Conflicts of Interest in Self-Regulation and Self-Regulatory Organizations (“SROs”), 6936-6958 [E7-2528]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 72, Number 30 (Wednesday, February 14, 2007)]
[Rules and Regulations]
[Pages 6936-6958]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-2528]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 38

RIN 3038-AC28


Conflicts of Interest in Self-Regulation and Self-Regulatory 
Organizations (``SROs'')

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commission hereby adopts final acceptable practices for 
minimizing conflicts of interest in decision making by designated 
contract markets (``DCMs'' or ``exchanges''),\1\ pursuant to Section 
5(d)(15) (``Core Principle 15'') \2\ of the Commodity Exchange Act 
(``CEA'' or ``Act'').\3\ The final acceptable practices are the first 
issued for Core Principle 15 and are applicable to all DCMs.\4\ They 
focus upon structural conflicts of interest within modern self-
regulation, and offer DCMs a ``safe harbor'' by which they may minimize 
such conflicts and comply with Core Principle 15. To receive safe 
harbor treatment, DCMs must implement the final acceptable practices in 
their entirety, including instituting boards of directors that are at 
least 35% public and establishing oversight of all regulatory functions 
through Regulatory Oversight Committees (``ROCs') consisting 
exclusively of public directors.
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    \1\ The acceptable practices for core principles reside in 
Appendix B to Part 38 of the Commission's Regulations, 17 CFR Part 
38, App. B.
    \2\ Core Principle 15 states: ``CONFLICTS OF INTEREST--The board 
of trade shall establish and enforce rules to minimize conflicts of 
interest in the decision-making process of the contract market and 
establish a process for resolving such conflicts of interest.'' CEA 
Sec.  5(d)(15), 7 U.S.C. 7(d)(15).
    \3\ The Act is codified at 7 U.S.C. 1 et seq. (2000).
    \4\ Any board of trade that is registered with the Securities 
and Exchange Commission (``SEC'') as a national securities exchange, 
is a national securities association registered pursuant to section 
15(A)(a) of the Securities Exchange Act of 1934, or is an 
alternative trading system, and that operates as a designated 
contract market in security futures products under Section 5f of the 
Act and Commission Regulation 41.31, is exempt from the core 
principles enumerated in Section 5 of the Act, and the acceptable 
practices thereunder, including those adopted herein.

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DATES: Effective Date: March 16, 2007.

FOR FURTHER INFORMATION CONTACT: Rachel F. Berdansky, Acting Deputy 
Director for Market Compliance, (202) 418-5429, or Sebastian Pujol 
Schott, Special Counsel (202) 418-5641, Division of Market Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Overview of the Acceptable Practices
    B. Background
II. Procedural History
III. Public Comments Received and the Commission's Response
    A. Legal Comments
    1. Overview of Commission's Authority to Issue the Acceptable 
Practices
    2. Specific Legal Issues Raised by Commenters
    B. Policy Comments
    1. General Comments
    2. Comments With Respect to the Board Composition Acceptable 
Practice
    3. Comments With Respect to the Public Director Acceptable 
Practice
    4. Comments With Respect to the ROC Acceptable Practice

[[Page 6937]]

    5. Comments With Respect to the Disciplinary Committee 
Acceptable Practice
IV. Specific Requests for Modifications and/or Clarifications that 
the Commission has Determined to Grant or Deny
    A. Phase-in Period for the New Acceptable Practices
    B. Selection of Public Directors
    C. Compensation of Public Directors
    D. Overlapping Public Directors
    E. Jurisdiction of Disciplinary Panels and Definition of 
``Public'' for Persons Serving on Disciplinary Panels
    F. ``No Material Relationship Test''
    G. Elimination of ROCs' Periodic Reporting Requirement
V. Related Matters
VI. Text of Acceptable Practices for Core Principle 15

I. Introduction

A. Overview of the Acceptable Practices

    The final acceptable practices recognize DCMs' unique public-
interest responsibilities as self-regulatory organizations (``SROs'') 
in the U.S. futures industry. They address conflicts of interest that 
exist within DCMs as they operate in an increasingly competitive 
environment and transform from member-owned, not-for-profit entities 
into diverse enterprises with a variety of business models and 
ownership structures. While continuing to meet their regulatory 
responsibilities, DCMs must now compete effectively to generate 
profits, advance their commercial interests, maximize the value of 
their stock, and/or serve multiple membership, ownership, customer, and 
other constituencies. The presence of these potentially conflicting 
demands within a single entity--regulatory authority coupled with 
commercial incentives to misuse such authority--constitutes the new 
structural conflict of interest addressed by the acceptable practices 
adopted herein.
    The Commission has determined that the structural conflicts 
outlined above are appropriately addressed through reforms within DCMs 
themselves, including reforms of DCMs' governing bodies. Accordingly, 
the Commission offers the new acceptable practices for Core Principle 
15 as an appropriate method for minimizing such conflicts. The 
Commission believes that additional public directors on governing 
bodies, greater independence at key levels of decision making, and 
careful insulation of regulatory functions and personnel from 
commercial pressures, are important elements in ensuring vigorous, 
effective, and impartial self-regulation now and in the future. The new 
acceptable practices incorporate and emphasize each of these elements, 
and offer all DCMs clear instruction as to how they may comply with 
Core Principle 15.
    Although DCMs are free to comply with Core Principle 15 by other 
means, the Commission stresses that they all must address structural 
conflicts of interest and adopt substantive measures to protect their 
regulatory decision making from improper commercial considerations. 
DCMs must ensure that regulatory decisions are made on their own 
merits, and that they are not compromised by the commercial interests 
of the DCMs or the interests of their numerous constituencies. 
Likewise, DCMs' regulatory operations and personnel must be insulated 
from improper influence and commercial considerations to ensure 
appropriate regulatory outcomes.
    The new acceptable practices are set forth in four component parts, 
and DCMs must meet all four to receive safe harbor treatment under Core 
Principle 15. Each component part is summarized as follows:
    First, the Board Composition Acceptable Practice calls upon all 
DCMs to minimize conflicts of interest in self-regulation by 
establishing boards of directors that contain at least 35% ``public 
directors'' (as defined by a separate Public Director Acceptable 
Practice discussed below). The Board Composition Acceptable Practice 
further requires that DCMs ensure that any executive committees (or 
similarly empowered bodies) also meet the 35% public director standard. 
This 35% standard in the new acceptable practices represents a 
modification from the 50% public director standard in the proposed 
acceptable practice.\5\
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    \5\ Conflicts of Interest in Self-Regulation and Self-Regulatory 
Organizations (``Proposed Rule''), 71 FR 38740 (July 7, 2006).
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    Second, the Regulatory Oversight Committee Acceptable Practice 
mandates that all DCMs establish Regulatory Oversight Committees, 
composed only of public directors, to oversee core regulatory functions 
and ensure that they remain free of improper influence. The Commission 
notes that ROCs are intended to insulate self-regulatory functions and 
personnel from improper influence. In fulfilling this role, however, 
ROCs are not expected to assume managerial responsibilities, or to 
isolate self-regulatory functions and personnel from others within the 
DCM. ROCs' oversight and insulation should be aided by their DCMs' 
chief regulatory officers (``CROs''). A full description of the 
responsibilities and authority of ROCs may be found in the text of the 
final acceptable practices.
    Third, the Disciplinary Panel Acceptable Practice states that DCM 
disciplinary panels should not be dominated by any group or class of 
DCM members or participants, and must include at least one ``public 
person'' on every panel. Under the Disciplinary Panel Acceptable 
Practice, disciplinary panels must keep thorough minutes of their 
meetings, including a full articulation of the rationale supporting 
their disciplinary decisions.
    Finally, the Public Director Acceptable Practice establishes 
specific definitions of ``public'' for DCM directors and for members of 
disciplinary panels. Public directors are persons who have no 
``material relationship'' with their DCM, i.e., any relationship which 
could reasonably affect their independent judgment or decision making. 
In addition, public directors must meet a series of ``bright-line 
tests'' which identify specific circumstances and relationships which 
the Commission believes are clearly material. For members of 
disciplinary panels, the definition of ``public'' includes the bright-
line tests, but not the materiality criterion.
    The final acceptable practices also include clarifications to the 
acceptable practices originally proposed by the Commission on July 7, 
2006. For example, the final acceptable practices clarify that a DCM's 
public directors may also serve as public directors of its holding 
company under certain circumstances. These clarifications were made in 
response to public comments on the proposed acceptable practices.
    In addition, although the final acceptable practices are effective 
30 days after publication in the Federal Register, the Commission will 
permit currently established DCMs to implement responsive measures over 
a phase-in period of two years or two regularly-scheduled board 
elections, whichever occurs sooner.\6\ Responsive measures include 
implementing the final acceptable practices or otherwise fully 
complying with the requirements of Core Principle 15, including 
requirements to minimize the structural conflicts of interest discussed 
herein. The phase-in period and the modified public director 
requirements for boards and executive committees are the only 
significant changes between the proposed acceptable practices and those 
adopted today.
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    \6\ ``Currently established'' DCMs are those that are already 
designated at the time this release is published in the Federal 
Register.

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[[Page 6938]]

B. Background

    U.S. futures markets are a critical component of the U.S. and world 
economies, providing significant economic benefits to market 
participants and the public at large. They provide an important hedging 
vehicle to individuals and firms in myriad industries, resulting in 
more efficient production, lower costs for consumers, and other 
economic benefits. By offering a competitive marketplace and focal 
point where traders can freely interact based on their assessments of 
supply and demand, futures markets also provide a vital forum for 
discovering prices that are generally considered to be superior to 
administered prices or prices determined privately. For this reason, 
futures markets are widely utilized throughout the global economy. 
Participants in the markets include virtually all economic actors, and 
the prices discovered on a daily basis materially affect a wide range 
of businesses in the agricultural, energy, financial, and other 
sectors.
    For the reasons outlined above, DCMs are not just typical 
commercial enterprises, but are commercial enterprises affected with a 
significant national public interest. Actions that distort prices or 
otherwise undermine the integrity of the futures markets have broad, 
detrimental implications for the economy as a whole and the public in 
general. Congress recognized the importance of futures trading in the 
Act, when it explicitly stated that futures transactions ``are entered 
into regularly in interstate and international commerce and are 
affected with a national public interest * * *.'' \7\ It defined the 
public interest to include ``liquid, fair, and financially secure 
trading facilities.'' \8\ Congress also identified the purposes of the 
Act: ``to deter and prevent price manipulation or any other disruptions 
to market integrity; to ensure the financial integrity of all 
transactions subject to this Act and the avoidance of systemic risk; 
and to protect all market participants from fraudulent or other abusive 
sales practices and misuses of customer assets.'' \9\ To accomplish 
these purposes, Congress established a statutory system of DCM self-
regulation, combined with Commission oversight, to promote 
``responsible innovation and fair competition among boards of trade, 
other markets and market participants.'' \10\ Meeting these statutory 
obligations and purposes requires DCM self-regulation that is as 
vigorous, impartial, and effective as possible.
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    \7\ CEA Sec.  3(a), 7 U.S.C. 5(a).
    \8\ Id.
    \9\ CEA Sec.  3(b), 7 U.S.C. 5(b).
    \10\ Id.
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    All DCMs face unique and potentially conflicting regulatory 
obligations and commercial demands as they work to meet the statutory 
requirements outlined above. On the commercial side, they must attract 
trading to their markets, maximize the value of their stock, generate 
profits, satisfy the financial needs of their numerous stakeholders and 
constituencies, and/or meet the diverse business needs of their market 
participants. At the same time, as self-regulatory organizations, DCMs 
must exercise their authority judiciously, impartially, and in the 
public interest. As essential forums for the execution of futures 
transactions and for price discovery, DCMs must ensure fair and 
financially secure trading facilities. DCMs must also help to ``serve'' 
and ``foster'' the national public interest through self-regulatory 
responsibilities that include ensuring market integrity, financial 
integrity, and the strict protection of market participants.\11\
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    \11\ Id.
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    When DCMs were first entrusted with these extensive regulatory 
responsibilities, they were almost exclusively member-owned, not-for-
profit exchanges facing little competition for customers or in their 
prominent contracts. Although conflicts of interest in self-regulation 
were a concern even then, such conflicts typically centered on 
individual exchange members policing one another. Today's DCMs, 
however, are vibrant commercial enterprises competing globally in an 
industry whose ownership structures, business models, trading 
practices, and products are evolving rapidly. As a result, DCMs now 
face potential conflicts of interest between their critical self-
regulatory responsibilities and their powerful commercial imperatives. 
Specifically, DCMs must: defend and expand their markets against others 
offering similar products or services; generate returns for their 
owners; and provide liquid markets where their members and customers 
may profit. At the same time, they must continue to meet fundamental 
public interest responsibilities through vigorous and impartial self-
regulation. To reconcile these obligations, DCMs must acknowledge and 
guard against conflicts between their regulatory responsibilities and 
their commercial interests, and take measures to prevent improper 
influence upon self-regulation by their numerous constituencies, 
including members, owners, customers, and others.
    As explained in the proposing release, rapid and ongoing changes in 
the futures industry have raised concerns as to whether existing self-
regulatory structures are equipped to manage evolving conflicts of 
interest. Self-regulation's traditional conflict--that members will 
fail to police their peers with sufficient zeal--has been joined by the 
possibility that competing DCMs could abuse their regulatory authority 
to gain competitive advantage or satisfy commercial imperatives. Such 
conflicts of interest must be addressed promptly and proactively to 
prevent them from becoming real abuses, and to ensure continued public 
confidence in the integrity of the U.S. futures markets.
    After three-and-a-half years of careful study, the Commission has 
determined that the conflicts of interest identified above are inherent 
in any system of self-regulation conducted by competing DCMs, many of 
which operate under new ownership structures and business models, and 
all of which are possessed of strong commercial imperatives. The 
Commission has further determined that successfully addressing such 
conflicts, and complying with Core Principle 15, requires appropriate 
responses within DCMs. Only by reconciling the inherent tension between 
their self-regulatory responsibilities and their commercial interests, 
whether via the new acceptable practices or otherwise, can DCMs 
successfully minimize conflicts of interest in their decision-making 
processes and thereby ensure the integrity of self-regulation in the 
U.S. futures industry.
    The new acceptable practices for Core Principle 15 are a direct 
response to the industry changes outlined above. As required by the 
Act, they ``promote responsible innovation and fair competition'' among 
U.S. DCMs, and ensure that self-regulation remains compatible with the 
modern business practices of today's DCMs.\12\ The new acceptable 
practices embody the Commission's firm belief that effective self-
regulation in an increasingly competitive, publicly traded, for-profit 
environment requires independent decision making at key levels of DCMs' 
regulatory governance structures. The Commission further believes that 
the new acceptable practices constitute an ideal solution to emerging 
structural conflicts of interest in self-regulation. Both proactive and 
carefully targeted, the new acceptable practices for Core Principle 15 
advance the public interest and ensure the continued strength and

[[Page 6939]]

integrity of self-regulation in a rapidly evolving industry.
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    \12\ Id.
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    The conflicts of interest described above require careful responses 
by all DCMs. The Commission believes that DCMs can comply with Core 
Principle 15 by minimizing conflicts of interest between their 
regulatory responsibilities and their commercial interests or those of 
their membership, ownership, management, customer, and other 
constituencies. However, whether DCMs choose to comply with Core 
Principle 15 via the acceptable practices adopted herein or by other 
means, the Commission recognizes that necessary measures may take time 
to implement. Accordingly, and at the request of public commenters, the 
Commission is adopting a phase-in period for full compliance with Core 
Principle 15. Within two years of this document's effective date, or 
two regularly-scheduled board elections, whichever occurs first, all 
DCMs must be in full compliance with Core Principle 15, either by 
availing themselves of the new acceptable practices or undertaking 
other effective measures to address the structural conflicts of 
interest identified herein. Commission staff will contact all DCMs in 
six months of the effective date of these final acceptable practices to 
learn of their plans for full compliance. Established DCMs must 
demonstrate substantial compliance with Core Principle 15, and plans 
for full compliance, well before the phase-in period's expiration. New 
candidates for designation as contract markets should be prepared to 
demonstrate compliance with Core Principle 15, or a plan for 
compliance, upon application.

II. Procedural History

    The four acceptable practices for Core Principle 15 adopted today 
are the culmination of a comprehensive review of self-regulation in the 
U.S. futures industry (``SRO Review'' or ``Review'') launched by the 
Commission in May of 2003. Phase I of the Review explored the roles, 
responsibilities, and capabilities of SROs in the context of industry 
changes. Staff examined the designated self-regulatory organization 
system of financial surveillance, the treatment of confidential 
information, the composition of DCM disciplinary committees and panels, 
and other aspects of the self-regulatory process. Phase I of the Review 
also included staff interviews with over 100 persons including 
representatives of DCMs, clearing houses, futures commission merchants 
(``FCMs''), industry associations, and securities-industry entities, as 
well as current and retired industry executives, academics, and 
consultants.
    In June of 2004, the Commission initiated Phase II of the SRO 
Review and broadened its inquiry to explicitly address SRO governance 
and the interplay between DCMs' self-regulatory responsibilities and 
their commercial interests. In June of 2004, the Commission issued a 
Federal Register Request for Comments (``Request'') on the governance 
of futures industry SROs.\13\ The Request sought input on the proper 
composition of DCM boards, optimal regulatory structures, the impact of 
different business and ownership models on self-regulation, the proper 
composition of DCM disciplinary committees and panels, and other 
issues.
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    \13\ Governance of Self-Regulatory Organizations, 69 FR 32326 
(June 9, 2004). Comment letters received are available at: https://
www.cftc.gov/foia/comment04/foi04_005_1.htm.
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    In November of 2005, the Commission updated its previous findings 
through a second Federal Register Request for Comments (``Second 
Request'') that focused on the most recent industry developments.\14\ 
The Second Request examined the board-level ROCs recently established 
at some SROs in the futures and securities industries. It also asked 
commenters to consider the impact of New York Stock Exchange (``NYSE'') 
listing standards on publicly traded futures exchanges; whether the 
standards were relevant to self-regulation; and how the standards might 
inform the Commission's own regulations.\15\
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    \14\ Self-Regulation and Self-Regulatory Organizations in the 
Futures Industry, 70 FR 71090 (Nov. 25, 2005). Comment letters 
received are available at https://www.cftc.gov/foia/comments05/foi05-
-007--1.htm.
    \15\ The NYSE's corporate governance listing standards require 
listed companies to: have a majority of independent directors; meet 
materiality and bright-line tests for independence; convene 
regularly scheduled executive sessions of the board without 
management present; institute nominating/governance, compensation, 
and audit committees consisting exclusively of public directors; 
etc. See NYSE Listed Company Manual, Sec. Sec.  303A:00-14, 
available at: https://www.nyse.com/regulation/listed/
1101074746736.html. The NASDAQ Stock Market has adopted corporate 
governance listing standards similar to the NYSE's. See the NASDAQ 
Stock Market Listing Standards and Fees, available at: https://
www.nasdaq.com/about/nasdaq_listing_req_fees.pdf. DCMs whose 
parent companies are listed on the NYSE include the CBOT, CME, 
NYBOT, and NYMEX. Although these DCMs themselves are not required to 
comply with the listing standards, they may be in de facto 
compliance if they have chosen to name identical boards of directors 
for both the listed parent and the DCM.
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    Phase II of the SRO Review concluded with a public Commission 
hearing on ``Self-Regulation and Self-Regulatory Organizations in the 
U.S. Futures Industry'' (``Hearing''). The day-long Hearing, held on 
February 15, 2006, included senior executives and compliance officials 
from a wide range of U.S. futures exchanges, representatives of small 
and large FCMs, academics and other outside experts, and an industry 
trade group. The Hearing afforded the Commission an opportunity to 
question panelists on four broad subject areas: (1) Board composition; 
(2) alternative regulatory structures, including ROCs and third-party 
regulatory service providers; (3) transparency and disclosure; and (4) 
disciplinary committees.\16 \
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    \16\ The Hearing Transcript is available at https://www.cftc.gov/
files/opa/opapublichearing021506.final.pdf.
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    Finally, in July of 2006, the Commission published the Proposed 
Rule and sought public comment on new acceptable practices for Core 
Principle 15.\17\ The Commission proposed that at least 50% of the 
directors on DCM boards and executive committees (or similarly 
empowered bodies) be public directors. It also proposed that day-to-day 
regulatory operations be overseen and insulated through a CRO reporting 
directly to a board-level ROC consisting exclusively of public 
directors. The proposed acceptable practices also defined ``public 
director'' for persons serving on boards and ROCs, and defined ``public 
person'' for disciplinary panel members. To qualify as a public 
director under the proposal, the director in question would require an 
affirmative determination that he or she had no material relationship 
with the DCM. In addition, public directors and public persons would 
both have been required to meet a series of ``bright-line'' tests. The 
inability to satisfy both the material relationship and bright-line 
test requirements would automatically preclude them from serving as 
public directors or public disciplinary panel members. Finally, the 
proposed acceptable practices called for DCM disciplinary panels that 
were not dominated by any group or class of SRO participants, and that 
included at least one public person.
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    \17\ See supra note 5.
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    The proposal's original 30-day comment period, scheduled to close 
on August 7, 2006, was extended by an additional 30 days, to September 
7, 2006. The Commission received a total of 34 comment letters in 
response to the proposed acceptable practices for Core Principle 15, 
significant aspects of which are discussed below.\18\
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    \18\ Comment letters in response to the Proposed Rules are 
available at: https://www.cftc.gov/foia/comment06/foi06_004_1.htm.

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[[Page 6940]]

III. Public Comments Received and the Commission's Response

    The 34 comment letters received in response to the proposed 
acceptable practices included responses from 10 industry associations 
and trade groups, nine individuals (including directors of exchanges 
writing separately), eight DCMs, six futures commission merchants 
(``FCMs''), one group of DCM public directors, one U.S. Senator, and 
one U.S. Congressman.\19\
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    \19\ The commenters were: Bear Stearns; Citigroup; Morgan 
Stanley; the Chicago Mercantile Exchange (``CME''); the New York 
Mercantile Exchange (``NYMEX''); U.S. Sen. Pat Roberts and 
Congressman Jerry Moran; the National Grain Trade Council; Daniel L. 
Gibson; the National Grain and Feed Association; the New York Board 
of Trade (``NYBOT''); Public Members of the NYBOT; the Chicago Board 
of Trade (``CBOT''); Philip McBride Johnson; the CBOE Futures 
Exchange (``CFE''); Dennis M. Erwin; HedgeStreet; Colby Moss; 
Horizon Milling, LLC; John Legg; the National Futures Association; 
Robert J. Rixey; Michael Braude; Lehman Brothers; the Kansas City 
Board of Trade (``KCBT''); the Futures Industry Association 
(``FIA''); the Florida Citrus Producers Association; the National 
Cotton Council of America; Cargill Juice North America; Nickolas 
Neubauer; the American Cotton Shippers Association; Barry Bell; 
Fimat; J.P. Morgan Futures Inc.; and the Minneapolis Grain Exchange 
(``MGEX'').
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    The Commission thoroughly reviewed and considered all comments 
received. In response to persuasive arguments by various commenters, 
the final acceptable practices include two significant modifications 
from those originally proposed. Specifically, the final acceptable 
practices include: (1) a reduction in the required number of public 
directors on boards and executive committees, from at least 50% public 
to at least 35% public; and (2) a phase-in period to implement the 
acceptable practices, or otherwise come into full compliance with Core 
Principle 15, of two years or two regularly scheduled board elections, 
whichever occurs sooner.
    In addition, in response to comments received, the Commission has 
made several clarifications and non-substantive revisions to the final 
acceptable practices. The Commission has also provided further 
discussion or elaboration in this preamble in order to provide further 
clarification on specific aspects of the acceptable practices, 
consistent with the Commission's original intent.
    Specifically, in the text of the final acceptable practices, the 
Commission has clarified: that a public director may serve on the 
boards of both a DCM and of its parent company; that public directors 
are allowed deferred compensation in excess of $100,000 under certain 
circumstances; and that public persons serving on disciplinary panels 
are subject only to the bright-line tests used to define public 
directors. The Commission has also clarified that the acceptable 
practices do not address the manner in which DCMs select their public 
directors, whether by election, appointment, or other means.
    Some commenters called for greater requirements than in the 
proposed acceptable practices, and others called for less requirements. 
The Commission carefully considered those comments, but decided not to 
make any changes other than those outlined above. As stated previously, 
the Commission believes that adopting the new acceptable practices 
strikes a careful balance between an appropriate approach to minimizing 
conflicts of interest in self-regulation, as required by Core Principle 
15, and the overall flexibility offered by the core principle regime. 
Moreover, the Commission believes that the acceptable practices adopted 
herein are necessary and appropriate to fulfill the purposes of the Act 
and advance the public interest.
    The substantive comments received, and the Commission's responses 
thereto, are presented below. They are organized as follows:

    Legal Comments: comments questioning the Commission's authority 
to issue the proposed acceptable practices, including comments with 
respect to the meaning of Core Principle 15 and its interaction with 
other core principles;
    Policy Comments: comments requesting more or stricter guidance 
than that proposed by the Commission; comments requesting that the 
Commission issue no acceptable practices, or fewer or less detailed 
acceptable practices; and comments questioning the rationale behind 
the proposed acceptable practices, including:
     General comments;
     Comments with respect to board composition;
     Comments with respect to the definition of public 
director;
     Comments with respect to Regulatory Oversight 
Committees;
     Comments with respect to disciplinary committees;
    Comments Requesting Modifications and Clarifications, including:
     Phase-in period for the new acceptable practices;
     Selection of public directors;
     Compensation of public directors;
     Overlapping public directors;
     Jurisdiction of disciplinary panels and definition of 
``public'' for persons serving on disciplinary panels;
     ``No material relationship'' test for public directors;
     elimination of ROCs' periodic reporting requirements.

A. Legal Comments: Public Comments Received and the Commission's 
Response.

1. Overview of the Commission's Authority To Issue the Acceptable 
Practices
    The Commission's issuance of the acceptable practices for Core 
Principle 15 respects the letter and spirit of the Act. The 
Commission's authority to do so is firmly rooted in Core Principle 15's 
mandate to DCMs to minimize conflicts of interest in decision making. 
Core Principle 15 requires DCMs to maintain systems to minimize 
structural conflicts of interest inherent in self-regulation, as well 
as individual conflicts of interest faced by particular persons.\20\ 
The acceptable practices are rationally related to the purposes of Core 
Principle 15.
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    \20\ 71 FR 38740, 38743.
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    The Board Composition Acceptable Practice recognizes that the 
governing board of a DCM is its ultimate decision maker and therefore 
the logical place to begin to address conflicts. Participation by 
public directors in board decision making is a widely accepted and 
effective means to reduce conflicts of interest.\21\ By providing for 
significant public participation on the board, the seat of DCM 
governance and policymaking, the acceptable practice ensures that 
conflicts of interest are minimized at the highest level of decision 
making.
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    \21\ See, e.g., NYSE Listed Company Manual, Sec.  303A 
(commentary).
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    The ROC Acceptable Practice recognizes the importance of insulating 
core regulatory functions from improper influences and pressures 
stemming from a DCM's commercial affairs. It operates to minimize 
conflicts of interest in decisions made in the ordinary course of 
business. Finally, the Disciplinary Panel Acceptable Practice, by 
mandating participation on most disciplinary panels of at least one 
person who meets the bright-line tests for public director, minimizes 
conflicts of interest that may undermine the fundamental fairness 
required of DCM disciplinary proceedings. In sum, these acceptable 
practices represent an effective means to implement Core Principle 15 
and are fully consistent with its mandate that DCMs minimize conflicts 
of interest in all decision making. They therefore lie well within the 
Commission's authority.
    Congress has determined that there is a national public interest in 
risk management and price discovery.\22\ The individual provisions of 
the Act operate

[[Page 6941]]

in furtherance of those interests by instituting and enforcing a system 
of ``effective self-regulation of trading facilities, clearing systems, 
market participants and market professionals under the oversight of the 
Commission.'' \23\ Core Principle 15 must be read in light of those 
public interests and purposes.
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    \22\ CEA Section 3(a), 7 U.S.C. 5(a).
    \23\ CEA Section 3(b), 7 U.S.C. 5(a).
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    The safe harbor created by the new acceptable practices removes the 
guesswork from compliance with Core Principle 15. Congress 
intentionally wrote the core principles to be broad and flexible, and 
to help DCMs and the Commission to adjust to changing circumstances. 
Flexibility, however, may give rise to uncertainty. In order to provide 
DCMs with greater certainty in the context of flexible core principles, 
Congress, in adopting the Commodity Futures Modernization Act 
(``CFMA''),\24\ added Section 5c(a)(1) to the CEA, which specifically 
authorizes the Commission, consistent with the purposes of the CEA, to 
``issue interpretations, or approve interpretations submitted to the 
Commission * * * to describe what would constitute an acceptable 
business practice for Core Principles.'' \25\ As a general rule, the 
Commission believes that issuing acceptable practices and other 
guidance under the core principles is beneficial, given the CFMA's lack 
of legislative history that might otherwise have been a source of 
guidance. Safe harbors, such as those created by the acceptable 
practices being issued today, remove uncertainty while setting high 
standards consistent with the purposes of the CEA and the authority 
granted by Congress to the Commission to issue such acceptable 
practices. Nothing in these acceptable practices, as safe harbors, 
infringes upon the Congressional directive in Section 5c(a)(2) of the 
CEA that acceptable practices not be the ``exclusive means for 
complying'' with core principles, as DCMs remain free to demonstrate 
core principle compliance by other means.\26\
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    \24\ The CFMA is published at Appendix E of Pub. L. 106-554, 114 
Stat. 2763 (2000).
    \25\ 7 U.S.C. 7a-2(a)(1).
    \26\ 7 U.S.C. 7a-2(a)(2).
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    Pursuant to its duty under the CEA to consider the costs and 
benefits of its action in issuing the acceptable practices, as 
discussed separately below, the Commission believes that the acceptable 
practices will minimize conflicts of interest in DCM decision making 
and promote public confidence in the futures markets. These are 
significant benefits to the futures industry, market participants, and 
the public. While commenters alleged that compliance would be costly, 
none of them provided an estimate of those costs in response to the 
Commission's specific request for quantitative data. The Commission has 
no basis to conclude that compliance would not be a reasonable cost of 
doing business in an industry subject to federal oversight--a cost that 
may be phased in gradually over two years or two election cycles.
    Finally, the Board Composition Acceptable Practice operates without 
impeding the duties owed to shareholders by the directors of a public 
corporation. Demutualized DCMs typically have reorganized themselves as 
subsidiaries of parent holding companies. The acceptable practice 
applies to the board of a DCM itself--not to the parent. Accordingly, 
the Board Composition Acceptable Practice is unquestionably within the 
Commission's authority to issue acceptable practices under the core 
principles applicable to DCMs. The composition of a DCM governing board 
may be identical to that of its parent--that decision is a matter for 
the business judgment of the persons involved. Nevertheless, the boards 
are separate bodies, even if their memberships overlap. DCM directors 
have a fiduciary duty to stockholders, to be sure, but stockholders of 
a DCM own an entity that, as a matter of federal law, is required to 
minimize conflicts of interest under Core Principle 15 and that serves 
a public interest through its business activity. Stockholders are well 
served when the DCMs that they own comply with applicable laws and 
regulations.
    We now turn to the legal issues raised by the commenters with 
respect to the Commission's authority to issue the acceptable 
practices.
2. Specific Legal Issues Raised by Commenters
    FIA, five major FCMs, and one exchange, CFE, filed comments 
generally in favor of the proposed acceptable practices and endorsed 
the Commission's analysis of its authority to issue them. CME, CBOT, 
NYMEX, and other commenters, in opposition, challenged the Commission's 
interpretation of Core Principle 15 and the statutory authority under 
which the proposals were issued.
    As stated above, Core Principle 15 requires DCMs to establish and 
maintain systems that address conflicts of interest inherent in the 
structure of self-regulation, as well as personal conflicts faced by 
individuals. FIA endorsed this analysis, stating that the proposed 
acceptable practices are ``well-grounded'' in the Commission's 
statutory authority and ``rationally related'' to the purposes of Core 
Principle 15.\27\
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    \27\ FIA Comment Letter (``CL'') 7 at 3-4.
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    Commenters challenging the Commission's authority to promulgate the 
acceptable practices for Core Principle 15 contend that they: (1) 
Conflict with Core Principle 16; (2) are contrary to the text of the 
statute; (3) are contrary to Congressional intent in enacting the CFMA; 
(4) lack factual support; (5) conflict with guidance for Core Principle 
14; and (6) impermissibly shift the burden to DCMs to demonstrate 
compliance with Core Principle 15. As discussed below, none of these 
contentions is persuasive.
    a. The Acceptable Practices For Core Principle 15 Do Not Conflict 
With Core Principle 16.
    CME challenged Core Principle 15's applicability to the acceptable 
practices, contending that because Core Principle 16 is the only core 
principle that mentions board composition, it is the only source of 
authority the Commission may use for this purpose, and that it is 
limited to mutually-owned DCMs.\28\ Similarly, NYBOT and KCBT contended 
that as member-owned DCMs, they are subject to Core Principle 16's 
requirement to maintain governing boards that ``reflect[ ] market 
participants,'' and should not face any other board composition 
provision.\29\
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    \28\ CME CL 29 at 4-5. Core Principle 16 states: ``COMPOSITION 
OF BOARDS OF MUTUALLY OWNED CONTRACT MARKETS.--In the case of a 
mutually owned contract market, the board of trade shall ensure that 
the composition of the governing board reflects market 
participants.'' CEA Sec.  5(d)(16), 7 U.S.C. 7(d)(16).
    \29\ NYBOT CL 21 at 4; KCBT CL 8 at 3.
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    Core Principle 16 requires a mutually owned board of trade to 
ensure that the composition of its governing board reflects market 
participants. Based on its plain language, Core Principle 16 is limited 
to that goal,\30\ and has no bearing on the entirely separate goal of 
Core Principle 15 to ``minimize conflicts of interest in the decision-
making process of the contract market,'' whether or not it is mutually 
owned. Core Principle 16 applies only to mutually owned contract 
markets and directs that their governing boards must fairly represent 
market participants. Core Principle 15 applies to all contract markets, 
no matter how organized, and directs them to minimize conflicts of 
interest. Conflicts may be structural as well as personal. Core 
Principle 15 embraces both and supports the public director membership 
requirement for

[[Page 6942]]

boards of DCMs. Accordingly, Core Principle 16 does not limit the 
Commission's authority to issue acceptable practices to increase public 
director representation on DCM boards in order to minimize conflicts of 
interest under Core Principle 15.
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    \30\ There is no legislative history concerning Core Principle 
16 other than the statutory language itself.
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    b. The Acceptable Practices for Core Principle 15 Are Not Contrary 
to the CEA's Text.
    Other opposing comments based on the text of Core Principle 15 
substitute the Commission's straightforward reading of the statute with 
targeted interpretations of individual words and phrases. The 
Commission believes that these comments do not rise to the stature of 
significant questions of statutory interpretation. For instance, 
various commenters contended that Core Principle 15 says ``minimize'' 
conflicts of interest, not ``eliminate'' them, as they argue the 
Commission seeks to do with the Board Composition Acceptable 
Practice.\31\ However, if the Commission had sought to ``eliminate'' 
conflicts of interest, the Commission could have imposed a 100% public 
director requirement. Certainly any less-than-100% public director 
requirement may not eliminate all conflicts of interest.
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    \31\ See, e.g., KCBT CL 8 at 2 and Roberts & Moran CL 27 at 1-2.
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    Another such comment stated that Core Principle 15 applies to 
``rules'' and ``process,'' but board composition is contained in DCM 
``bylaws'' (not rules), and a change to board composition is not a 
``process.'' \32\ Contrary to this commenter's restrictive 
interpretation of the term, ``rule'' is defined broadly in Commission 
regulations to include by-laws.\33\ Thus, the mere mention of ``rules'' 
in Core Principle 15 has no bearing on the Commission's authority. In 
addition, Core Principle 15 provides that a DCM shall establish and 
enforce rules to minimize conflicts of interest in the decision-making 
process of the contract market and establish a process for resolving 
such conflicts of interest. The two requirements are not mutually 
exclusive.
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    \32\ NYMEX CL 28 at 6.
    \33\ See Commission Reg. 40.1(h), 17 CFR 40.1(h).
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    Another commenter stated that Core Principle 15 provides that a DCM 
shall ``enforce'' rules, and thereby contemplates action against 
individuals rather than the DCM itself.\34\ In fact, Core Principle 15 
states ``establish and enforce'' rules. Use of the conjunctive belies 
any contention that Core Principle 15 was intended to be directed 
solely to individuals.
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    \34\ NYMEX CL 28 at 6.
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    Numerous comments of this type were received, none of which 
constitutes a serious challenge to the Commission's legal authority and 
reasonable interpretation of Core Principle 15.
    c. The Acceptable Practices for Core Principle 15 Are Not Contrary 
to Congressional Intent in Enacting the CFMA.
    Several commenters, including NYMEX and CBOT, contended that the 
Board Composition Acceptable Practice is contrary to Congress' intent 
in enacting Core Principle 15 and the CFMA.
    Specifically, CBOT stated that prior to the CFMA's enactment, the 
CEA treated board composition and conflicts of interest in two distinct 
provisions of the statute. In passing the CFMA, Congress omitted the 
board composition provision and kept the conflicts of interest 
provision. CBOT interpreted this as evidence that Congress did not view 
board composition as a mechanism to minimize conflict of interests.\35\ 
We believe that the legal import of silence as a statutory canon of 
construction in these circumstances is a weak indicator of 
Congressional intent.\36\ Moreover, inclusion of public directors on 
company boards is a widely accepted means to reduce conflicts of 
interest.\37\ Congress has in other contexts recognized the utility of 
public directors in controlling conflicts of interest.\38\ Interpreting 
the CFMA as the CBOT advocates would require the Commission to infer 
that Congress was unaware of its own enactments, as well as the 
aforementioned wide acceptance of public directors for reducing 
conflicts, which the Commission is not prepared to do.
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    \35\ CBOT CL at 5-6.
    \36\ See, e.g., U.S. v. Vonn, 535 U.S. 55, 65 (2002); Pauley v. 
Bethenergy Mines, Inc., 501 U.S. 680, 703 (1991) (internal citation 
omitted).
    \37\ See, e.g., NYSE Corporate Governance Rule 303A 
(commentary).
    \38\ See Section 10(a) of the Investment Company Act of 1940, 7 
U.S.C. 80a-10(a); Burks v. Lasker, 441 U.S. 471, 484 (1979).
---------------------------------------------------------------------------

    Similarly, NYMEX commented that when the CFMA was enacted there was 
a general understanding among DCMs, Commission staff, and legislators 
that Congress did not intend the Commission to establish board 
composition requirements for demutualized DCMs, which would instead be 
subject to corporate governance and NYSE listing standards.\39\ A 
congressional comment letter stated that it does not ``appear'' that 
Congress intended the Commission to address board composition in the 
instance of small mutually-owned DCMs like KCBT.\40\
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    \39\ NYMEX CL 28 at 5-6.
    \40\ Roberts & Moran CL 27 at 1-2.
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    No commenter, however, cited any legislative history supporting 
these views, and no rule of statutory or legal interpretation compels 
the Commission to adopt them. The Commission may interpret the CEA 
according to its reasoned discretion and agency expertise given the 
absence of any contrary indication of Congressional intent at the time 
the CFMA was enacted.
    Various commenters also asserted that the proposed acceptable 
practices in general are counter to the spirit of the CFMA, which 
transformed the Commission into an oversight agency.\41\ They contended 
also that the 50% public board member requirement in the proposed Board 
Composition Acceptable Practice is stricter than the former statutory 
requirement that DCM boards have 20% independent directors.\42\ This 
comment would apply equally to the minimum 35% requirement contained in 
the final acceptable practice. These commenters, however, overlook the 
essential fact that the acceptable practices--unlike the pre-CFMA 20% 
rule--are safe harbors, not statutory mandates. Persons taking this 
view appear to want the Commission to do nothing at all--neither issue 
rules nor announce nonbinding acceptable practices that embody high 
standards.
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    \41\ See, e.g., NYMEX CL 28 at 9-10.
    \42\ See, e.g., CME CL 29 at 12.
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    One commenter argued that the Commission did not subject DCMs to 
Commission Rule 1.64 (containing the board composition requirement for 
non-member representation) \43\ when it adopted Commission Rule 38.2 
\44\ shortly after the enactment of the CFMA, thus suggesting that the 
Commission's interpretation was that Core Principle 15 did not impose a 
board composition requirement.\45\
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    \43\ 17 CFR 1.64.
    \44\ Commission Rule 38.2 contains an exemption for DCMs from 
all Commission regulations except those specifically enumerated. 17 
CFR 38.2.
    \45\ NYMEX CL 28 at 15.
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    The Commission did not adopt acceptable practices for all of the 
core principles when it promulgated Commission Rule 38.2. Nor did the 
Commission permanently reserve from exemption all regulations that are 
reflected in core principles. Indeed, in January 2006, the Commission 
added Commission Rule 1.60 to the enumerated list of regulations to 
which DCMs are subject pursuant to Commission Rule 38.2.\46\ 
Accordingly,

[[Page 6943]]

the fact that Commission Rule 1.64 was not specifically exempted when 
Commission Rule 38.2 was promulgated is not a reliable indicator of the 
Commission's interpretation of Core Principle 15. Moreover, not long 
after Commission Rule 38.2 was issued, the Commission began the SRO 
Review to examine governance issues in order to determine whether 
action was warranted. Thus, even if the omission of Commission Rule 
1.64 from the enumerated regulations in Commission Rule 38.2 were 
somehow indicative of a contemporaneous interpretation by the 
Commission of Core Principle 15, a matter that the Commission does not 
concede, the Commission's evolving views--based on the extensive record 
developed during the course of the SRO Review--support its current 
interpretation that Core Principle 15 authorizes it to adopt the Board 
Composition Acceptable Practice.
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    \46\ See 71 FR 1953 (Jan. 12, 2006).
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    d. Acceptable Practices Are Justified As A Prophylactic Measure.
    Several commenters contended that the acceptable practices lack 
factual support demonstrating a need for their issuance. They argued 
that the Commission did not point to any specific event or documented 
self-regulatory failure or allegation of such failure in support of the 
acceptable practices.\47\ Several commenters contended that the studies 
cited by the Commission in the proposing release applied only to the 
securities industry, and thus were inapposite to conditions in the 
futures industry.\48\
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    \47\ See CME CL 29 at 9; NYMEX CL 28 at 11-12; NYBOT CL 22 at 4; 
CBOT CL 21 at 3.
    \48\ See, e.g., NYMEX CL 28 at 11-13; CME CL 29 at 9; NYBOT CL 
22 at 2; Comment of Donald L. Gibson, CL 25 at 1.
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    These comments are misplaced. Although the Commission did not 
specifically identify futures industry self-regulatory lapses in 
support of the acceptable practices, it identified significant trends 
in the futures industry, including increased competition and changing 
ownership structures, that justify the acceptable practices as a 
prophylactic measure to minimize conflicts in decision making and to 
promote public confidence in the futures markets in the altered, 
demutualized, and more competitive landscape. Commenters pointed to 
nothing in the CEA, nor has the Commission found anything, to suggest 
that Congress intended to restrict the authority of the Commission to 
make ``precautionary or prophylactic responses to perceived risks,'' 
that would render the Commission's action a violation of the CEA.\49\
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    \49\ Chamber of Commerce v. SEC, 412 F.3d 133, 141 (D.C. Cir. 
2005).
---------------------------------------------------------------------------

    e. Acceptable Practices for Core Principle 15 Do Not Conflict with 
Guidance to Core Principle 14.
    Another issue raised is whether the new acceptable practices for 
Core Principle 15 conflict with guidance issued for Core Principle 
14.\50\ One commenter asserted that guidance to Core Principle 14 
suggests that directors of DCMs should, at a minimum, be market 
participants, contrary to the proposed ``public director'' 
definition.\51\ This contention misreads the guidance for Core 
Principle 14. Minimum standards for directors provided in the guidance 
are derived from the bases for refusal to register persons under CEA 
Section 8a(2),\52\ and from the types of serious disciplinary offenses 
that would disqualify persons from board and committee service under 
Commission Rule 1.63.\53\ Nothing in the Application Guidance for Core 
Principle 14 requires directors to be market participants. Moreover, a 
significant number of DCMs currently have directors on their boards who 
are not market participants.
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    \50\ Core Principle 14 provides that a ``Board of Trade shall 
establish and enforce appropriate fitness standards for directors 
[and others].'' CEA Sec.  5(d)(14), 7 U.S.C. 7(d)(14).
    \51\ CME CL 29 at 9.
    \52\ 7 U.S.C. 12a(2).
    \53\ 17 CFR 1.63. See 17 CFR Part 38, Appendix B, Core Principle 
14 (``Application Guidance'').
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    f. Acceptable Practices for Core Principle 15 Do Not Impermissibly 
Shift the Burden to DCMs for Demonstrating Compliance.
    Finally, CME, CBOT, and NYMEX contended that the Board Composition 
Acceptable Practice impermissibly shifts the burden of demonstrating a 
DCM's compliance with Core Principle 15 from the Commission to the DCM 
if a DCM elects not to comply with the acceptable practices.
    There is no burden shifting here. All DCMs are required to 
demonstrate to the Commission how they are complying with the core 
principles. Without such a factual demonstration, the Commission could 
not determine whether a contract market is in compliance with the core 
principles, and thus the Commission could not meet its obligations 
under the CEA.\54\ Compliance with these acceptable practices merely 
eliminates the need for a DCM to demonstrate to the Commission that it 
is complying with certain aspects of Core Principle 15. It follows that 
a contract market that does not comply with the acceptable practices 
must demonstrate to the Commission that it is complying with Core 
Principle 15 by other means, as stated in the release.
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    \54\ See CEA Sec.  5c(d), 7 U.S.C. 7a-2(d).
---------------------------------------------------------------------------

B. Policy Comments: Public Comments Received and the Commission's 
Response

1. General Comments
    The Commission received a series of general comments, as discussed 
more fully below, both in support of and in opposition to the overall 
direction and findings of the proposed acceptable practices.
    a. The proposed acceptable practices are inflexible; DCMs should be 
free to determine their own methods of core principle compliance.
    Several commenters stated that, consistent with the CFMA, DCMs, and 
not the Commission, should determine the composition of their boards 
and committees, and should have the discretion to establish their own 
definition of ``public director.'' One commenter noted that the concept 
of membership has evolved as markets have become increasingly 
electronic and global, and now encompasses a growing number of new 
types of market participants (which consequently reduces the population 
of potential public directors). Commenters argued that DCMs should be 
permitted to tap these new types of members for service as directors, 
bringing market knowledge and differing perspectives to their boards, 
rather than adding public directors, who, as defined by the Commission, 
will lack experience and expertise. It was further argued that DCMs 
should be permitted to decide for themselves how to constitute their 
boards in order to obtain the necessary knowledge, experience, and 
expertise that will permit them to serve their economic functions and 
the public interest.
    With respect to the other committees and panels addressed in the 
proposal, commenters stated that each DCM should be permitted to 
determine the appropriate size and composition of its executive 
committee, and likewise should be permitted: To determine whether to 
establish an ROC; to determine the extent of an ROC's responsibilities; 
and to determine the most appropriate composition for such committee. 
Commenters also stated that each DCM should be permitted to determine 
the composition and the structure of its disciplinary committees in 
order to ensure that decisions are informed by knowledge and 
experience.
    Numerous commenters opined that the proposals are inflexible, 
arbitrary, or

[[Page 6944]]

overly prescriptive. Among other things, commenters stated that the 
regulatory proposals: could stifle vital day-to-day market functions; 
Could swing the balance too far towards rigid, arbitrary requirements 
when there is no demonstrable need for such action; are contrary to the 
spirit and intent of the CFMA and the market-oriented, principle-based 
structure authorized by that legislation; unnecessarily micromanage the 
operations of DCMs; fail to recognize the changing definition and 
increasing breadth of the concept of DCM membership; inflexibly impose 
uniform requirements upon all DCMs without regard to the nature of a 
particular DCM or the products traded on that DCM; and should be 
presented not as a model for DCMs to adopt, but rather as examples of 
ways for DCMs to meet core principle requirements.
    Commenters also expressed concern that a bright-line test regarding 
the proper number of public directors will become the de facto 
requirement for all DCMs and will severely limit the ability of DCMs to 
undertake other approaches to achieving the general performance 
standard set by the core principles. Some commenters also contended 
that requiring a DCM that does not meet the proposed acceptable 
practices to demonstrate compliance with Core Principle 15 through 
other means impermissibly shifts the burden of proof to DCMs to justify 
departures from the acceptable practices, when the Act gives DCMs 
reasonable discretion in how they comply with the core principles. 
Another commenter noted that since the Commission has proposed absolute 
numerical standards as a means of avoiding conflicts of interest, there 
is no legitimate way to prove compliance by other means.
    b. Safeguards are already in place to protect against conflicts of 
interest at publicly traded, mutually-owned, and other DCMs.
    Numerous commenters opined that the proposals are not necessary 
because there are sufficient safeguards already in place to ensure that 
potential conflicts of interest are adequately identified and 
controlled and that self-regulation remains effective. Several 
commenters argued that small DCMs already have in place adequate 
controls to address potential conflicts of interest, and that the 
Commission conducts an independent review of each DCM's compliance 
department through its rule enforcement review (``RER'') program.\55\ 
Several commenters noted that their board composition standards already 
require public directors (albeit at a level lower than the proposed 50% 
requirement). Those commenters opined that their existing procedures 
for avoiding conflicts and including public participation are 
sufficient and more effective than the proposed 50% public member 
requirement.
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    \55\ The Commission's Division of Market Oversight conducts 
periodic RERs at all DCMs to assess their compliance with particular 
core principles over a one-year target period. Staff's analyses, 
conclusions, and recommendations regarding any identified deficiency 
are included in a publicly available written report.
---------------------------------------------------------------------------

    Commenters also argued that fear of a possible conflict of interest 
between a demutualized DCM's regulatory responsibilities and the 
demands of a for-profit company is without foundatio