Conflicts of Interest in Self-Regulation and Self-Regulatory Organizations, 14051-14053 [E7-5468]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 72, Number 57 (Monday, March 26, 2007)]
[Proposed Rules]
[Pages 14051-14053]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-5468]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

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

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Federal Register / Vol. 72, No. 57 / Monday, March 26, 2007 / 
Proposed Rules

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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

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commission hereby proposes amendments to the Acceptable 
Practices \1\ for section 5(d)(15) (``Core Principle 15'') of the 
Commodity Exchange Act (``CEA'' or ``Act'').\2\ The amendments clarify 
the definition of ``public director'' contained in the Acceptable 
Practices.\3\ The Commission believes that the proposed amendments will 
remove potential ambiguities and correct a technical drafting error. 
The amendments are consistent with the Acceptable Practices' intent to 
ensure the inclusion of truly public directors on designated contract 
market (``DCM'') boards of directors and Regulatory Oversight 
Committees (``ROCs''), as well as truly public persons on their 
disciplinary panels. The Commission welcomes comment on the proposed 
amendments.
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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\ The Act is codified at 7 U.S.C. 1 et seq. (2000).
    \3\ Those Acceptable Practices were adopted by the Commission on 
January 31, 2007, 72 FR 6936 (February 14, 2007), after having been 
originally proposed by the Commission on June 28, 2006, 71 FR 38740 
(July 7, 2006).

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DATES: Comments should be submitted on or before April 25, 2007.

ADDRESSES: Comments should be sent to Eileen A. Donovan, Acting 
Secretary, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, N.W., Washington, DC 20581. Comments may be 
submitted via e-mail at secretary@cftc.gov. ``Regulatory Governance'' 
must be in the subject field of responses submitted via e-mail, and 
clearly indicated in written submissions. Comments may also be 
submitted at https://www.regulations.gov.

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, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    On February 14, 2007, the Commission published final Acceptable 
Practices for Core Principle 15 of the Act.\4\ The published Acceptable 
Practices are the first for Core Principle 15 and are applicable to all 
DCMs.\5\ They pertain to minimizing conflicts of interest in decision 
making by DCMs, and offer all DCMs a ``safe harbor'' by which they may 
minimize such conflicts and thereby comply with Core Principle 15. To 
receive safe harbor treatment, DCMs must implement the Acceptable 
Practices' various operational provisions in their entirety, including 
instituting boards of directors that are composed of at least 35% 
public directors and establishing oversight of all regulatory functions 
through ROCs consisting exclusively of public directors.\6\ In addition 
to these operational provisions, the Acceptable Practices also set 
forth a public director definition. The proposed amendments consist 
exclusively of revisions to that definition.
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    \4\ Core Principle 15 states: ``CONFLICTS OF INTEREST--The board 
of trade shall establish and enforce rules to minimize conflicts of 
interest in the decisionmaking 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).
    \5\ Any board of trade that is registered with the Securities 
and Exchange Commission 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 DCM 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.
    \6\ The Acceptable Practices became effective on March 16, 2007. 
Existing DCMs were given two years, measured from the effective 
date, to achieve full compliance with Core Principle 15.
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II. Need for Clarifying Amendments

    The Commission proposes to amend two subsections of the Acceptable 
Practices, Subsections (b)(2)(ii)(B) and (b)(2)(ii)(C), which together 
with Subsections (b)(2)(i), (b)(2)(ii)(A) and (b)(2)(ii)(D), establish 
the definition of a DCM public director.\7\ In general, the amendments 
address ambiguities that may arise from those provisions' different 
uses of the terms ``affiliate'' and ``affiliated.'' Such uses include 
references to corporate affiliation; personal affiliation; affiliation 
with a DCM member; and affiliation with a firm. The amendments also 
correct a technical drafting error and define ``payments.'' The 
proposed amendments are consistent with the intent of both the proposed 
and final Acceptable Practices, and should not be interpreted as a 
diminution in the level of independence that those criteria are 
intended to ensure for public directors. In light of the nature of 
these amendments, the Commission does not anticipate that it will be 
necessary to extend the comment period.
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    \7\ Other than Subsections (b)(2)(ii)(B) and (b)(2)(ii)(C), the 
Commission is not proposing changes to any other provision of the 
Acceptable Practices for Core Principle 15.
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III. Description of Clarifying Amendments

A. Subsection (b)(2)(ii)(B)

    Subsection (b)(2)(ii)(B) precludes DCM members, employees of 
members, and persons ``affiliated'' with members from service as public 
directors. As adopted, the Acceptable Practices define ``affiliated 
with a member'' as being an officer or director of a member, or having 
``any other relationship with the member such that his or her 
impartiality could be called into question in matters concerning the 
member.'' This impartiality provision reflects a qualitative test 
intended to capture specific disqualifying relationships between 
individuals and DCM members.
    The Commission proposes to amend the definition of ``affiliated'' 
in Subsection (b)(2)(ii)(B) by removing any reference to the 
qualitative ``impartiality'' test outlined above. This eliminates the 
qualitative test and replaces it with an exact articulation of the 
relationships that are prohibited under Subsection (b)(2)(ii)(B).

[[Page 14052]]

Specifically, the amendment states that a person is ``affiliated'' with 
a DCM member, and thus disqualified as a public director, if he or she 
is an ``officer, director, or partner of the member.''

B. Subsection (b)(2)(ii)(C)

    Subsection (b)(2)(ii)(C) creates a bright-line, $100,000 combined 
annual payments test for potential public directors and the firms with 
which they are affiliated (``payment recipients''). A particular 
payment's relevance to the $100,000 bright-line test depends upon the 
source (``payment provider'') and nature of the payment. The Commission 
proposes to amend this subsection to define ``payment;'' clarify the 
term ``affiliate,'' as used in the subsection; remove the term 
``affiliated'' in referring to certain relationships and replace it 
with the specific payment providers and recipients that the Commission 
intends to reach; and correct a technical drafting error.
    The first amendment defines the nature of ``payment,'' limiting it 
to compensation for professional services rendered. The amendment 
reflects the Commission's intent to capture those persons and firms 
providing professional services to a DCM and/or its members, as well as 
the employees, officers, directors, and partners of such firms.
    The second amendment to Subsection (b)(2)(ii)(C) clarifies the 
clause ``any affiliate of the contract market.'' Clarification is 
provided via explicit cross-reference to Subsection (b)(2)(ii)(A), 
which defines the affiliates of a contract market to include the 
parents or subsidiaries of the contract market or entities that share a 
common parent with the contract market. This proposed amendment is 
consistent with the Commission's original intent.
    Two other amendments to Subsection (b)(2)(ii)(C) address payment 
providers and recipients, resolving potential ambiguities arising from 
multiple uses of the term ``affiliated.'' In addition, one of the 
amendments corrects a drafting error in this subsection which resulted 
from the inadvertent inclusion of ``entity'' in the clause ``any person 
or entity affiliated with a member of the contract market'' (``member 
payment-providers provision''). The inclusion of ``entity'' in the 
member payment-providers provision resulted in a standard that 
encompassed a range of payment providers broader than the Commission 
intended. The Commission proposes to remedy its error by deleting 
``entity.''
    With respect to ``affiliated,'' the Commission notes that the term 
is not defined in the member payment-providers provision. Potential 
ambiguity could arise in importing and applying a definition from 
elsewhere in the Acceptable Practices. Accordingly, the Commission 
proposes to amend and clarify the member payment-providers provision by 
replacing the term ``affiliated'' with a precise articulation of the 
member payment providers it intends to reach. Consistent with the 
proposed Acceptable Practices, the Commission proposes to amend the 
adopted member payment-providers provision so that it refers to 
payments ``from a member or an officer or director of a member* * *.''
    Similarly, the Commission has determined to specifically define the 
payment recipients that it intends to reach. In the adopted Acceptable 
Practices, the relevant recipients include ``a firm with which the 
director is affiliated, as defined above,'' implying a cross-reference 
to Subsection (b)(2)(ii)(B). Furthermore, through this cross-reference, 
the payment recipients provision incorporates the qualitative 
impartiality test embedded within the adopted Subsection 
(b)(2)(ii)(B).\8\
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    \8\ Discussed in Section III(A) of this preamble.
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    As previously noted, the Commission has determined that the 
qualitative impartiality test in Subsection (b)(2)(ii)(B) is best 
replaced with a specific articulation of the relevant relationships. 
Similarly, the Commission believes that a specific articulation is 
appropriate with respect to payment recipients in Subsection 
(b)(2)(ii)(C), both to remove any ambiguities which may exist and to 
eliminate the cross-reference upon which the payment recipients 
provision currently relies. Accordingly, the Commission proposes to 
amend Subsection (b)(2)(ii)(C) to reach payments made to the director 
and payments made to firms ``of which the director is an employee, 
officer, director, or partner.''
    Finally, as adopted, the last sentence in Subsection (b)(2)(ii)(C) 
states, in part, that ``compensation for services as a director does 
not count toward the $100,000 payment limit.'' This provision was 
intended to avoid the dilemma of DCM public directors forfeiting their 
public director eligibility because of compensation received for 
serving in such capacity. The Commission notes, however, that proposed 
changes elsewhere in this Subsection contain new references to various 
types of directors and that those changes may create uncertainty as to 
the meaning of ``director'' in this context. Accordingly, the 
Commission proposes to insert ``of the contract market'' after 
``director,'' making clear that compensation for services as a director 
of the contract market does not count toward the $100,000 payment cap.

IV. Related Matters

A. Cost-Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its action before issuing a new regulation or 
order under the CEA.\9\ By its terms, Section 15(a) requires the 
Commission to ``consider the costs and benefits'' of a subject rule or 
order without requiring the Commission to quantify the costs and 
benefits of its action or to determine whether the benefits of the 
action outweigh its costs. Section 15(a) requires that the costs and 
benefits of proposed rules be evaluated in light of five broad areas of 
market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness, and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. In conducting 
its analysis, the Commission may, in its discretion, give greater 
weight to any one of the five enumerated areas of concern and may 
determine that notwithstanding its costs, a particular rule is 
necessary or appropriate to protect the public interest or to 
effectuate any of the provisions or to accomplish any of the purposes 
of the CEA.\10\
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    \9\ 7 U.S.C. 19(a).
    \10\ E.g, Fishermen's Dock Co-op., Inc. v. Brown. 75 F.3d 164 
(4th Cir. 1996); Center for Auto Safety v. Peck, 751 F.2d 1336 (D.C. 
Cir. 1985)(agency has discretion to weigh factors in undertaking 
costs-benefits analyses).
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    On February 14, 2007, the Commission published final Acceptable 
Practices for Core Principle 15 that included prophylactic measures 
designed to minimize conflicts of interest in a DCM's decision making 
process.\11\ The final rulemaking thoroughly considered the costs and 
benefits of the Acceptable Practices and responded to comments relating 
to the costs of adhering to their requirements.
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    \11\ 72 FR 6936 (February 14, 2007).
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    The amendments herein to the adopted Acceptable Practices are 
proposed to enhance regulatory certainty by addressing potential 
definitional ambiguities and a drafting error. The removal of such 
ambiguities will facilitate the inclusion of public directors on DCM 
governing boards and committees and ensure that DCMs are able to comply 
with the requirements of the Acceptable Practices. In turn,

[[Page 14053]]

compliance with the Acceptable Practices will assure DCMs of their 
compliance with the requirements of Core Principle 15 as they pertain 
to conflicts of interest in self-regulation and self-regulatory 
organizations. The amendments should not impose additional costs, but 
in fact may reduce costs of compliance in light of the removal of 
ambiguities. They assure that what is intended to be a bright-line test 
operates as such. After considering the above mentioned factors and 
issues, the Commission has determined to propose these amendments to 
the Acceptable Practices of Core Principle 15. The Commission 
specifically invites public comment on its application of the criteria 
contained in Section 15(a) of the Act and furthermore invites 
interested parties to submit any quantifiable data that they may have 
concerning the costs and benefits of the proposed amendments to the 
Acceptable Practices of Core Principle 15.

B. Paperwork Reduction Act of 1995

    These proposed amendments to the Acceptable Practices of Core 
Principle 15 would not impose any new recordkeeping or information 
collection requirements, or other collections of information that 
require approval of the Office of Management and Budget under 44 U.S.C. 
3501, et seq. Accordingly, the Paperwork Reduction Act does not apply. 
We solicit comment on the accuracy of our estimate that no additional 
recordkeeping or information collection requirements or changes to 
existing collection requirements would result from the amendments 
proposed herein.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., requires 
federal agencies, in promulgating rules, to consider the impact of 
those rules on small entities. The proposed amendments to the 
Acceptable Practices for Core Principle 15 affect DCMs. The Commission 
has previously determined that DCMs are not small entities for purposes 
of the Regulatory Flexibility Act.\12\ Accordingly, the Chairman, on 
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) 
that the proposed amendments to the Acceptable Practices will not have 
a significant economic impact on a substantial number of small 
entities.
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    \12\ See Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618, 18619 (Apr. 30, 1982).
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V. Text of Proposed Amendments to Acceptable Practices for Core 
Principle 15

List of Subjects in 17 CFR Part 38

    Commodity futures, Reporting and recordkeeping requirements.

    In light of the foregoing, and pursuant to the authority in the 
Act, and in particular, Sections 3, 5, 5c(a) and 8a(5) of the Act, the 
Commission hereby proposes to amend Part 38 of Title 17 of the Code of 
Federal Regulations as follows:

PART 38--DESIGNATED CONTRACT MARKETS

    1. The authority citation for part 38 continues to read as follows:

    Authority: 7 U.S.C. 2, 5, 6, 6c, 7, 7a-2, and 12a, as amended by 
Appendix E of Pub. L. 106-554, 114 Stat. 2763A-365.

    2. In Appendix B to Part 38 amend paragraphs (b)(2)(ii)(B) and 
(b)(2)(ii)(C) of the Acceptable Practices for Core Principle 15 to read 
as follows:

Appendix B to Part 38--Guidance on, and Acceptable Practices in, 
Compliance with Core Principles

* * * * *

Core Principle 15 of section 5(d) of the Act: CONFLICTS OF INTEREST

* * * * *
    (b) * * *
    (2) * * *
    (ii) * * *
    (B) The director is a member of the contract market, or a person 
employed by or affiliated with a member. ``Member'' is defined 
according to Section 1a(24) of the Commodity Exchange Act and 
Commission Regulation 1.3(q). In this context, a person is 
``affiliated'' with a member if he or she is an officer, director, 
or partner of the member;
    (C) The director, or a firm of which the director is an 
employee, officer, director or partner, receives more than $100,000 
in combined annual payments from the contract market, any affiliate 
of the contract market, as defined in Subsection (2)(ii)(A), or from 
a member or an officer or director of a member of the contract 
market. As used in this Subsection (2)(ii)(C), ``payments'' means 
compensation for professional services. Compensation for services as 
a director of the contract market does not count toward the $100,000 
payment limit, nor does deferred compensation for services prior to 
becoming a director, so long as such compensation is in no way 
contingent, conditioned, or revocable;
* * * * *

    Issued in Washington, DC, on March 20, 2007 by the Commission.
Eileen A. Donovan,
Acting Secretary of the Commission.

 [FR Doc. E7-5468 Filed 3-23-07; 8:45 am]
BILLING CODE 6351-01-P