all 
examinations conducted with an ``as of'' date later than the date of 
the Division of Swap Dealer and Intermediary's written notification.
    (H) The Joint Audit Program must require the Joint Audit Committee 
members to report to their respective risk and/or audit committee of 
their respective board of directors, or a functional equivalent 
committee, with timely reports of the activities and findings of the 
Joint Audit Program to assist the risk and/or audit committee of the 
board of directors, or a functional equivalent committee, to fulfill 
its responsibility of overseeing the examination function.
    (I) The examinations expert's written report, the Joint Audit 
Committee's response, if any, as well as any information concerning the 
supervisory program is confidential.
    (iii) Meetings of the Joint Audit Committee. (A) The Joint Audit 
Committee members must meet at least once each year. During such 
meetings, the Joint Audit Committee members shall consider revisions to 
the Joint Audit Program as a result of regulatory changes, revisions to 
the examination standards resulting from new or amended auditing 
standards issued by the Public Company Accounting Oversight Board, or 
the results of an examinations expert's review.
    (B) In addition to the items considered in paragraph (d)(2)(iii)(A) 
of this section, the Joint Audit Committee members must consider the 
following items during the meetings:
    (1) Coordinating and sharing information between the Joint Audit 
Committee members, including issues and industry concerns in connection 
with examinations of futures commission merchants;
    (2) Identifying industry regulatory reporting issues and financial 
and operational internal control issues and modifying the Joint Audit 
Program accordingly;
    (3) Issuing risk alerts for futures commission merchants and/or 
designated self-regulatory organization examiners on an as-needed 
basis;
    (4) Responding to industry issues; and
    (5) Providing industry feedback to Commission proposals.
    (C) Minutes must be taken of all meetings and distributed to all 
members on a timely basis.
    (D) The Director of the Division of Swap Dealer and Intermediary 
Oversight must receive timely prior notice of each meeting, have the 
right to attend and participate in each meeting and receive written 
copies of the minutes required pursuant to paragraph (d)(2)(iii)(C) of 
this section, respectively.
* * * * *

    Issued in Washington, DC, on June 28, 2018, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note:  The following appendix will not appear in the Code of 
Federal Regulations.

Appendix to Financial Surveillance Examination Program Requirements for 
Self-Regulatory Organizations--Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz 
and Behnam voted in the affirmative. No Commissioner voted in the 
negative.

[FR Doc. 2018-14272 Filed 7-2-18; 8:45 am]
 BILLING CODE 6351-01-P