2017-11014
Federal Register, Volume 82 Issue 102 (Tuesday, May 30, 2017)
[Federal Register Volume 82, Number 102 (Tuesday, May 30, 2017)]
[Rules and Regulations]
[Pages 24479-24487]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11014]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1 and 23
RIN 3038-AE36
Recordkeeping
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (the ``Commission'')
is amending the recordkeeping obligations set forth in Commission
regulations along with corresponding technical changes to certain
provisions regarding retention of oral communications and record
retention requirements applicable to swap dealers and major swap
participants, respectively. The amendments modernize and make
technology neutral the form and manner in which regulatory records must
be kept, as well as rationalize the rule text for ease of understanding
for those persons required to keep records pursuant to the Commodity
Exchange Act (the ``CEA'' or ``Act'') and regulations promulgated by
the Commission thereunder. The amendments do not alter any existing
requirements regarding the types of regulatory records to be inspected,
produced, and maintained set forth in other Commission regulations.
DATES: The effective date for this final rule is August 28, 2017.
FOR FURTHER INFORMATION CONTACT: Eileen T. Flaherty, Director, (202)
418-5326, [email protected]; Frank Fisanich, Chief Counsel, (202) 418-
5949, [email protected]; Andrew Chapin, Associate Chief Counsel, (202)
418-5465, [email protected]; Katherine Driscoll, Associate Chief
Counsel, (202) 418-5544, [email protected]; C. Barry McCarty, Special
Counsel, (202) 418-6627, [email protected]; or Jacob Chachkin, Special
Counsel, (202) 418-5496, [email protected], Division of Swap Dealer
and Intermediary Oversight, Commodity Futures Trading Commission, 1155
21st Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
In response to petitions for rulemaking from various industry
groups requesting amendments to Sec. 1.31, the Commission published in
the Federal Register on January 19, 2017 a proposal (``Proposal'') to
amend the recordkeeping obligations applicable to all persons required
to keep records pursuant to the Act and Commission regulations
promulgated thereunder (referred to in the Proposal as ``records
entities'').\1\ Regulation 1.31 sets forth the form and manner in which
all regulatory records must be kept by records entities. Regulation
1.31 does not specify the types of regulatory records that must be
kept, rather it specifies the form and manner in which regulatory
records required by other Commission regulations are maintained and
produced to the Commission. The proposed amendments to Sec. 1.31, and
related technical amendments to Sec. Sec. 1.35 and 23.203, would
modernize and make technology neutral the form and manner in which
regulatory records must be kept, as well as rationalize the current
rule text for ease of understanding. Under the proposed amendments,
records entities would have greater flexibility regarding the retention
and production of all regulatory records
[[Page 24480]]
under a less-prescriptive, principles-based approach.
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\1\ Recordkeeping, 82 FR 6356 (Jan. 19, 2017).
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Among other proposed changes requested in the petitions for
rulemaking, the Commission proposed to eliminate the requirement for a
records entity to: (1) Keep electronic regulatory records in their
native file format (i.e., in the format in which it was originally
created); (2) retain any electronic record in a non-rewritable, non-
erasable format (i.e., the ``write once, read many'' or ``WORM''
requirement); and (3) engage a third-party technical consultant and for
the consultant to file certain representations with the Commission
regarding access to the records entity's electronic regulatory records.
These proposed changes would be universal to all records entities,
including intermediaries registered or required to be registered with
the Commission; registered entities such as designated contract
markets, swap execution facilities, and derivatives clearing
organizations; and any other persons required to produce certain
regulatory records as set forth in other Commission regulations.
II. Summary of Comments
The Commission received sixteen comment letters on the Proposal
from a wide range of records entities, including registrants,
registered entities and other persons subject to the Commission's
recordkeeping obligations set forth in Sec. 1.31.\2\ All commenters
generally supported the Commission's efforts to modernize and make
technology neutral the existing recordkeeping obligations. One
commenter requested that the Commission limit changes to Sec. 1.31 to
the elimination of the native file format, WORM, and third-party
technical consultant requirements, and withdraw the remainder of the
proposal.\3\ As outlined below, several commenters also suggested
modifications to the proposed rule text, including the requirement for
records entities to establish, maintain, and implement written policies
and procedures reasonably designed to ensure that the records entity
complies with its recordkeeping obligations. For reasons provided
below, the Commission has accepted certain of these recommendations in
the amendments being adopted today, but has declined to accept certain
other recommendations, including recommendations beyond the scope of
the Proposal.
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\2\ Comment letters were submitted by the following entities:
The Securities Industry and Financial Markets Association
(``SIFMA''); CME Group Inc. (``CME''); NASDAQ Futures, Inc.
(``NASDAQ''); the National Futures Association (``NFA''); SunTrust
Bank; the Futures Industry Association (``FIA''); the Edison
Electric Institute and National Rural Electric Cooperative (``EEI &
NREC''); the Investment Company Institute (``ICI''); Managed Funds
Association, Investment Adviser Association, Alternative Investment
Management Association, and SIFMA Asset Management Group
(``Associations''; the Minneapolis Grain Exchange (``MGEX''); The
Depository Trust & Clearing Corporation (``DTCC''); ICE Futures
U.S., Inc. (``ICE''); the Commercial Energy Working Group (``Working
Group''); the International Swaps and Derivatives Association, Inc.
(``ISDA''); the Federal Home Loan Banks (``FHLBanks''); and the
International Energy Credit Association (``IECA''). All comment
letters are available on the Commission's Web site at https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1774.
\3\ See CME comment letter.
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III. Final Rule
The Commission has considered the comments it received in response
to the Proposal and is adopting the rule amendments as proposed, with
the following exceptions: (1) Revising the definition of ``regulatory
records'' in Sec. 1.31(a); (2) deleting proposed Sec. 1.31(b)
regarding the requirement for a records entity to establish, maintain,
and implement written policies and procedures designed to ensure
compliance with all obligations under Sec. 1.31; (3) amending Sec.
1.31(c) to limit the retention period for pre- trade communications
required by Sec. 23.202(a)(1) and Sec. 23.202(b)(1)-(3) to five years
from the date the communication was created; (4) deleting from Sec.
1.31(d)(2)(i) the requirement that a records entity retain systems that
maintain the ``chain of custody elements'' of any electronic regulatory
record; and (5) re-lettering Sec. 1.31(c)-(f) to account for the
deletion of proposed Sec. 1.31(b). Specific provisions of the final
rules are addressed below.
A. Regulation 1.31(a): Definitions
The Commission proposed to define in Sec. 1.31(a) the terms
``electronic regulatory records,'' ``records entity,'' and ``regulatory
records'' as used elsewhere in the section.
The Commission received several comments regarding the proposed
definition of ``records entity'' to be any person required by the Act
or Commission regulations to keep regulatory records. A few commenters
requested that the Commission exclude from the definition of ``records
entity'' those persons that are neither registrants nor registered
entities.\4\ One commenter \5\ further suggested that compliance with
the proposed changes would impose greater costs on records entities
that are neither registrants nor registered entities.\6\ In light of
these comments, the Commission notes that the final rule as adopted by
this release does not impose any new recordkeeping requirements on any
records entity, including those that are neither registrants nor
registered entities, such as commercial end-users. Rather, the final
rule merely modernizes and makes technology neutral the form and manner
in which regulatory records must be kept. Further, the final rule is
clear that it does not override other methods of maintaining records
that may be specified elsewhere in the Act or other Commission
regulations.\7\ Thus, commercial end-users that are records entities,
for example, may continue to maintain records in accordance with their
current practices if such are permitted by the Act, Commission
regulations, or existing relief or guidance.\8\ Further, as stated
above, the final rule removes several obligations regarding the form
and manner in which regulatory records must be kept that should lessen
the compliance costs associated with the recordkeeping requirements set
forth in Sec. 1.31. Given the foregoing, the Commission has determined
not to exclude any persons required to keep regulatory records from the
definition of ``records entity.''
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\4\ E.g., ISDA, ICI, and Associations comment letters.
\5\ See ISDA comment letter.
\6\ E.g., Sec. 1.35(a) (Unregistered members of a DCM or SEF
required to retain records of commodity interests and related cash
or forward transactions) and Sec. Sec. 32.2, 32.3, 45.2, and 45.6
(Non-Swap Dealer/Major Swap Participants (``Non-SD/MSPs'') are
subject to trade option requirements including recordkeeping).
\7\ See text of final rule, Sec. 1.31(b), (c), and (d), each
stating, ``[u]nless specified elsewhere in the Act or Commission
Regulations. . . .''
\8\ E.g., Revised recordkeeping requirements for trade option
counterparties that are Non-SD/MSPs, Trade Options, 81 FR 14966,
14970 (Mar. 21, 2016); and Relief for Unregistered Members from
retaining text messages and maintaining required records in a
particular form and manner, Records of Commodity Interest and
Related Cash or Forward Transactions, 80 FR 80247, 80250-51 (Dec.
24, 2015).
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Regarding the definition of ``regulatory records,'' the Commission
specifically requested comment whether the term ``metadata''--or data
about data--should be defined. The Commission recognized in the
Proposal that the term metadata may be generally understood by
practitioners notwithstanding a lack of universal agreement on an exact
definition. A majority of commenters on the issue agreed that metadata
need not be defined at this time as that would be inconsistent with the
Commission's stated goal to provide for less-prescriptive recordkeeping
obligations.\9\ Further, one commenter asserted that including metadata
within the
[[Page 24481]]
definition of a ``regulatory record'' would greatly increase the amount
and associated costs of data to be stored and potentially subject to
production requests.\10\ Another commenter stated that records entities
would be required to pursue, develop, and purchase additional
technological solutions to ensure compliance if metadata were
defined.\11\
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\9\ E.g., FIA and ICE comment letters.
\10\ See CME comment letter.
\11\ See Associations comment letter.
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The Commission notes that it and other federal agencies, including
the Securities and Exchange Commission (``SEC''), have been requesting
metadata in conjunction with information requests to industry for more
than five years through standardized data delivery standards.\12\ The
Commission believes that the Sec. 1.31(a) definition of ``regulatory
record,'' i.e., all data produced and stored electronically describing
how and when such books and records were created, formatted, or
modified, is sufficient to support its statutory inspection and
investigative functions. Thus, the Commission has determined that there
is no need to define metadata at this time.
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\12\ The Commission publishes the CFTC Data Delivery Standards
on its Web site at: http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/file/enfdatadeliverystandards052716.pdf. The Commission notes that other
federal agencies, such as the SEC (https://www.sec.gov/divisions/enforce/datadeliverystandards.pdf), the Department of Justice
(https://www.justice.gov/atr/case-document/file/494686/download) and
the Department of Treasury Office of Foreign Asset Control (https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Documents/ofac_data_delivery.pdf) have similar data delivery
standards.
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The Commission further noted in the Proposal that the proposed
definition of ``regulatory records'' would more clearly state the
existing requirement for each records entity to maintain a regulatory
record and any subsequent versions of such record. Multiple commenters
questioned whether the revised language was, in fact, imposing a new
requirement to maintain versions of a regulatory record before it
becomes in fact a regulatory record (i.e., drafts of an agreement
created during a negotiation but prior to execution).\13\ To clarify
that the Commission did not intend to require versions of a regulatory
record prior to its becoming a regulatory record, the Commission is
modifying the definition of ``regulatory records'' to indicate that the
term means all books and records required to be kept by the Act or
Commission regulations, including any record of any correction or other
amendment to such books and records, provided that, with respect to
such books and records stored electronically, regulatory records shall
also include: (i) Any data necessary to access, search, or display any
such books and records; and (ii) all data produced and stored
electronically describing how and when such books and records were
created, formatted, or modified. The Commission believes the definition
as revised makes clear that a records entity only has the obligation to
maintain data about a regulatory record after it is created and not
about the record before it becomes a regulatory record.
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\13\ E.g., Associations, CME, and ICE comment letters.
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As noted in the Proposal this is the existing standard in Sec.
1.31. Under existing Sec. 1.31(b)(1)(ii)(A) electronic records are
required to be preserved exclusively in a non-rewritable, non-erasable
format. This provision was designed to ensure the ``trustworthiness of
documents that may be relied upon by the Commission in conducting
investigations and entered into evidence in administrative and judicial
proceedings.'' \14\ It therefore follows that each version of an
electronic record and all subsequent versions would have to be
maintained under the existing rule. This requirement provides for a
comprehensive audit trail, which the Commission believes is vital to
both the supervision and enforcement of the Act and Commission
regulations.
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\14\ See 58 FR at 27460.
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Finally, another commenter also asserted that retaining all
versions of a regulatory record is redundant and creates additional
opportunities for data theft or loss.\15\ The commenter did not provide
any detail regarding how maintaining subsequent versions of a
regulatory record, which is an existing requirement under Sec. 1.31,
raises new concerns about data theft or loss. Thus, the Commission is
unable to address any such concern at this time.
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\15\ See CME comment letter.
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B. Regulation 1.31(b): Regulatory Records Policies and Procedures
The Commission proposed to amend Sec. 1.31(b) to require each
records entity to establish, maintain, and implement written policies
and procedures reasonably designed to ensure that the records entity
complies with its obligations under Regulation 1.31. As proposed, the
written policies and procedures would provide for, without limitation,
appropriate training of officers and personnel of the records entity
regarding their responsibility for ensuring compliance with the
obligations of the records entity under Sec. 1.31, and regular
monitoring of such compliance.
Without an explanation of the differences, several commenters
disagreed with the Commission that the proposed requirement for written
policies and procedures is consistent with the existing Sec.
1.31(b)(3) requirement for anyone using electronic storage media to
develop and maintain written operational procedures and controls (i.e.,
an ``audit system'') designed to provide accountability over both the
initial entry of required records and the entry of each change made to
any original or duplicate record.\16\ Again without providing any
explanation of the differences between the existing ``audit system''
requirement and the proposed requirement for written policies and
procedures or any specific cost estimates, commenters also argued that
the application of the proposed written policies and procedures
requirement would create new regulatory obligations for records
entities which are neither registrants nor registered entities, some of
whom are commercial end-users.\17\ As a result, commenters argued that
this additional requirement could deter certain market participants
from trading swaps and other derivatives products in order to avoid
having to comply with burdensome recordkeeping requirements.\18\ A few
commenters argued that the specific reference to training is not
consistent with the Commission's emphasis on a less-prescriptive,
principles-based recordkeeping requirement.\19\ Other commenters
requested that the Commission provide a phase-in period for
establishing, maintaining and implementing written policies and
procedures.\20\
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\16\ E.g., ISDA comment letter.
\17\ E.g., IECA comment letter.
\18\ See ISDA comment letter.
\19\ E.g., Associations comment letter.
\20\ See MGEX and Working Group comment letters.
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Having considered these comments, the Commission has determined not
to adopt the written policies and procedures requirement for records
entities set forth in proposed Sec. 1.31(b). The final rule, as
adopted, sets forth the form and manner in which regulatory records
must be kept, the retention period for various types of regulatory
records, and the standards for production of regulatory records to the
Commission. Given these clearly defined obligations, the Commission
agrees with commenters that the requirement for written policies and
procedures is unnecessary. As the Commission noted in the Proposal, the
obligation to satisfy the requirements
[[Page 24482]]
regarding Sec. 1.31 is one that a records entity ignores at its peril.
It is ultimately the duty and responsibility of records entities to
ensure accurate and reliable records. The Commission also notes that
registrants are subject to a duty to diligently supervise all
activities relating to its business as a Commission registrant,
pursuant to Sec. 166.3. The Commission does not consider the
withdrawal of a requirement for written policies and procedures to
create an explicit or implicit defense against recordkeeping violations
or failure to supervise violations.
C. Regulation 1.31(b): Duration of Retention
The Commission proposed to amend Sec. 1.31(c)(re-lettered as Sec.
1.31(b) in the final rule) to re-state and clarify the existing
retention period requirements for categories of regulatory records set
forth in existing Sec. 1.31(a), including the requirement that certain
records associated with a swap be retained for the duration of the swap
plus five years. The Commission also proposed to distinguish between
electronic regulatory records and those records exclusively created and
maintained on paper by requiring a records entity to keep electronic
regulatory records readily accessible for the duration of the required
record keeping period, and not just for the first two years. The
Commission noted that this standard is consistent with the SEC's
standard for certain intermediaries.\21\ For ease of understanding, the
Commission also proposed to amend Sec. Sec. 1.35(a) and 23.203(b)(1)
and (2) to make technical changes regarding regulatory records related
to oral communications and swaps-related information maintained by
swaps dealers and major swap participants, respectively. The Commission
received several comments regarding various aspects of proposed Sec.
1.31(c).
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\21\ SEC Rule 17a-4(f).
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Two commenters \22\ requested that the Commission reduce the
retention standard for electronic pre-execution communications required
by Sec. 23.202 in relation to a swap to five years from the date of
creation of the regulatory record rather than the current standard of
the duration of the swap plus five years.\23\ The commenters stated
that the longer retention period ``places an unnecessary retention
burden on firms, which exceeds most statutes of limitations or utility
with respect to underlying transactions.'' \24\ Another commenter
stated that increasing retention periods for the storage of sensitive
information in electronic form could put records entities, and their
third-party service providers, at greater risk in the event of a data
breach.\25\
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\22\ See SIFMA and ISDA comment letters.
\23\ See Sec. 23.202(a)(1).
\24\ See SIFMA comment letter.
\25\ See Associations comment letter.
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The Commission recognizes the increased burden and risk of a longer
retention period as pointed out by commenters, and, having considered
such increased burden and risk in light of the nature of the affected
regulatory records, has determined to require retention of electronic
communications specified in Sec. 23.202(a)(1) and Sec. 23.202(b)(1)-
(3) only for a period of five years from the date of creation of the
required record. The Commission notes that these are records of pre-
execution communications and, as such, are likely to be useful for
regulatory oversight purposes for a shorter length of time than records
regarding execution of transactions or records of events that effect
transactions following execution.
For the avoidance of doubt, the Commission is not changing the
retention period for execution trade information under Sec.
23.202(a)(2), post-execution trade information under Sec.
23.202(a)(3), the ledgers required under Sec. 23.202(a)(4), or the
daily trading records for related cash and forward transactions in
Sec. 23.202(b)(4)-(7). However, as previously stated, the Commission
will continue to monitor changes in information technology and consider
whether the recordkeeping regulation should be adjusted to reflect
technological developments.
Certain commenters requested clarification whether the requirements
as adopted apply to existing records.\26\ The Commission confirms that
the requirements adopted by this release do apply to existing records.
However, the Commission notes that existing recordkeeping methods
remain valid for compliance with the new rule, and that for many
records entities, applying the new regime will reduce regulatory
burdens. For example, many records entities will be permitted to
maintain existing electronic records in a manner other than in their
native file format and will no longer be required to retain a third-
party technical consultant with authority to access a records entity's
existing electronic records.\27\
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\26\ See FIA and Working Group comment letters.
\27\ The amendments adopted herein however would not excuse non-
compliance with existing Sec. 1.31 prior to the effective date of
such amendments.
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D. Regulation 1.31(c): Form and Manner of Retention
The Commission proposed to adopt Sec. 1.31(d) (re-lettered as
Sec. 1.31(c) in final rule) to describe recordkeeping requirements
regarding the form and manner in which regulatory records are retained
by records entities. Consistent with the Commission's emphasis on a
less-prescriptive, principles-based approach, proposed Sec. 1.31(d)(1)
would rephrase the existing requirements in the form of a general
standard for each records entity to retain all regulatory records in a
form and manner necessary to ensure the records' and recordkeeping
systems' authenticity and reliability. The Commission proposed to adopt
Sec. 1.31(d)(2) to set forth additional controls for records entities
retaining electronic regulatory records. The Commission emphasized in
the Proposal that the proposed regulatory text does not create new
requirements, but rather updates the existing requirements so that they
are set out in a way that appropriately reflects technological
advancements and changes to recordkeeping methods since the prior
amendments of Sec. 1.31 in 1999.
Various commenters proposed technical amendments to proposed Sec.
1.31(d)(2). Multiple commenters \28\ requested that the Commission
delete the ``chain of custody'' provision in proposed Sec.
1.31(d)(2)(i) because it is a legal evidentiary standard which does not
translate clearly to the technological requirements for recordkeeping.
Another commenter similarly noted that the ``chain of custody''
requirement is redundant and unnecessarily prescriptive given that
records entities are required under proposed Regulation 1.31(d)(1) to
keep regulatory records in a form and manner that ensures the
authenticity and reliability of such records.\29\ Moreover, one of the
commenters noted that the proposed definition of ``regulatory records''
in proposed Sec. 1.31(a) already includes a chain of custody
requirement based on the following language: ``data that describes how,
when, and, if relevant, by whom such electronically stored information
was collected, created, accessed, modified, or formatted.'' \30\ The
Commission has considered the comment that the term ``chain of
custody'' may cause confusion given that it currently exists as a legal
evidentiary standard and, given that the Commission is also persuaded
that the concept is adequately covered under the
[[Page 24483]]
definition of ``regulatory records'' it has determined to delete the
``chain of custody elements'' from the electronic regulatory records
systems requirement in amended Sec. 1.31(c)(2)(i). The Commission
notes, however, that the deletion of the term ``chain of custody'' does
not change the practical requirement that records entities maintain a
comprehensive audit trail for all electronic regulatory records.
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\28\ See SIFMA, ISDA, and Associations comment letters.
\29\ See Working Group comment letter.
\30\ See SIFMA comment letter.
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One commenter also requested that the Commission amend proposed
Sec. 1.31(d)(2)(ii) to incorporate existing business continuity
planning regulations in lieu of the proposed language: ``in the event
of an emergency or other disruption of the records entity's electronic
record retention systems[.]'' \31\ The Commission is not making this
requested change because records entities are not prohibited by the
rule from incorporating their obligations to maintain availability of
regulatory records into their existing business continuity planning.
The Commission does not believe that the general standard in new Sec.
1.31(c)(2)(ii) creates an obligation that would conflict with a records
entity's existing business continuity procedures.
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\31\ Id.
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The same commenter also requested that the Commission amend the
proposed records inventory requirement in new Sec. 1.31(c)(2)(iii) to
not require system descriptions and information necessary for accessing
or producing electronic regulatory records because introducing concepts
related to access and production of records in this section is
potentially confusing.\32\ For clarity, the Commission notes that data
necessary to access and produce electronic regulatory records is itself
a regulatory record under the definition thereof in Sec. 1.31(a).
Thus, the requirement in new Sec. 1.31(c)(2)(iii) is simply a
requirement that a records entity keep an up-to-date inventory of the
systems where such data is maintained.
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\32\ Id.
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Another commenter requested that the Commission delete from
proposed Sec. 1.31(d)(2)(i) the language ``and to monitor compliance
with the Act and Commission regulations in this Chapter'' because such
an ``obligation to comply would not normally be embodied in a
recordkeeping system.'' \33\ The Commission understands this comment to
mean that the commenter reads proposed Sec. 1.31(d)(2)(1) (re-lettered
as Sec. 1.31(c)(2)(1) in the final rule) as a stand-alone obligation
to ``monitor compliance with the Act. . . .'' To clarify, the
Commission notes that the requirement is to establish systems that
maintain the security, signature, and data regarding electronic
regulatory records to ensure that the records entity can monitor
compliance with the Act. Thus the requirement is not a stand-alone
obligation to ``monitor compliance with the Act and Commission
regulations. . . .''
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\33\ See Associations comment letter.
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Another commenter objected to the proposed amendments that would
impose the requirements of proposed Sec. 1.31(d) (re-lettered as Sec.
1.31(c) in the final rule) on commercial end-users that happen to be
records entities, including the requirements that ``each records entity
maintaining electronic regulatory records shall establish appropriate
systems and controls that ensure the authenticity and reliability of
electronic regulatory records[.]'' \34\ The commenter stated that
commercial end-users should not be subject to the obligation to
establish ``systems and controls . . . that ensure the authenticity of
the information . . . and . . . monitor compliance with the Act and
Commission regulations in this chapter[]'' because the expense and
burden of that obligation goes beyond the recordkeeping methods allowed
in other Commission regulations allowing commercial end-users to retain
and maintain their records in the ordinary or normal course of
business.\35\ Moreover, the commenter stated that the creation of an
``up-to-date inventory'' appears to impose an entirely new regulatory
recordkeeping expense that will require a commercial end-user to
produce an inventory of its electronic records, and keep that inventory
up to date, with respect to the ``electronic records'' that a
commercial end-user is allowed in other Commission regulations to
retain and maintain in the ordinary or normal course of business.\36\
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\34\ See IECA comment letter.
\35\ See e.g., Sec. 20.6(c) regarding large trader reporting
for physical commodity swaps.
\36\ See e.g., Sec. Sec. 32.2, 32.3, 45.2, and 45.6 regarding
trade option requirements for Non-SD/MSPs.
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The Commission declines to revise the rule in response to this
comment because, as noted previously, Sec. 1.31(d) (re-lettered as
Sec. 1.31(c) in the final rule) does not impose any new recordkeeping
requirements on any records entity, including those that are commercial
end-users. Rather, the final rule merely modernizes and makes
technology neutral the form and manner in which regulatory records must
be kept. Further, the final rule is clear that it does not override
other methods of maintaining records that may be specified elsewhere in
the Act or other Commission regulations. Thus, commercial end-users
that are records entities, for example, may continue to maintain
records in accordance with their current practices if such are
permitted by the Act, Commission regulations, or existing relief or
guidance. Finally, as described above, the final rule removes several
obligations regarding the form and manner in which regulatory records
must be kept that should lessen the compliance costs associated with
the recordkeeping requirements set forth in Sec. 1.31 generally.
In response to a specific question in the Proposal as to whether
the Commission should routinely publish guidelines regarding the
technical standards for electronic regulatory records, one commenter
argued that publication of such standards likely would result in
increased cost and devotion of technical resources to ensure compliance
with any changing standards.\37\ The commenter specifically requested
that the Commission avoid publishing guidelines for technical standards
of regulatory records and simply monitor records entities to ensure
that regulatory records are retained in a ``form and manner necessary
to ensure the records' and recordkeeping systems' authenticity and
reliability.'' Given that only one commenter responded to the request
for comment, and responded negatively, the Commission is persuaded that
publishing guidelines regarding the technical standards for electronic
regulatory records would not be helpful at this time.
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\37\ See MGEX comment letter.
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Regarding the form and manner of retention of electronic regulatory
records, one commenter requested confirmation that the specific means
of electronic storage that the commenter employs is an acceptable means
for storing electronic regulatory records.\38\ As noted throughout this
adopting release the Commission believes that the amendments to Sec.
1.31 are intended to be technology neutral and therefore the Commission
is not requiring or endorsing any type of record retention system or
technology.
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\38\ See DTCC comment letter.
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With respect to the effective date of these regulations, a few
commenters requested a three- or six-month phase-in period for
compliance.\39\ Although the Commission has noted throughout this
adopting release that it believes that the amendments adopted today are
not
[[Page 24484]]
creating any new compliance obligations for any records entities, it is
nevertheless persuaded that a three-month phase-in for compliance is a
reasonable request. Thus, the Commission has determined that the
effective date for the proposed amendments will be 90 days from the
date of publication.
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\39\ See MGEX and Working Group comment letters.
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E. Regulation 1.31(d): Inspection and Production of Regulatory Records
The Commission proposed to adopt new Sec. 1.31(e) (re-lettered as
Sec. 1.31(d) in the final rule) to re-state and clarify the right of
inspection of the Commission and the United States Department of
Justice in existing Sec. 1.31(a)(1). One commenter requested that the
Commission engage in a dialogue with industry to address challenges
presented by the production requirements of Sec. 1.31, including the
scope of what is subject to a production request and who may make such
a request.\40\ In particular, the commenter stated that Sec. 1.31
should recognize the long standing protections of attorney-client
privilege and expressly exclude such information from the rule's
production requirement.
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\40\ See CME comment letter.
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The Commission believes that the proposed amendment to Sec.
1.31(e) does not alter the existing right of inspection regarding
regulatory records and notes that attorney-client protections are
addressed elsewhere in federal and state law.\41\
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\41\ See Wigmore on Evidence: Evidence in Trials at Common Law--
Wigmore, Rule 502. Attorney- Client Privilege and Work Product
(online version updated 4/2017), for a comprehensive list of
attorney-client protections under federal and state law. Further, in
1999, the Commission addressed the waiver of privilege issue as
follows: ``As is currently the case with all Commission required
records, recordkeepers may not deny authorized Commission
representatives access to any individual storage medium that
includes Commission-required records or delay production while the
individual storage medium is reviewed for the presence of privileged
material. The final rule merely eliminates the regulatory inference
that the commingling of Commission-required records with non-
Commission-required records necessarily amounts to a waiver of any
privilege otherwise covering the latter category of records.'' See
Recordkeeping, 64 FR 28735, 28740, note 40 (May 27, 1999).
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F. Comments Beyond the Scope of the Proposed Rulemaking
Although the Commission stated that the Proposal was limited to
amendments to Sec. 1.31 and related technical amendments, the
Commission received several comments regarding matters outside the
scope of the Proposal, as discussed below.
The petitioners for rulemaking restated their request from their
original petition that the Commission adopt amendments to Part 4 of the
Commission's regulations regarding certain recordkeeping requirements
applicable to commodity pool operators and commodity trading
advisors.\42\ The Proposal did not address any such amendments and thus
such amendments are outside of the scope of this rulemaking.
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\42\ See Associations and ICI comment letters.
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Another commenter \43\ acknowledged that the Regulation AT
rulemaking \44\ addresses source code issues outside the scope of the
Proposal, but nonetheless requested the Commission provide additional
guidance regarding any requests for source code information by the
Commission subject to Sec. 1.31. In response to this request, the
Commission reiterates that production of source code is outside the
scope of this rulemaking.
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\43\ See FIA comment letter.
\44\ See Regulation Automated Trading, 81 FR 85334 (Nov. 25,
2016).
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Finally, another commenter \45\ recommended that the SEC amend SEC
Rule 17a-4 regarding the recordkeeping obligations of broker-dealers,
some of whom are also registered as futures commission merchants with
the Commission. The Commission does not have jurisdiction with respect
to SEC regulations and thus such recommendation is outside of the scope
of this rulemaking.
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\45\ See SIFMA comment letter.
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IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \46\ requires Federal
agencies, in promulgating regulations, to consider whether the rules
they propose will have a significant economic impact on a substantial
number of small entities and, if so, to provide a regulatory
flexibility analysis regarding the economic impact on those entities.
In the Proposal, the Commission certified that the Proposal would not
have a significant economic impact on a substantial number of small
entities. The Commission received no comments with respect to the RFA.
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\46\ 5 U.S.C. 601 et seq.
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As discussed above, because the final rule relates to most
recordkeeping obligations under the Act and the Commission's
regulations, it may affect the full spectrum of Commission registrants,
all persons required to register but not registered with the
Commission, and certain persons that are neither registered nor
required to register with the Commission. The Commission has previously
determined that certain registrants are not small entities for purposes
of the RFA and, therefore, the requirements of the RFA do not apply to
those entities.\47\ For other registrants, however, the Commission has
found it appropriate to consider whether such registrants should be
deemed small entities for purposes of the RFA on a case-by-case basis,
in the context of the particular Commission regulation at issue.\48\ As
certain persons affected by the final rule, including Commission
registrants, may be small entities for purposes of the RFA, the
Commission considered whether this rulemaking would have a significant
economic impact on any such persons.
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\47\ See, e.g., Policy Statement and Establishment of
Definitions of ``Small Entities'' for Purposes of the Regulatory
Flexibility Act, 47 FR 18618 (Apr. 30, 1982) (futures commission
merchants and commodity pool operators); Leverage Transactions, 54
FR 41068 (Oct. 5, 1989) (leverage transaction merchants); Regulation
of Off-Exchange Retail Foreign Exchange Transactions and
Intermediaries, 75 FR 55410, 55416 (Sept. 10, 2010) (retail foreign
exchange dealers); and Registration of Swap Dealers and Major Swap
Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (swap dealers and
major swap participants).
\48\ See 47 FR at 18620 (commodity trading advisors and floor
brokers); Registration of Floor Traders; Mandatory Ethics Training
for Registrants; Suspension of Registrants Charged With Felonies, 58
FR 19575, 19588 (Apr. 15, 1993) (floor traders); and Introducing
Brokers and Associated Persons of Introducing Brokers, Commodity
Trading Advisors and Commodity Pool Operators; Registration and
Other Regulatory Requirements, 48 FR 35248, 35276 (Aug. 3, 1983)
(introducing brokers).
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As discussed in the Proposal, the final rule generally updates and
simplifies existing Commission regulation 1.31 with new provisions that
maintain the ability of the Commission to examine and inspect
regulatory records. It accomplishes this by deleting outdated terms and
revising provisions to reflect advances in information technology,
allowing records entities to benefit from evolving technological
developments while maintaining necessary safeguards to ensure the
reliability of the recordkeeping process. It also reduces the retention
period for certain regulatory records related to swaps and related cash
and forward transactions, as discussed above.
The Commission believed that the Proposal would impose only limited
additional costs on small entities related to the requirement that they
establish written recordkeeping policies and procedures. However, for
the reasons discussed above, the Commission has been persuaded to not
require such written recordkeeping policies and procedures.
As a result, the final rule is not expected to impose any new
burdens on market participants. The Commission
[[Page 24485]]
does not, therefore, expect small entities to incur any additional
costs as a result of the final rule. In addition, the Commission does
not expect the economic value of the benefit to small entities of the
final rule to be significant. Consequently, the Commission finds that
no significant economic impact on small entities will result from the
final rule.
Accordingly, for the reasons stated above, the Commission believes
that the final rule will not have a significant economic impact on a
substantial number of small entities. Therefore, the Acting Chairman,
on behalf of the Commission, hereby certifies, pursuant to 5 U.S.C.
605(b), that the final rule being published today by this Federal
Register release will not have a significant economic impact on a
substantial number of small entities.
B. Paperwork Reduction Act
1. Background
The Paperwork Reduction Act of 1995 (``PRA'') \49\ imposes certain
requirements on Federal agencies (including the Commission) in
connection with their conducting or sponsoring any collection of
information as defined by the PRA. The final rule does not impose any
new recordkeeping or information collection requirements, or other
collections of information that require approval of the Office of
Management and Budget (``OMB'') under the PRA.
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\49\ 44 U.S.C. 3501 et seq.
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As discussed above, the Proposal would have replaced the existing
audit system requirements in Commission regulation 1.31 with a
requirement that records entities establish written recordkeeping
policies and procedures. Such changes would have resulted in revisions
to ``Adaptation of Regulations to Incorporate Swaps-Records of
Transactions, OMB control number 3038-0090''. Because the Commission
has been persuaded not to require such written recordkeeping policies
and procedures, the Commission will not be modifying this OMB control
number to reflect the addition of the proposed recordkeeping policies
and procedures requirement. As discussed in the Proposal, however, the
Commission will submit to OMB revisions to OMB control number 3038-0090
to reflect the final rule's removal of the audit system requirements in
current Commission regulation 1.31.
2. Information Collection Comments
In the Proposal, the Commission invited the public and other
Federal agencies to comment on any aspect of the information collection
requirements discussed therein, including that the only collection of
information within the meaning of the PRA added or modified by the
Proposal would be in respect of the proposed, but not adopted,
requirement that records entities establish recordkeeping policies and
procedures. The Commission did not receive any such comments.
C. Cost-Benefit Considerations
Section 15(a) of the Act \50\ requires the Commission to consider
the costs and benefits of its actions before issuing a regulation under
the Act. Section 15(a) further specifies that the costs and benefits
shall be evaluated in light of the following five broad areas of market
and public concern: (i) Protection of market participants and the
public; (ii) efficiency, competitiveness and financial integrity of
futures markets; (iii) price discovery; (iv) sound risk management
practices; and (v) other public interest considerations. The Commission
considers the costs and benefits resulting from its discretionary
determinations with respect to the Section 15(a) considerations.
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\50\ 7 U.S.C. 19(a).
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1. Costs
As discussed above in relation to the RFA, the Proposal generally
updates and simplifies existing Commission regulation 1.31 by deleting
outdated terms and revising provisions to reflect advances in
information technology while safeguarding the reliability of the
recordkeeping process. The Commission believes that the final rule does
not impose any additional costs on records entities.
2. Benefits
The Commission is committed to reviewing its regulations to ensure
they keep pace with technological developments and industry trends, and
reduce regulatory burden. The Commission believes that the final rule
will allow records entities to benefit from evolving technology while
maintaining necessary safeguards to ensure the reliability of the
recordkeeping process. By deleting outdated terms and revising
provisions to reflect advances in information technology, the final
rule will allow records entities to utilize a wider range of currently
available technology than previously allowed and remove or modify
requirements that the Commission believes are now obsolete (e.g.,
removing the requirements to have an audit system, to maintain
electronic records in limited specified formats, and to retain a
Technical Consultant, and reducing the retention period for certain
regulatory records of swaps and related cash or forward transactions),
allowing records entities to reduce their costs. In addition, the
Commission believes that the flexibility provided by the final rule
will, without further Commission rulemaking, allow records entities to
adopt new technologies as such technologies evolve, allowing such
persons to reduce future costs.
Moreover, the Commission expects that the added flexibility
provided by the final rule will encourage records entities to utilize
electronic storage rather than maintain paper regulatory records. The
Commission expects that this conversion will benefit the Commission,
the Department of Justice, and the commodity interest industry,
generally, by making the universe of regulatory records more accessible
and searchable.
3. Section 15(a) Factors
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders. CEA Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (i) Protection of market
participants and the public; (ii) efficiency, competitiveness, and
financial integrity of futures markets; (iii) price discovery; (iv)
sound risk management practices; and (v) other public interest
considerations.
i. Protection of Market Participants and the Public
Because the final rule does not alter any existing requirements
regarding the type of regulatory records to be produced and maintained,
but, rather, modernizes and makes technology neutral the form and
manner in which certain regulatory records must be kept the Commission
believes that the final rule will continue to protect the public by
maintaining necessary safeguards to ensure the reliability of the
recordkeeping process while allowing records entities to benefit from
evolving technology.
ii. Efficiency, Competitiveness, and Financial Integrity of Markets
As discussed above, the final rule, by providing additional
flexibility to records entities to electronically store their
regulatory records, may increase resource allocation efficiency by
improving the way in which such records are maintained. Apart from
that,
[[Page 24486]]
the Commission anticipates minimal change to the efficiency,
competitiveness, and financial integrity of the markets, because this
rulemaking only affects recordkeeping and not how these markets
otherwise operate.
iii. Price Discovery
The Commission believes that the final rule may increase confidence
and participation in the markets by lowering costs for records entities
and by encouraging the electronic storage of regulatory records,
allowing such records to be more easily accessed and searched.
Nevertheless, the Commission does not anticipate a significant increase
in liquidity or a significant improvement in price discovery as a
result of the final rule.
iv. Sound Risk Management Practices
The Commission does not believe that the final rule will have any
significant impact on sound financial risk management practices because
this rulemaking only affects recordkeeping and not how market
participants conduct financial risk management. The Commission believes
that the final rule may result in minor improvements to operational
risk management because, as noted above, it will provide additional
flexibility to records entities to electronically store their
regulatory records.
v. Other Public Interest Considerations
The Commission has not identified any additional public interest
considerations.
4. Comments on Cost-Benefit Considerations
The Commission invited public comment on its cost-benefit
considerations in the Proposal, including the Section 15(a) factors
described above. Commenters were invited to submit with their comment
letters any data or other information that they had that quantified or
qualified the costs and benefits of the Proposal. The Commission
received a number of comments on the Proposal as described above;
however, none of the persons who commented on the Proposal submitted
any data or other information that quantified or qualified the costs
and benefits of the Proposal. Nevertheless, in response to certain
comments on the Proposal, and to reduce the costs of the final rule on
records entities, the Commission has been persuaded not to require in
the final rule the written recordkeeping policies and procedures that
had been proposed in Sec. 1.31(b) because the alternative suggested by
commenters achieves all the recordkeeping objectives of the Commission.
List of Subjects
17 CFR Part 1
Commodity futures, Reporting and recordkeeping requirements.
17 CFR Part 23
Authority delegations (Government agencies), Commodity futures,
Reporting and recordkeeping requirements.
For the reasons set forth in the preamble, the Commodity Futures
Trading Commission amends 17 CFR chapter I 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. Revise Sec. 1.31 to read as follows:
Sec. 1.31 Regulatory records; retention and production.
(a) Definitions. For purposes of this section:
Electronic regulatory records means all regulatory records other
than regulatory records exclusively created and maintained by a records
entity on paper.
Records entity means any person required by the Act or Commission
regulations in this chapter to keep regulatory records.
Regulatory records means all books and records required to be kept
by the Act or Commission regulations in this chapter, including any
record of any correction or other amendment to such books and records,
provided that, with respect to such books and records stored
electronically, regulatory records shall also include:
(i) Any data necessary to access, search, or display any such books
and records; and
(ii) All data produced and stored electronically describing how and
when such books and records were created, formatted, or modified.
(b) Duration of retention. Unless specified elsewhere in the Act or
Commission regulations in this chapter:
(1) A records entity shall keep regulatory records of any swap or
related cash or forward transaction (as defined in Sec. 23.200(i) of
this chapter), other than regulatory records required by Sec.
23.202(a)(1) and (b)(1)-(3) of this chapter, from the date the
regulatory record was created until the termination, maturity,
expiration, transfer, assignment, or novation date of the transaction
and for a period of not less than five years after such date.
(2) A records entity that is required to retain oral
communications, shall keep regulatory records of oral communications
for a period of not less than one year from the date of such
communication.
(3) A records entity shall keep each regulatory record other than
the records described in paragraphs (b)(1) or (b)(2) of this section
for a period of not less than five years from the date on which the
record was created.
(4) A records entity shall keep regulatory records exclusively
created and maintained on paper readily accessible for no less than two
years. A records entity shall keep electronic regulatory records
readily accessible for the duration of the required record keeping
period.
(c) Form and manner of retention. Unless specified elsewhere in the
Act or Commission regulations in this chapter, all regulatory records
must be created and retained by a records entity in accordance with the
following requirements:
(1) Generally. Each records entity shall retain regulatory records
in a form and manner that ensures the authenticity and reliability of
such regulatory records in accordance with the Act and Commission
regulations in this chapter.
(2) Electronic regulatory records. Each records entity maintaining
electronic regulatory records shall establish appropriate systems and
controls that ensure the authenticity and reliability of electronic
regulatory records, including, without limitation:
(i) Systems that maintain the security, signature, and data as
necessary to ensure the authenticity of the information contained in
electronic regulatory records and to monitor compliance with the Act
and Commission regulations in this chapter;
(ii) Systems that ensure the records entity is able to produce
electronic regulatory records in accordance with this section, and
ensure the availability of such regulatory records in the event of an
emergency or other disruption of the records entity's electronic record
retention systems; and
(iii) The creation and maintenance of an up-to-date inventory that
identifies and describes each system that maintains information
necessary for accessing or producing electronic regulatory records.
[[Page 24487]]
(d) Inspection and production of regulatory records. Unless
specified elsewhere in the Act or Commission regulations in this
chapter, a records entity, at its own expense, must produce or make
accessible for inspection all regulatory records in accordance with the
following requirements:
(1) Inspection. All regulatory records shall be open to inspection
by any representative of the Commission or the United States Department
of Justice.
(2) Production of paper regulatory records. A records entity must
produce regulatory records exclusively created and maintained on paper
promptly upon request of a Commission representative.
(3) Production of electronic regulatory records. (i) A request from
a Commission representative for electronic regulatory records will
specify a reasonable form and medium in which a records entity must
produce such regulatory records.
(ii) A records entity must produce such regulatory records in the
form and medium requested promptly, upon request, unless otherwise
directed by the Commission representative.
(4) Production of original regulatory records. A records entity may
provide an original regulatory record for reproduction, which a
Commission representative may temporarily remove from such entity's
premises for this purpose. Upon request of the records entity, the
Commission representative shall issue a receipt for any original
regulatory record received. At the request of a Commission
representative, a records entity shall, upon the return thereof, issue
a receipt for the original regulatory record returned by such
representative.
0
3. In Sec. 1.35, revise paragraph (a)(5) to read as follows:
Sec. 1.35 Records of commodity interest and related cash or forward
transactions.
(a) * * *
(5) Form and manner. All records required to be kept pursuant to
paragraphs (a)(1), (a)(2), (a)(3), and (a)(4) of this section, other
than pre-trade communications, shall be kept in a form and manner that
allows for the identification of a particular transaction.
* * * * *
PART 23--SWAP DEALERS AND MAJOR SWAP PARTICIPANTS
0
4. 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.
Section 23.160 also issued under 7 U.S.C. 2(i); Sec. 721(b),
Pub. L. 111-203, 124 Stat. 1641 (2010).
0
5. In Sec. 23.203, amend paragraph (b) as follows:
0
a. Revise paragraph (b)(1); and
0
b. Remove and reserve paragraph (b)(2).
The revisions to read as follows:
Sec. 23.203 Records; retention and inspection.
* * * * *
(b) Record retention. (1) The records required to be maintained by
this chapter shall be maintained in accordance with the provisions of
Sec. 1.31 of this chapter, except as provided in paragraph (b)(3) of
this section. All such records shall be open to inspection by any
representative of the Commission, the United States Department of
Justice, or any applicable prudential regulator. Records relating to
swaps defined in section 1a(47)(A)(v) shall be open to inspection by
any representative of the Commission, the United States Department of
Justice, the Securities and Exchange Commission, or any applicable
prudential regulator.
(2) [Reserved]
* * * * *
Issued in Washington, DC, on May 23, 2017, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Note: The following appendix will not appear in the Code of
Federal Regulations.
Appendix to Recordkeeping--Commission Voting Summary
On this matter, Acting Chairman Giancarlo and Commissioner Bowen
voted in the affirmative. No Commissioner voted in the negative.
[FR Doc. 2017-11014 Filed 5-26-17; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: May 30, 2017