Conflicts of Interest in Self-Regulation and Self-Regulatory Organizations, 3475-3480 [E9-891]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 74, Number 12 (Wednesday, January 21, 2009)]
[Proposed Rules]
[Pages 3475-3480]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-891]


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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 (``Commission'').

ACTION: Proposed rule; withdrawal of previous proposed rule.

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SUMMARY: On January 31, 2007, the Commission adopted its first 
acceptable practices for Section 5(d)(15) (``Core Principle 15'') of 
the Commodity Exchange Act (``Act'').\1\ As with all other acceptable 
practices, those for Core Principle 15 are a safe harbor that 
designated contract markets (``DCMs'') can use to demonstrate core 
principle compliance. The acceptable practices contain four 
provisions--three are ``operational provisions'' and one provides 
necessary definitions, including a definition of ``public director.'' 
All four provisions were published simultaneously in the Federal 
Register on February 14, 2007, and became effective on March 16, 
2007.\2\ Existing DCMs were given a two-year phase-in period to 
implement the acceptable practices or otherwise demonstrate full 
compliance with Core Principle 15.
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    \1\ The Act is codified at 7 U.S.C. 1 et seq. (2000). The 
acceptable practices for the DCM core principles reside in Appendix 
B to Part 38 of the Commission's Regulations, 17 CFR Part 38, App. 
B. 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 
section 5(d)(15). 7 U.S.C. 7(d)(15).
    \2\ 72 FR 6936 (February 14, 2007).
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    On March 26, 2007, the Commission published certain proposed 
amendments to the definition of public director in the acceptable 
practices.\3\ The Commission received six comment letters, but did not 
act upon the proposed amendments.\4\ Subsequently, on November 23, 
2007, the Commission published a stay of the entire acceptable 
practices for Core Principle 15 in the Federal Register.\5\ The 
Commission noted that absent a clear and settled definition of public 
director, the acceptable practices' three operational provisions were 
difficult to implement. To bring further clarity to this term and move 
to finalize the underlying acceptable practices, the Commission hereby 
withdraws the proposed amendments to the definition of public director 
published on March 26, 2007, and proposes and seeks public comment on 
updated proposed amendments to the definition of public director, as 
described below. This proposal does not amend the other provisions 
contained in the adopted acceptable practices, including the DCM 
requirement for a regulatory oversight committee (``ROC'') consisting 
of all public directors and a board of directors with at least 35% 
public directors. The November 23, 2007 stay remains in effect until 
further notice by the Commission.
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    \3\ 72 FR 14051 (March 26, 2007). Under the acceptable 
practices, the definition of ``public director'' is also relevant to 
members of DCM regulatory oversight committees (all of whom must be 
public directors) and to members of DCM disciplinary panels 
(panelists need not be directors, but panels must include at least 
one member who meets certain elements of the public director 
definition).
    \4\ The comment letters are available on the Commission's Web 
site, at: https://www.cftc.gov/lawandregulation/federalregister/
federalregistercomments/2007/07-001.html.
    \5\ 72 FR 65658 (November 23, 2007).

DATES: Comments on the new proposed amendments should be submitted on 
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or before February 20, 2009.

ADDRESSES: Comments should be sent to David Stawick, Secretary, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., 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 on 
written submissions. Comments may also be submitted at https://
www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Rachel F. Berdansky, 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:

I. Background

A. Procedural History

    As noted above, the Commission adopted its first acceptable 
practices for Core Principle 15 on January 31, 2007. In order to 
receive the benefit of the safe harbor provided by the acceptable 
practices, a DCM is required to satisfy all four of the included 
provisions. The acceptable practices include three operational 
provisions pertaining to DCM boards of directors, the insulation and 
oversight of self-regulatory functions, and the composition of 
disciplinary panels. In particular, the acceptable practices require 
that a DCM's board be composed of at least 35% public directors. They 
also require that a DCM's regulatory programs fall under the authority 
and oversight of a board-level ROC consisting exclusively of public 
directors. Finally, the acceptable practices require that a DCM's 
disciplinary panels include at least one public person. These 
provisions remain unchanged by this proposed rule.

[[Page 3476]]

    All three operational provisions are dependent on the presence of 
one or more ``public'' persons, either public directors serving on the 
board, public directors serving on the ROC, or public disciplinary 
panel members serving on adjudicatory bodies. Thus, the acceptable 
practices include an important fourth provision that defines ``public 
director'' and also impacts disciplinary panel members. The definition 
of public director includes two separate elements.\6\ The first and 
most important element is an overarching materiality test, which 
provides that to qualify as a public director, the director must first 
be found ``to have no material relationship with the contract market.'' 
The second element consists of a series of bright-line tests that 
outline specific relationships that are per se material and 
automatically disqualify a director from service as a public director.
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    \6\ While not required under these acceptable practices, the 
Commission believes DCMs benefit from endeavoring to recruit their 
public directors from a broad and culturally diverse pool of 
qualified candidates.
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    The acceptable practices were published in the Federal Register on 
February 14, 2007, with an effective date of March 16, 2007. Shortly 
thereafter, the Commission proposed certain clarifying and other 
amendments to the definition of public director.\7\ However, those 
amendments were limited to the bright-line tests. In proposing those 
amendments, the Commission emphasized that they should not be read as a 
diminution of the public representation, conflict-of-interest 
mitigation, and self-regulatory insulation intended by the acceptable 
practices. To that end, all three operational provisions in the 
acceptable practices remained as originally adopted. The Commission 
received six comment letters in response to the March 26, 2007, 
proposed amendments, including letters from the National Futures 
Association (``NFA''); the Futures Industry Association (``FIA''); the 
CBOE Futures Exchange (``CFE''); the Chicago Board of Trade (``CBOT''); 
the Chicago Mercantile Exchange (``CME'') and Kansas City Board of 
Trade (``KCBT'') writing jointly; and Mr. Dennis Gartman (``Gartman'').
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    \7\ In addition to the clarifying amendments, the Commission 
also proposed to correct a technical drafting error.
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    The six comment letters included general observations on the merits 
of the entire acceptable practices for Core Principle 15. They also 
included comments on specific provisions of the acceptable practices 
and on the proposed amendments to the definition of public director 
itself. CFE, for example, stated its belief that the acceptable 
practices will ``serve to enhance the self regulatory process'' and 
``have a positive impact'' on exchange governance and conflicts of 
interest.\8\ At the same time, CFE requested amendments or 
clarifications with respect to the payments permitted to public 
directors; allowing overlapping public directors between a DCM and its 
affiliates; and compensation for director services.
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    \8\ CFE Comment Letter at 1.
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    The joint comment letter from CME and KCBT repeated prior arguments 
against the acceptable practices. Among other things, the two exchanges 
stated that ``the CEA does not grant the Commission authority to 
require an arbitrary minimum percentage of `public' directors on 
publicly-traded DCM boards.'' \9\ They also stated that ``the Act does 
not grant the Commission power to dictate the formation or conduct of a 
ROC.'' \10\ The Commission has considered these arguments before and 
addressed them at length in the public record.\11\
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    \9\ CME and KCBT Comment Letter at 2.
    \10\ Id.
    \11\ The Commission carefully reviewed and addressed challenges 
to its authority when it originally adopted the acceptable practices 
for Core Principle 15. See 72 FR 6936, 6940-6943 (providing an 
overview of the Commission's authority to issue the acceptable 
practices and explaining that the acceptable practices for Core 
Principle 15: (a) Do not conflict with Core Principle 16; (b) are 
not contrary to the text of the Act; (c) are not contrary to 
Congressional intent in enacting the Commodity Futures Modernization 
Act; (d) no not impermissibly shift the burden to DCMs for 
demonstrating compliance; (e) do not conflict with the guidance to 
Core Principle 14; and (f) are justified as a prophylactic measure).
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    The CBOT's comment letter noted that CBOT ``continues to question 
the need for the acceptable practices in general'' and that it 
``believes that the Commission's definition of a public director is 
overbroad.'' \12\ CBOT also elaborated on its specific concerns 
regarding the definition of public director. The FIA stated that ``FIA 
is supportive of the acceptable practices adopted by the Commission * * 
* and compliments the Commission and its staff for their extensive work 
in this important area.'' \13\ However, FIA also asked the Commission 
to reconsider elements of the bright-line tests for public director. In 
particular, FIA argued that ``the Commission's $100,000 professional 
service payment criterion sweeps too broadly insofar as it equates 
service to a DCM with service to a DCM member.'' \14\
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    \12\ CBOT Comment Letter at 1.
    \13\ FIA Comment Letter at 1-2.
    \14\ Id. at 2.
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    Additional comment letters were received from NFA and from Gartman. 
NFA noted that the acceptable practices for Core Principle 15 ``do not 
apply to NFA's governance and NFA again applauds the Commission's 
decision not to include registered futures association's [sic]'' under 
these acceptable practices.\15\ NFA then provided examples of how the 
acceptable practices might impact NFA if they were applicable to it. 
NFA also proposed changes to the definition of public director, 
including that the Commission ``eliminate * * * criteria based upon 
payments to `firms' by `members'.'' \16\ Finally, Gartman summarized 
his experience in the futures industry and noted that he served as a 
director of the KCBT. Gartman was concerned that the limitation on 
payments to public directors would preclude him from serving as a 
director of the exchange. Gartman stated that he ``clearly earn[s] more 
than $100,000/year from business directly related to the futures 
industry, and it is because of that relationship that your new rules 
will preclude me from remaining as a Director of the KC Board of 
Trade.'' \17\
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    \15\ NFA Comment Letter at 1.
    \16\ Id at 2.
    \17\ Gartman Comment Letter at 1.
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    The Commission carefully considered the six comment letters noted 
above. After due deliberation, however, it determined not to act on the 
proposed amendments or the comments received. Instead, on November 23, 
2007, the Commission gave notice via the Federal Register that the 
acceptable practices for Core Principle 15 were stayed indefinitely and 
in their entirety. Likewise, the two-year compliance period for 
existing DCMs also was stayed. With the definition of public director 
in flux, the Commission, with its two new members, concluded that a 
stay was an appropriate response to the resulting regulatory 
uncertainty while it considered ways to move forward on the proposal.
    In issuing the stay, the Commission explained that it would 
``carefully consider its next steps'' with respect to the acceptable 
practices.\18\ It is noteworthy, however, that the Commission did not 
repeal or in any way diminish the acceptable practices, nor did it 
abandon its commitment to the principles that they embody. Now, 
returning again to those principles, the Commission fully reasserts the 
fundamental philosophy underpinning the acceptable practices for Core 
Principle 15: that potential conflicts of

[[Page 3477]]

interest in self-regulation by for-profit and publicly-traded DCMs--
structural conflicts of interest--can be addressed successfully through 
appropriate measures embedded in DCMs' governance structures.
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    \18\ 72 FR 65658, 65659 (November 23, 2007).
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B. The Commission Remains Committed to the Acceptable Practices for 
Core Principle 15

    Through this release, and the proposed amendments to the bright-
line tests for public director contained herein, the Commission 
reaffirms its support for public representation on DCM boards of 
directors and disciplinary panels, including the 35% public board 
standard first enunciated in the acceptable practices. Likewise, the 
Commission reaffirms its strong commitment to ROCs, consisting 
exclusively of public directors, to oversee all facets of DCMs' self-
regulatory programs and staff. In short, while the definition of public 
director is subject to refinement, the importance of public directors' 
purpose and placement at the center of effective self-regulation 
remains intact, as do the acceptable practices for Core Principle 15 
that provide secure safe harbors for compliance.
    Equally important, the Commission remains committed to a definition 
of public director that is both meaningful and effective. To that end, 
the Commission hereby withdraws its previous proposal to amend the 
bright-line tests for public director and seeks public comment on new 
bright-lines that simplify and clarify the definition of ``public 
director'' while maintaining its integrity and effectiveness.
    The Commission believes that, while the changes summarized below 
are material, they are fundamentally consistent with the design and 
purposes of the acceptable practices as originally conceived. Most 
importantly, the new proposed amendments touch only on the bright-line 
tests. Thus, the single most important element of the definition of 
public director--the overarching ``material relationship'' test in 
section (2)(i)--remains unchanged. As before, ``[t]o qualify as a 
public director of a contract market, an individual must first be 
found, by the board of directors, on the record, to have no material 
relationship with the contract market.'' \19\ And, as before, ``[a] 
material relationship is one that reasonably could affect the 
independent judgment or decision making of the director.'' \20\
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    \19\ Acceptable practices for Core Principle 15 at (b)(2)(i).
    \20\ Id.
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    The practical consequence of the amended bright-line tests for 
public director is that certain relationships that were once 
automatically disqualifying now must be analyzed under the material 
relationship test recited above. This in no way diminishes the 
importance of such relationships. Instead, it makes it incumbent upon 
DCMs to conduct the necessary facts and circumstances analysis to 
determine whether a potential public director's relationship with his 
or her DCM in fact rises to the level of a material relationship. The 
Commission believes that requiring the DCM to conduct this analysis is 
consistent with the spirit and intent of the acceptable practices.
    Fundamentally, the proposed amendments to the bright-line tests 
restate the proposition that while certain director-DCM relationships 
are so clearly material that the Commission must automatically preclude 
them in public directors, the materiality of all other relationships is 
best determined by the DCM, as the need arises and the specific facts 
present themselves. This is especially true with respect to the complex 
business, social, and other relationships that exist at the highest 
levels of corporate management and directorship in the financial 
services industry. In addition, the proposed amendments also serve to 
streamline and clarify the definition of public director in certain 
areas, with the understanding that, in those areas, the overarching 
material relationship test will continue to give the necessary 
protection to the integrity of the ``public director'' designation.
    Finally, while reemphasizing the importance of the material 
relationship test in the definition of public director, the Commission 
also notes its continued commitment to specific bright-line tests for 
director-DCM relationships that, as explained above, are so clearly 
material that they must automatically preclude service as a public 
director. Accordingly, the proposed amendments to the bright-line tests 
retain most of the original substantive content of the tests. As with 
the original bright-line tests, those now proposed touch on a potential 
public director's (A) Employment relationships with the contract 
market; (B) direct and indirect membership relationships with the 
contract market; (C) direct and indirect compensation relationships 
with the contract market; and (D) familial relationships with the 
contract market. The one-year look back period also remains intact, as 
does the requirement that a DCM disclose to the Commission those 
members of its board that are public directors and the basis for those 
determinations. The Commission will also closely scrutinize the 
implementation of the materiality and bright-line tests when conducting 
its routine rule enforcement reviews of the exchanges, to ensure that 
the independence of these public directors is upheld. The proposed 
amendments are summarized below.

C. The Proposed Amendments

    First, in subsection (2)(ii), the Commission proposes to make its 
vocabulary more consistent with that in subsection (2)(i), but without 
altering its meaning. As adopted, the provision states that ``* * * a 
director shall not be considered public if [the bright-line tests are 
not met].'' The Commission proposes that subsection (2)(ii) should 
instead read ``* * * a director shall be considered to have a `material 
relationship' with the contract market if [the bright-line tests are 
not met].'' Because the overarching material relationship test in 
subsection (2)(i) precludes a person with a material relationship from 
serving as a public director, the purpose and effect of the provision 
remains unchanged.
    Second, in subsections (2)(ii)(A) and (2)(iv), the Commission 
proposes amendments that will free a DCM's public directors from 
bright-line tests that they would have failed if they also served as 
directors of the DCM's affiliates. For this purpose, ``affiliate'' is 
proposed to be defined in subsection (2)(ii)(A) to include ``parents or 
subsidiaries of the contract market or entities that share a common 
parent with the contract market.'' Previously, a DCM's public directors 
could also serve as directors of its parent company, but not as 
directors of its subsidiary or sister companies. With this amendment, 
the latter two relationships no longer suffer automatic exclusion. 
Thus, for example, an exchange holding company owning two DCMs could 
place the same public director on the boards of all three entities 
without falling afoul of the acceptable practices and voluntary safe 
harbor for Core Principle 15 if the director separately qualified as a 
public director for each entity.
    The Commission cautions, however, that any affiliate relationships 
must still be scrutinized carefully under the material relationship 
test in subsection (2)(i). As stated previously, the fact that an 
interlocking director relationship is no longer automatically precluded 
under the bright-line tests does not signal that the Commission is no 
longer concerned with this type of relationship. Instead, the point of 
analysis is simply shifted from a preemptive, bright-line determination

[[Page 3478]]

by the Commission to an overarching material relationship test applied 
by the DCM and its board of directors. In this context, the Commission 
notes that certain affiliate relationships could certainly be material. 
For example, a DCM affiliate that is also subject to the DCM's 
regulatory authority (e.g., as a member of the DCM or as a participant 
in its markets) raises obvious concerns.
    Third, the Commission proposes to amend subsection (2)(ii)(B) of 
the definition of public director. As adopted, this subsection 
precludes DCM members, employees of members, and persons affiliated 
with members from service as public directors. Currently, 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'' (emphasis added). As is 
obvious from the statutory text, subsection (2)(ii)(B) effectively 
inserts another material relationship determination in what is an 
otherwise bright-line test. Thus, not only are members and their 
employees, officers, and directors excluded as public directors, but 
another category of potential directors--those having any relationship 
with a member such that his or her impartiality could be called into 
question in matters concerning the member--is also excluded.
    The Commission believes that subsection (2)(ii)(B) should be 
streamlined in three ways. First, any material relationship 
determinations made pursuant to section (2) should take place under the 
overarching material relationship test of subsection (2)(i), and not 
under the bright-line tests of subsection (2)(ii). Second, subsection 
(2)(ii)(B) should set forth the exact membership relationships that are 
automatically precluded. Finally, the subsection should allow the DCM 
to conduct the necessary analysis of the facts and circumstances to 
determine whether employment by a member--or, more likely, employment 
of his or her spouse, parent, child, or sibling--should prove fatal to 
an otherwise qualified public director.
    Each of these changes is reflected in the proposed amendments to 
subsection (2)(ii)(B). The proposed amendments eliminate the material 
relationship test embedded in the original subsection and restructure 
it as a strict bright-line test. The amended subsection also states 
with precision which membership relationships are automatically 
considered material relationships: Neither a DCM member nor its 
officers or directors may serve as public directors of the DCM. 
Finally, a DCM member's employees are no longer automatically precluded 
(unless they are employed as officers or directors). As with other 
amendments proposed herein, however, the Commission again reiterates 
that the amendments merely shift the point of analysis from the bright-
lines of subsection (2)(ii) to the overarching material relationship 
test of subsection (2)(i). As before, the Commission remains concerned 
about any relationship between potential public directors and DCM 
members that could ``affect the independent judgment or decision making 
of the director.''
    Finally, the Commission proposes to amend subsection (2)(ii)(C) of 
the bright-line tests. Here again, the Commission seeks to simplify and 
clarify the provision, and to ensure that the bright-line tests are 
clearly articulated. As adopted, subsection (2)(ii)(C) creates a 
$100,000 combined annual payments test for potential public directors 
and the firms with which they may be 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. In this regard, the subsection does not specify which 
payments should count towards the $100,000 annual cap---all payments or 
only those for certain types of services. In addition, the subsection 
also contains potential ambiguity with respect to the universe of 
potential payment providers and payment recipients.
    The first proposed amendment to subsection (2)(ii)(C) defines the 
nature of ``payment,'' specifying that it is payment for ``legal, 
accounting, or consulting services.'' The second proposed amendment 
clarifies that the relevant payment recipients include the potential 
public director and any firm in which the director is an officer, 
partner, or director. The third proposed amendment to subsection 
(2)(ii)(C) clarifies that the relevant payment providers include the 
DCM and any parent, sister, or subsidiary company of the DCM. Notably, 
the proposed new payment providers provision no longer captures DCM 
members or persons or entities affiliated with members, although such 
relationships should still be analyzed under the overarching 
materiality test of subsection (2)(i). Finally, the Commission proposes 
to amend subsection (2)(ii)(C) to take into account payments to a 
public director in excess of $100,000 by sister and subsidiary 
companies of the DCM. This is consistent with the Commission's intent, 
previously articulated, not to automatically prohibit overlapping 
public directors between DCMs and their affiliates.

II. Related Matters

A. Cost-Benefit Analysis

    Section 15(a) of the Act requires the Commission to consider the 
costs and benefits of its actions before issuing a new regulation or 
order under the Act.\21\ By its terms, Section 15(a) requires the 
Commission to ``consider the costs and benefits'' of a subject rule or 
order, without requiring it 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 interests considerations. In conducting its analysis, 
the Commission may, in its discretion, give greater weight to any one 
of the five enumerated areas of concerns 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.\22\
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    \21\ 7 U.S.C. 19(a).
    \22\ E.g., Fishermen's Dock Co-op., Inc. v. Brown, 75 F3d 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 
cost benefit 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 DCMs' decision making 
processes. 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.
    The new amendments herein to the definition of public director are 
proposed to bring further clarity and finality to the acceptable 
practices for Core Principle 15. The Commission believes that the 
proposed amendments are fully consistent with the design and purpose of 
the acceptable practices as originally conceived. Furthermore, through 
more consistent, streamlined, and precise articulations, the proposed 
amendments will facilitate DCMs' implementation of the acceptable 
practices and thereby further important public interest considerations 
with

[[Page 3479]]

respect to conflicts of interest in DCM self-regulation. In particular, 
the acceptable practices offer all DCMs a safe harbor for compliance 
with Core Principle 15, which requires them to ``establish and enforce 
rules to minimize conflicts of interest in the decision making process 
of the contract market. * * *'' \23\ The acceptable practices' safe 
harbor is based on the inclusion of public directors on their boards; 
the creation and empowerment of ROCs consisting exclusively of public 
directors; and the presence of public persons on DCM disciplinary 
panels. Thus, each of these provisions depends heavily on a clear and 
settled definition of public director. The Commission believes that the 
proposed amendments will not impose any additional costs upon DCMs. To 
the contrary, they may reduce the costs of compliance through 
improvements in the bright-line tests for public director, such that 
the tests truly operate as bright-lines and the definition of public 
director is well-settled.
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    \23\ 7 U.S.C. 7(d)(15).
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    After considering the above mentioned factors and issues, the 
Commission has determined to propose these amendments to the acceptable 
practices for Core Principle 15. The Commission specifically invites 
public comment on its application of the criteria contained in Section 
15(a) of the Act and further 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 for Core 
Principle 15.

B. Paperwork Reduction Act of 1995

    These proposed amendments to the acceptable practices for Core 
Principle 15 will 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 comments 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.\24\ Accordingly, the Acting 
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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    \24\ 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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III. Text of Proposed Amendments

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 Public Law 106-554, 114 Stat. 2763A-365.

    2. In Appendix B to Part 38 revise paragraphs (b)(2)(ii) through 
(b)(2)(v) 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) In addition, a director shall be considered to have a 
``material relationship'' with the contract market if any of the 
following circumstances exist:
    (A) The director is an officer or employee of the contract 
market or an officer or employee of its affiliate. In this context, 
``affiliate'' includes parents or subsidiaries of the contract 
market or entities that share a common parent with the contract 
market;
    (B) The director is a member of the contract market, or an 
officer or director of a member. ``Member'' is defined according to 
Section 1a(24) of the Commodity Exchange Act and Commission 
Regulation 1.3(q);
    (C) The director, or a firm with which the director is an 
officer, director, or partner, receives more than $100,000 in 
combined annual payments from the contract market, or any affiliate 
of the contract market (as defined in Subsection (2)(ii)(A)), for 
legal, accounting, or consulting services. Compensation for services 
as a director of the contract market or as a director of an 
affiliate 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;
    (D) Any of the relationships above apply to a member of the 
director's ``immediate family,'' i.e., spouse, parents, children and 
siblings.
    (iii) All of the disqualifying circumstances described in 
Subsection (2)(ii) shall be subject to a one-year look back.
    (iv) A contract market's public directors may also serve as 
directors of the contract market's affiliate (as defined in 
Subsection (2)(ii)(A)) if they otherwise meet the definition of 
public director in this Section (2).
    (v) A contract market shall disclose to the Commission which 
members of its board are public directors, and the basis for those 
determinations.
* * * * *

    Issued in Washington, DC, on January 12, 2009 by the Commission.
David Stawick,
Secretary of the Commission.

Concurring Statement of Commissioner Jill E. Sommers Regarding the 
Withdrawal of Previously Proposed Amendments to the Acceptable 
Practices for Core Principle 15 and Solicitation of Public Comments on 
New Proposed Amendments

    I fully support the Commission's decision to issue these proposed 
amendments to the bright-line tests for determining when a board member 
has a material relationship with an exchange such that he or she is 
disqualified from serving as a public director. The proposed amendments 
attempt to cure certain ambiguities and complexities that existed in 
the acceptable practices adopted by the Commission on January 31, 2007, 
and the proposed amendments thereto published on March 26, 2007. I 
commend Commission staff for their dedication to this important project 
and their resolve, through several changes in Commission membership, to 
get it right. I believe the amendments proposed today provide a 
workable method of discerning the existence of those relationships that 
should be deemed automatically ``material,'' and appropriately leave to 
the exchanges the responsibility for determining whether other 
circumstances not specified in the bright-line tests may give rise to 
potential conflicts of interest.
    I write separately, however, to express my disagreement with 
issuing the statement contained in footnote six of

[[Page 3480]]

the proposal, that ``the Commission believes DCMs benefit from 
endeavoring to recruit their public directors from a broad and 
culturally diverse pool of qualified candidates.'' The purpose of the 
acceptable practices is to ``ensure that there is adequate independence 
within [exchange] board[s] to insulate [their] regulatory functions 
from the interests of the exchange's management, members and other 
business interests of the market itself.'' 71 FR 38740 (July 7, 2006). 
It is not clear to me how recruiting directors from a culturally 
diverse pool of candidates advances that goal, nor is it a given that 
seating a well-qualified board that is culturally diverse is something 
that may be practicably accomplished. My primary objection, however, is 
based on the fact that we have no legal authority to issue 
pronouncements on the subject. We are not a commission of general 
jurisdiction. Our authority and oversight responsibilities are 
specifically limited by statute and do not include the promotion of 
equal employment opportunity. Moreover, to the extent the Commission 
may be suggesting that exchanges consider factors such as race, gender, 
national origin, or religion in selecting public directors, we may be 
encouraging activity that could potentially violate Title VII of the 
Civil Rights Act of 1964.

Concurring Statement of Commissioner Bart Chilton Regarding the 
Withdrawal of Previously Proposed Amendments to the Acceptable 
Practices for Core Principle 15 and Solicitation of Public Comments on 
New Proposed Amendments

    I concur in the Commission's issuance of the above-referenced 
action. I write separately, however, to comment on certain aspects of 
the proposal of particular interest to me.
    First, I am gratified to see language in the proposal relating to 
my longstanding request that we note to designated contract markets the 
benefits of diversity in recruiting public directors. While this is, as 
stated, not a requirement under the acceptable practices, it is quite 
obviously a laudable and attainable goal, and one that should be 
encouraged.
    Second, I would ask commenters to respond specifically as to 
whether the Commission has included within the proposal all appropriate 
decision-making bodies at designated contract markets, or whether the 
class should be broadened to include entities other than boards of 
directors, executive committees or similarly empowered bodies, 
regulatory oversight committees, and disciplinary panels.
    Lastly, I note with some concern the timeline of this proposal. In 
November 2007, the Commission stayed the ``final'' acceptable practices 
that had been issued in February 2007. This was a necessary action, 
although unfortunate in that it created further delay in an already 
protracted and flawed process. Even more unfortunate, swift action was 
promised on this proposal in December 2007, yet it has taken more than 
a full year to see any progress. As public servants, we can and should 
do better to serve American consumers and businesses.

 [FR Doc. E9-891 Filed 1-16-09; 8:45 am]
BILLING CODE 6351-01-P