Implementation of Conflicts of Interest Policies and Procedures by Futures Commission Merchants and Introducing Brokers, 70152-70159 [2010-29003]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 75, Number 221 (Wednesday, November 17, 2010)]
[Proposed Rules]
[Pages 70152-70159]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-29003]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AC96


Implementation of Conflicts of Interest Policies and Procedures 
by Futures Commission Merchants and Introducing Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is proposing rules to implement new statutory provisions enacted by 
Title VII of the Dodd-Frank Wall Street

[[Page 70153]]

Reform and Consumer Protection Act (Dodd-Frank Act). The proposed 
regulations establish conflicts of interest requirements for futures 
commission merchants (FCMs) and introducing brokers (IBs) for the 
purpose of ensuring that such persons implement adequate policies and 
procedures in compliance with the Commodity Exchange Act (CEA), as 
amended by the Dodd-Frank Act.

DATES: Comments must be received on or before January 18, 2011.

ADDRESSES: You may submit comments, identified by RIN number 3038-AC96 
and FCM-IB Conflicts of Interest, by any of the following methods:
     Agency Web site, via its Comments Online process: https://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.

Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
https://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act, a petition for confidential treatment of 
the exempt information may be submitted according to the procedures 
established in CFTC Regulation 145.9, 17 CFR 145.9.
    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from https://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Associate 
Director, Division of Clearing and Intermediary Oversight, (202) 418-
5684, sjosephson@cftc.gov, or Ward P. Griffin, Counsel, Office of 
General Counsel, (202) 418-5425, wgriffin@cftc.gov, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Act.\1\ 
Title VII of the Dodd-Frank Act \2\ amended the CEA \3\ to establish a 
comprehensive regulatory framework to reduce risk, increase 
transparency, and promote market integrity within the financial system 
by, among other things: (1) Providing for the registration and 
comprehensive regulation of swap dealers and major swap participants; 
(2) imposing clearing and trade execution requirements on standardized 
derivative products; (3) creating rigorous recordkeeping and real-time 
reporting regimes; and (4) enhancing the rulemaking and enforcement 
authorities of the Commission with respect to all registered entities 
and intermediaries subject to the Commission's oversight.
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at https://www.cftc.gov.
    \2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \3\ 7 U.S.C. 1 et seq.
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    This proposed rulemaking relates to the conflicts of interest 
provisions set forth in section 732 of the Dodd-Frank Act. In relevant 
part, section 732 of the Dodd-Frank Act amends section 4d of the CEA to 
direct each FCM and IB to implement conflicts of interest systems and 
procedures that establish safeguards within the firm to ensure that any 
persons researching or analyzing the price or market for any commodity 
are separated by ``appropriate informational partitions'' within the 
firm from review, pressure, or oversight of persons whose involvement 
in trading or clearing activities might potentially bias the judgment 
or supervision of the persons. Section 732 also requires that such 
conflicts of interest systems and procedures ``address such other 
issues as the Commission determines to be appropriate.''
    Section 754 of the Dodd-Frank Act establishes that ``[u]nless 
otherwise provided in this title, the provisions of this subtitle shall 
take effect on the later of 360 days after the date of the enactment of 
this subtitle or, to the extent a provision of this subtitle requires a 
rulemaking, not less than 60 days after publication of the final rule 
or regulation implementing such provision of this subtitle.'' 
Consequently, the Commission will seek to promulgate rules--by July 15, 
2011--implementing the conflicts of interest provisions of section 732 
of the Dodd-Frank Act.
    Accordingly, pursuant to authority granted under sections 4d(c) and 
8a(5) of the CEA, as amended by the Dodd-Frank Act, the Commission is 
proposing to adopt Regulation 1.71 to address potential conflicts of 
interest in the preparation and release of research reports by FCMs and 
IBs, and the establishment of ``appropriate informational partitions'' 
within such firms, as required by the Dodd-Frank Act. The proposed rule 
also will address other issues, such as enhanced disclosure 
requirements, in order to minimize the potential that conflicts of 
interest will arise within FCMs and IBs.
    The proposed rules reflect consultation with staff of the following 
agencies: (i) The Securities and Exchange Commission; (ii) the Board of 
Governors of the Federal Reserve System; (iii) the Office of the 
Comptroller of the Currency; and (iv) the Federal Deposit Insurance 
Corporation. Staff from each of these agencies has had the opportunity 
to provide oral and/or written comments to the proposal, and the 
proposed rules incorporate elements of the comments provided.
    The Commission requests comment on all aspects of the proposed 
rules, as well as comment on the specific provisions and issues 
highlighted in the discussion below.

II. Proposed Regulations

A. Conflicts of Interest in Research or Analysis

    Section 732 of the Dodd-Frank Act requires, in relevant part, that 
FCMs and IBs implement conflicts of interest systems and procedures 
that ``establish structural and institutional safeguards to ensure that 
the activities of any person within the firm relating to research or 
analysis of the price or market for any commodity are separated by 
appropriate informational partitions within the firm from the review, 
pressure, or oversight of persons whose involvement in trading or 
clearing activities might potentially bias the judgment or supervision 
of the persons.''
    The language in section 732 of the Dodd-Frank Act is similar to 
certain language contained in section 501(a) of the Sarbanes-Oxley Act 
of 2002,\4\ which

[[Page 70154]]

amended the Securities Exchange Act of 1934 by creating a new section 
15D. In relevant part, section 15D(a) mandates that the Securities and 
Exchange Commission, or a registered securities association or national 
securities exchange, adopt ``rules reasonably designed to address 
conflicts of interest that can arise when securities analysts recommend 
equity securities in research reports and public appearances, in order 
to improve the objectivity of research and provide investors with more 
useful and reliable information, including rules designed * * * to 
establish structural and institutional safeguards within registered 
brokers or dealers to assure that securities analysts are separated by 
appropriate informational partitions within the firm from the review, 
pressure, or oversight of those whose involvement in investment banking 
activities might potentially bias their judgment or supervision * * 
*.''
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    \4\ Public Law 107-204, 116 Stat. 745 (2002) (codified at 15 
U.S.C. 78o-6).
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    Unlike section 15D of the Securities Exchange Act of 1934, section 
732 of the Dodd-Frank Act does not expressly limit the requirement for 
informational partitions to only those persons who are responsible for 
the preparation of the substance of research reports; rather, section 
732 could be read to require informational partitions between persons 
involved in trading or clearing activities and any person within a FCM 
or IB who engages in ``research or analysis of the price or market for 
any commodity,'' whether or not such research or analysis is to be made 
part of a research report that may be publicly disseminated.
    However, the Commission believes that an untenable outcome could 
result from implementing informational partitions between persons 
involved in trading or clearing activities and all persons who may be 
engaged in ``research or analysis of the price or market for any 
commodity,'' given that persons involved in trading or clearing 
activities are routinely--or even primarily--engaged in ``research or 
analysis of the price or market for'' commodities. Sound trading and/or 
clearing activities necessarily require some form of pre-decisional 
research or analysis of the facts supporting such trading or clearing 
determinations.
    Therefore, given the untenable alternative, the proposed rules 
reflect the Commission's belief that the Congressional intent 
underlying section 732 with respect to ``research and analysis of the 
price or market of any commodity'' is primarily intended to prevent 
undue influence by persons involved in trading or clearing activities 
over the substance of research reports that may be publicly 
disseminated, and to prevent pre-public dissemination of any material 
information in the possession of a person engaged in research and 
analysis, or of the research reports, to traders.
    Many elements of the proposed rule, particularly those provisions 
relating to potential conflicts of interest surrounding research and 
analysis, have been adapted from National Association of Securities 
Dealers (NASD) Rule 2711. To construct the ``structural and 
institutional safeguards'' mandated by Congress under section 732 of 
the Dodd-Frank Act, the proposed rule establishes specific restrictions 
on the interaction and communications between persons within a FCM or 
IB involved in research or analysis of the price or market for any 
derivative \5\ and persons involved in trading or clearing activities. 
The proposed rules also impose duties and constraints on persons 
involved in the research or analysis of the price or market for any 
derivative. For instance, such persons will be required to disclose 
conspicuously during public appearances any relevant personal financial 
interests relating to any derivative of a type that the person follows. 
FCMs and IBs similarly will be obligated to make certain disclosures 
clearly and prominently in research reports, including third-party 
research reports that are distributed or made available by the FCM or 
IB. Further, FCMs and IBs, as well as employees involved in trading or 
clearing activities, will be prohibited from retaliating against any 
person involved in the research or analysis of the price or market for 
any derivative who produces, in good faith, a research report that 
adversely impacts the current or prospective trading or clearing 
activities of the FCM or IB.
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    \5\ Use of the term ``derivative'' is based upon the products 
listed in the definitions of futures commission merchant and 
introducing broker in sections 1a(28) and 1a(29) of the CEA.
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    Although section 732 of the Dodd-Frank Act requires that 
appropriate informational partitions be constructed within FCMs and 
IBs, the Commission recognizes that the appropriateness of such 
partitions may be affected by the size of the FCM or IB and the scope 
of its operations. The Commission invites comment on how these rules 
should apply to FCMs and IBs, considering the varying size and scope of 
the operations of such firms. For instance, NASD Rule 2711(k) provides 
an exception from certain requirements for ``small firms,'' defined to 
include those firms that over the past three years have participated in 
ten or fewer ``investment banking services transactions'' and 
``generated $5 million or less in gross investment banking services 
revenues from those transactions.'' The Commission solicits comment on 
whether a similar approach should be adopted for small FCMs and IBs. 
Moreover, the exceptions to the definition of ``research report'' are 
designed to address issues typically found in smaller firms where 
individuals in the trading unit perform their own research to advise 
their clients or potential clients. These exceptions do not in any way 
impact or lessen the restrictions placed on firms that prepare research 
reports and release them for public consumption. Any attempt by such 
firms to move research personnel into a trading unit to attempt to 
avail themselves of the exception will result in insufficient 
``structural and institutional safeguards'' and will be a violation of 
Section 732 of the Dodd-Frank Act and these Regulations.
    To address the possibility that the proposed rules could be evaded 
by employing research analysts in an affiliate of a FCM or IB, the 
proposed rules also will restrict communications with research analysts 
employed by an affiliate. An affiliate will be defined as an entity 
controlling, controlled by, or under common control with, a FCM or IB.

B. Other Issues

    In addition to mandating the establishment of ``appropriate 
informational partitions'' within FCMs and IBs that focus on the 
activities of persons involved in the ``research or analysis of the 
price or market for any commodity,'' section 732 of the Dodd-Frank Act 
also requires FCMs and IBs to ``implement conflict-of-interest systems 
and procedures that * * * address such other issues as the Commission 
determines to be appropriate.'' Having considered the potential 
conflicts of interest that may arise in a FCM or IB, the Commission is 
proposing rules that will address two general topics: (1) Clearing 
activities; and (2) the potential for undue influence on customers. The 
intended cumulative effect of the proposed rules is to fulfill 
Congress's objective that FCMs and IBs construct ``structural and 
institutional safeguards'' to minimize the potential conflicts of 
interest that could arise within such firms.
    With respect to the proposed language relating to clearing 
activities, although the Commission is exercising its statutory 
authority under section 4d(c)(2) of the CEA, as amended by the Dodd-
Frank Act, the impetus underlying the proposed language originates in 
the Dodd-Frank Act: Section 731. Section 731 creates a new

[[Page 70155]]

section 4s of the CEA, which provides for the registration and 
regulation of swap dealers (SDs) and major swap participants (MSPs). 
New section 4s contains a conflicts of interest provision that is 
similar--though not identical--to the conflicts of interest provision 
in section 732 of the Dodd-Frank Act. New section 4s(j)(5) requires the 
establishment of ``structural and institutional safeguards'' 
surrounding the activities of any person ``providing clearing 
activities or making determinations as to accepting clearing 
customers''--specifically that the activities of such persons be 
separated from the review, pressure, or oversight of persons involved 
in pricing, trading, or clearing. Although the quoted language is not 
contained in section 4d(c) of the CEA, as amended by section 732 of the 
Dodd-Frank Act, the Commission believes that to effectuate fully the 
intent of section 4s(j)(5) of the CEA, these issues should be addressed 
with regard to FCMs.
    The Dodd-Frank Act stipulates that only a person registered as a 
FCM may accept money, securities or property to clear a swap through a 
derivatives clearing organization on behalf of another person, though 
the restriction does not prohibit a SD or MSP from clearing its own 
swap transaction.\6\ New section 4s(j)(5) of the CEA requires that 
certain determinations be made relating to the provision of clearing 
activities or the acceptance of clearing customers, such as (1) whether 
to enter into a cleared or uncleared trade, (2) whether to refer a 
counterparty to a particular FCM for clearing, or (3) whether to send a 
cleared trade to a particular derivatives clearing organization. 
Although the ultimate determination as to whether to accept a customer 
for clearing would be made at a FCM, an affiliated SD or MSP could have 
incentives to try to influence that decision improperly. Such influence 
may be motivated by conflicts of interest that could have a direct 
impact on the clearing treatment of transactions. Moreover, in any 
situation where a person is dually registered as a FCM and as a SD or 
MSP, the restrictions on clearing activities set forth in the proposed 
regulations are intended to apply to the relationship between the 
clearing unit of the FCM and the business trading unit of the SD or 
MSP, even though the business trading unit and clearing unit reside 
within the same entity. The proposed rules, set forth at subsection 
(d), have been adapted from NASD Rule 2711(b).
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    \6\ See section 4d(f)(1) of the CEA, as amended by section 
724(a) of the Dodd-Frank Act.
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    The Commission specifically requests comment regarding whether 
there are alternative approaches that could be taken to address the 
potential conflicts of interest that may arise between a FCM providing 
clearing services to customers and the business trading unit personnel 
of an affiliated swap dealer or major swap participant. For example, 
what approach would address an attempt by a swap dealer's trading desk 
personnel to interfere with an affiliated FCM's decision to offer 
clearing services to a particular customer because of a perceived 
competitive threat?
    As an additional safeguard, the Commission is proposing to require 
that each affected FCM and IB implement policies and procedures 
mandating the disclosure to its customers of any material conflicts of 
interest that relate to a customer's decision on the execution or 
clearing of a transaction.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) \7\ requires that agencies, in 
proposing rules, consider whether the rules they propose will have a 
significant economic impact on a substantial number of small entities 
and, if so, provide a regulatory flexibility analysis addressing the 
impact. The proposed rules would impact FCMs and IBs, each of which is 
addressed separately in the following paragraphs.
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    \7\ 5 U.S.C. 601 et seq.
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    The Commission previously has established certain definitions of 
``small entities'' to be used in evaluating the impact of the 
Commission's rules on such small entities in accordance with the RFA. 
In the Commission's ``Policy Statement and Establishment of Definitions 
of `Small Entities' for Purposes of the Regulatory Flexibility Act,'' 
\8\ the Commission concluded that registered FCMs should not be 
considered to be small entities for purposes of the RFA. The 
Commission's determination in this regard was based, in part, upon the 
obligation of registered FCMs to meet the capital requirements 
established by the Commission. Likewise, the Commission determined 
``that, for the basic purpose of protection of the financial integrity 
of futures trading, Commission regulations can make no size distinction 
among registered FCMs.'' \9\ Thus, with respect to registered FCMs, the 
Commission believes that the proposed regulations will not have a 
significant economic impact on a substantial number of small entities.
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    \8\ 47 FR 18618, Apr. 30, 1982.
    \9\ Id. at 18619.
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    The Commission previously has determined that, for purposes of the 
RFA, the Commission should ``evaluate within the context of a 
particular rule proposal whether all or some [IBs] should be considered 
to be small entities and, if so, to analyze the economic impact on 
[IBs] of any such rule at that time. Specifically, the Commission 
recognizes that the [IB] definition, even as narrowed to exclude 
certain persons, undoubtedly encompasses many business enterprises of 
variable size.'' \10\ At present, IBs are subject to various existing 
rules that govern and impose minimum requirements on their internal 
compliance operations, based on the nature of their business. The 
proposed amendments would merely augment the existing compliance 
requirements of such persons to address potential conflicts of interest 
within such firms. To the extent that certain IBs may be considered to 
be small entities, the Commission believes that the proposed 
regulations will not have a significant economic impact.
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    \10\ 48 FR 35248, 35276, Aug. 3, 1983.
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    Accordingly, pursuant to Section 605(b) of the RFA, 5 U.S.C. 
605(b), the Chairman, on behalf of the Commission, certifies that these 
proposed rule amendments will not have a significant economic impact on 
a substantial number of small entities. However, the Commission invites 
the public to comment on this finding.

B. Paperwork Reduction Act

    The Paperwork Reduction Act (PRA),\11\ imposes certain requirements 
on Federal agencies in connection with their conducting or sponsoring 
any collection of information as defined by the PRA. Certain provisions 
of this proposed rulemaking would result in new collection of 
information within the meaning of the PRA. The Commission therefore is 
submitting this proposal to the Office of Management and Budget (OMB) 
for review in accordance with 44 U.S.C. 3597(d) and 5 CFR 1320.11. The 
title for this collection is ``Conflicts of Interest Policies and 
Procedures by Futures Commission Merchants and Introducing Brokers.'' 
An agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid control number. OMB has not yet assigned a control number to the 
new collection.
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    \11\ 44 U.S.C. 3501 et seq.

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[[Page 70156]]

    The collection of information under these proposed rules is 
necessary to implement certain provisions of the CEA, as amended by the 
Dodd-Frank Act. Specifically, it is essential to ensuring that FCMs and 
IBs develop and maintain the required conflicts of interest systems and 
procedures. The Commission's staff would use the information collected 
when conducting examination and oversight to evaluate the completeness 
and effectiveness of the conflicts of interest procedures and 
disclosures of FCMs and IBs.
    If the proposed regulations are adopted, responses to this new 
collection of information would be mandatory. The Commission will 
protect proprietary information according to the Freedom of Information 
Act and 17 CFR part 145, ``Commission Records and Information.'' In 
addition, section 8(a)(1) of the CEA strictly prohibits the Commission, 
unless specifically authorized by the CEA, from making public ``data 
and information that would separately disclose the business 
transactions or market positions of any person and trade secrets or 
names of customers.'' The Commission also is required to protect 
certain information contained in a government system of records 
according to the Privacy Act of 1974.\12\
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    \12\ 5 U.S.C. 552a.
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1. Information Provided by Reporting Entities/Persons
    The proposed rules will require FCMs and IBs to adopt conflicts of 
interest policies and procedures that may impose PRA burdens, 
particularly through the implementation of certain recordkeeping 
requirements. For purposes of the PRA, the term ``burden'' means the 
``time, effort, or financial resources expended by persons to generate, 
maintain, or provide information to or for a Federal agency.'' \13\ 
This burden will result from the recordkeeping obligations related to 
an FCM and IB's obligations to adopt and implement written policies and 
procedures reasonably designed to ensure compliance with the proposed 
regulation, document certain communications between non-research 
personnel and research department personnel, and provide certain 
disclosures. The burden relates solely to recordkeeping requirements; 
the proposed regulation does not contain any reporting requirements.
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    \13\ 44 U.S.C. 3502(2).
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    The burden for compliance per respondent is expected to be 44.5 
hours, at a cost annually of $4,450 for each respondent. This estimate 
includes the time needed to review applicable laws and regulations; 
develop and update conflicts of interest policies and procedures and to 
maintain records of certain communications and disclosures periodically 
required by the proposed regulation. The Commission does not expect 
respondents to incur any start-up costs in connection with this 
proposed regulation as it anticipates that respondents already maintain 
personnel and systems for regulatory recordkeeping.
    There are currently 159 registered FCMs and 1,645 registered IBs 
that will be required to comply with the proposed conflicts of interest 
provisions (or a total of 1,804 registrants). It is expected that the 
compliance officers of those firms will be the employees charged with 
fulfilling the regulatory obligations imposed by the proposed 
regulations. According to recent Bureau of Labor Statistics, the mean 
hourly wage of an employee under occupation code 13-1041, ``Compliance 
Officers, Except Agriculture, Construction, Health and Safety, and 
Transportation,'' that is employed by the ``Securities and Commodity 
Contracts Intermediation and Brokerage'' industry is $38.77.\14\ 
Because FCMs and IBs include financial institutions whose compliance 
employees' salaries may exceed the mean wage, the Commission has taken 
a conservative approach and estimated the cost burden of these proposed 
regulations based upon an average salary of $100 per hour. Accordingly, 
the estimated burden was calculated as follows:
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    \14\ https://www.bls.gov/oes/current/oes131041.htm.
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    Recordkeeping Related to Maintenance of Conflicts of Interest 
Policies and Procedures
    Number of registrants: 1,804.
    Average number of annual responses by each registrant: 1.
    Estimated average hours per response: 2.
    Frequency of collection: Annually.
    Aggregate annual burden: 1,804 registrants x 1 response x 2 hours = 
3,608 burden hours.
    Recordkeeping Related to Communications Between Certain Personnel
    Number of registrants: 1,804.
    Average number of annual responses by each registrant: 20.
    Estimated average hours per response: 0.5.
    Frequency of collection: As needed.
    Aggregate annual burden: 1,804 registrants x 20 responses x 0.5 
hours = 18,040 burden hours.
    Recordkeeping Related to Disclosure Requirements
    Number of registrants: 1,804.
    Average number of annual responses by each registrant: 65.
    Estimated average hours per response: 0.5.
    Frequency of collection: As needed.
    Aggregate annual burden: 1,804 registrants x 65 responses x 0.5 
hours = 58,630 burden hours.
    Based upon the above, the aggregate cost for all registrants is 
80,278 burden hours and $8,027,800 [80,278 burden hours x $100 per 
hour].
2. Information Collection Comments
    The Commission invites the public and other federal agencies to 
comment on any aspect of the recordkeeping burdens discussed above. 
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments 
in order to: (i) Evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information will have practical 
utility; (ii) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information; (iii) determine 
whether there are ways to enhance the quality, utility, and clarity of 
the information to be collected; and (iv) minimize the burden of the 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs, by fax at (202) 395-6566 or by e-mail at 
OIRAsubmissions@omb.eop.gov. Please provide the Commission with a copy 
of submitted comments so that they can be summarized and addressed in 
the final rule. Refer to the Addresses section of this notice of 
proposed rulemaking for comment submission instructions to the 
Commission. A copy of the supporting statements for the collections of 
information discussed above may be obtained by visiting https://www.RegInfo.gov. OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication of 
this release. Consequently, a comment to OMB is most assured of being 
fully effective if received by OMB (and the Commission) within 30 days 
after publication of this notice of proposed rulemaking.

C. Cost-Benefit Analysis

    Section 15(a) of the CEA \15\ requires the Commission to consider 
the costs

[[Page 70157]]

and benefits of its actions before issuing a rulemaking under the Act. 
By its terms, section 15(a) does not require the Commission to quantify 
the costs and benefits of the rule or to determine whether the benefits 
of the rulemaking outweigh its costs; rather, it requires that the 
Commission ``consider'' the costs and benefits of its actions.
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    \15\ 7 U.S.C. 19(a).
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    Section 15(a) further specifies that the costs and benefits of a 
proposed rulemaking shall be evaluated in light of five broad areas of 
market and public concern: (1) Protection of market participants and 
the public; (2) efficiency, competitiveness and financial integrity of 
futures markets; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. The Commission 
may, in its discretion, give greater weight to any one of the five 
enumerated areas and could, in its discretion, 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 accomplish any of the purposes of the Act.
1. Summary of Proposed Requirements
    The proposed regulations would implement section 732 of the Act, 
which amends section 4d of the CEA \16\ to direct each FCM and IB to 
implement conflicts of interest systems and procedures to ensure that 
any persons researching or analyzing the price or market for any 
commodity are separated by ``appropriate informational partitions'' 
within the firm from review, pressure, or oversight of persons whose 
involvement in trading or clearing activities might potentially bias 
the judgment or supervision of the persons. Such conflicts of interest 
systems and procedures also must address any other issues that the 
Commission determines to be appropriate.
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    \16\ 7 U.S.C. 6d.
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2. Costs
    With respect to costs, the Commission has determined that costs to 
FCMs and IBs would be minimal because the anticipated implementation of 
the proposed rules would require little additional resources beyond 
internal organizational changes to prevent compliance violations.
3. Benefits
    With respect to benefits, the Commission has determined that formal 
conflicts of interest rules will enhance transparency, bolster 
confidence in markets, reduce risk and allow regulators to better 
monitor and manage risks to our financial system.
4. Public Comment
    The Commission invites public comment on its cost-benefit 
considerations. Commenters also are invited to submit any data or other 
information that they may have quantifying or qualifying the costs and 
benefits of the proposed regulations with their comment letters.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Conflicts of interest, Reporting and 
recordkeeping requirements.

    For the reasons stated in this release, the Commission proposes to 
amend 17 CFR part 1 as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for part 1 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6b-1, 6c, 6d, 6e, 6f, 6g, 
6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 9a, 12, 12a, 
16, 18, 19, 21, 23.

    2. Section 1.71 is added to read as follows:


Sec.  1.71  Implementation of conflicts of interest policies and 
procedures by futures commission merchants and introducing brokers.

    (a) Definitions. For purposes of this section, the following terms 
shall be defined as provided.
    (1) Affiliate. This term means, with respect to any person, a 
person controlling, controlled by, or under common control with, such 
person.
    (2) Business trading unit. This term means any department, 
division, group, or personnel of a futures commission merchant or 
introducing broker or any of its affiliates, whether or not identified 
as such, that performs or is involved in any pricing, trading, sales, 
marketing, advertising, solicitation, structuring, or brokerage 
activities on behalf of a futures commission merchant or introducing 
broker.
    (3) Clearing unit. This term means any department, division, group, 
or personnel of a futures commission merchant or any of its affiliates, 
whether or not identified as such, that performs or is involved in any 
proprietary or customer clearing activities on behalf of a futures 
commission merchant.
    (4) Derivative. This term means (i) a contract for the purchase or 
sale of a commodity for future delivery; (ii) a security futures 
product; (iii) a swap; (iv) any agreement, contract, or transaction 
described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; 
(v) any commodity option authorized under section 4c of the Act; and 
(vi) any leverage transaction authorized under section 19 of the Act.
    (5) Non-research personnel. This term means any employee of the 
business trading unit or clearing unit, or any other employee of the 
futures commission merchant or introducing broker who is not directly 
responsible for, or otherwise involved with, research concerning a 
derivative, other than legal or compliance personnel.
    (6) Public appearance. This term means any participation in a 
conference call, seminar, forum (including an interactive electronic 
forum) or other public speaking activity before 15 or more persons, or 
interview or appearance before one or more representatives of the 
media, radio, television or print media, or the writing of a print 
media article, in which a research analyst makes a recommendation or 
offers an opinion concerning a derivatives transaction. This term does 
not include a password-protected Webcast, conference call or similar 
event with 15 or more existing customers, provided that all of the 
event participants previously received the most current research report 
or other documentation that contains the required applicable 
disclosures, and that the research analyst appearing at the event 
corrects and updates during the public appearance any disclosures in 
the research report that are inaccurate, misleading, or no longer 
applicable.
    (7) Research analyst. This term means the employee of a futures 
commission merchant or introducing broker who is primarily responsible 
for, and any employee who reports directly or indirectly to such 
research analyst in connection with, preparation of the substance of a 
research report relating to any derivative, whether or not any such 
person has the job title of ``research analyst.''
    (8) Research department. This term means any department or division 
that is principally responsible for preparing the substance of a 
research report relating to any derivative on behalf of a futures 
commission merchant or introducing broker, including a department or 
division contained in an affiliate of a futures commission merchant or 
introducing broker.
    (9) Research report. This term means any written communication 
(including electronic) that includes an analysis of the price or market 
for any derivative, and that provides information reasonably sufficient 
upon which to base a decision to enter into a

[[Page 70158]]

derivatives transaction. This term does not include:
    (i) Communications distributed to fewer than 15 persons;
    (ii) periodic reports or other communications prepared for 
investment company shareholders or commodity pool participants that 
discuss individual derivatives positions in the context of a fund's 
past performance or the basis for previously-made discretionary 
decisions;
    (iii) any communication generated by an employee of the business 
trading unit that is conveyed as a solicitation for entering into a 
derivatives transaction, and is conspicuously identified as such; and
    (iv) internal communications that are not given to current or 
prospective customers.
    (b) Policies and Procedures. Each futures commission merchant and 
introducing broker subject to this rule must adopt and implement 
written policies and procedures reasonably designed to ensure that the 
futures commission merchant or introducing broker and its employees 
comply with the provisions of this rule.
    (c) Research Analysts and Research Reports.
    (1) Restrictions on Relationship with Research Department.
    (i) Non-research personnel shall not influence the content of a 
research report of the futures commission merchant or the introducing 
broker.
    (ii) No research analyst may be subject to the supervision or 
control of any employee of the futures commission merchant's or 
introducing broker's business trading unit or clearing unit, and no 
personnel engaged in trading or clearing activities may have any 
influence or control over the evaluation or compensation of a research 
analyst.
    (iii) Except as provided in paragraph (c)(1)(iv) of this section, 
non-research personnel, other than the board of directors and any 
committee thereof, shall not review or approve a research report of the 
futures commission merchant or introducing broker before its 
publication.
    (iv) Non-research personnel may review a research report before its 
publication as necessary only to verify the factual accuracy of 
information in the research report, to provide for non-substantive 
editing, to format the layout or style of the research report, or to 
identify any potential conflicts of interest, provided that:
    (A) Any written communication between non-research personnel and 
research department personnel concerning the content of a research 
report must be made either through authorized legal or compliance 
personnel of the futures commission merchant or introducing broker or 
in a transmission copied to such personnel; and
    (B) Any oral communication between non-research personnel and 
research department personnel concerning the content of a research 
report must be documented and made either through authorized legal or 
compliance personnel acting as an intermediary or in a conversation 
conducted in the presence of such personnel.
    (2) Restrictions on Communications. Any written or oral 
communication by a research analyst to a current or prospective 
customer, or to any employee of the futures commission merchant or 
introducing broker, relating to any derivative must not omit any 
material fact or qualification that would cause the communication to be 
misleading to a reasonable person.
    (3) Restrictions on Research Analyst Compensation. A futures 
commission merchant or introducing broker may not consider as a factor 
in reviewing or approving a research analyst's compensation his or her 
contributions to the futures commission merchant's or introducing 
broker's trading or clearing business. No employee of the business 
trading unit or clearing unit of the futures commission merchant or 
introducing broker may influence the review or approval of a research 
analyst's compensation.
    (4) Prohibition of Promise of Favorable Research. No futures 
commission merchant or introducing broker may directly or indirectly 
offer favorable research, or threaten to change research, to an 
existing or prospective customer as consideration or inducement for the 
receipt of business or compensation.
    (5) Disclosure Requirements.
    (i) Ownership and Material Conflicts of Interest. A futures 
commission merchant or introducing broker must disclose in research 
reports and a research analyst must disclose in public appearances 
whether the research analyst maintains, from time to time, a financial 
interest in any derivative of a type that the research analyst follows, 
and the general nature of the financial interest.
    (ii) Prominence of Disclosure. Disclosures and references to 
disclosures must be clear, comprehensive, and prominent. With respect 
to public appearances by research analysts, the disclosures required by 
paragraph (c)(5) of this section must be conspicuous.
    (iii) Records of Public Appearances. Each futures commission 
merchant and introducing broker must maintain records of public 
appearances by research analysts sufficient to demonstrate compliance 
by those research analysts with the applicable disclosure requirements 
under paragraph (c)(5) of this section.
    (iv) Third-Party Research Reports.
    (A) For the purposes of paragraph (c)(5)(iv) of this section, 
``independent third-party research report'' shall mean a research 
report, in respect of which the person or entity producing the report:
    (1) Has no affiliation or business or contractual relationship with 
the distributing futures commission merchant or introducing broker, or 
that futures commission merchant's or introducing broker's affiliates, 
that is reasonably likely to inform the content of its research 
reports; and
    (2) makes content determinations without any input from the 
distributing futures commission merchant or introducing broker or from 
the futures commission merchant's or introducing broker's affiliates.
    (B) Subject to paragraph (c)(5)(iv)(C) of this section, if a 
futures commission merchant or introducing broker distributes or makes 
available any independent third-party research report, the futures 
commission merchant or introducing broker must accompany the research 
report with, or provide a web address that directs the recipient to, 
the current applicable disclosures, as they pertain to the futures 
commission merchant or introducing broker, required by this section. 
Each futures commission merchant and introducing broker must establish 
written policies and procedures reasonably designed to ensure the 
completeness and accuracy of all applicable disclosures.
    (C) The requirements of paragraph (c)(5)(iv)(B) of this section 
shall not apply to independent third-party research reports made 
available by a futures commission merchant or introducing broker to its 
customers:
    (1) Upon request; or
    (2) through a website maintained by the futures commission merchant 
or introducing broker.
    (6) Prohibition of Retaliation Against Research Analysts. No 
futures commission merchant or introducing broker, and no employee of a 
futures commission merchant or introducing broker who is involved with 
the futures commission merchant's or introducing broker's trading or 
clearing activities, may, directly or indirectly, retaliate against or 
threaten to retaliate against any research analyst employed by the 
futures commission merchant or introducing broker or its affiliates as 
a

[[Page 70159]]

result of an adverse, negative, or otherwise unfavorable research 
report or public appearance written or made, in good faith, by the 
research analyst that may adversely affect the futures commission 
merchant's or introducing broker's present or prospective trading or 
clearing activities.
    (d) Clearing activities.
    (1) No futures commission merchant shall permit any affiliated swap 
dealer or major swap participant to directly or indirectly interfere 
with, or attempt to influence, the decision of the clearing unit 
personnel of the futures commission merchant with regard to the 
provision of clearing services and activities, including but not 
limited to:
    (i) Whether to offer clearing services and activities to customers;
    (ii) Whether to accept a particular customer for the purposes of 
clearing derivatives;
    (iii) Whether to submit a transaction to a particular derivatives 
clearing organization;
    (iv) Setting risk tolerance levels for particular customers;
    (v) Determining acceptable forms of collateral from particular 
customers; or
    (vi) Setting fees for clearing services.
    (2) Each futures commission merchant shall create and maintain an 
appropriate informational partition between business trading units of 
an affiliated swap dealer or major swap participant and clearing unit 
personnel of the futures commission merchant. At a minimum, such 
informational partitions shall require that:
    (i) No employee of a business trading unit of an affiliated swap 
dealer or major swap participant may review or approve the provision of 
clearing services and activities by clearing unit personnel of the 
futures commission merchant, make any determination regarding whether 
the futures commission merchant accepts clearing customers, or 
participate in any way with the provision of clearing services and 
activities by the futures commission merchant;
    (ii) No employee of a business trading unit of an affiliated swap 
dealer or major swap participant shall supervise, control, or influence 
any employee of a clearing unit of the futures commission merchant; and
    (iii) No employee of the business trading unit of an affiliated 
swap dealer or major swap participant shall influence or control 
compensation or evaluation of any employee of the clearing unit of the 
futures commission merchant.
    (e) Undue Influence on Customers. Each futures commission merchant 
and introducing broker must adopt and implement written policies and 
procedures that mandate the disclosure to its customers of any material 
incentives and any material conflicts of interest regarding the 
decision of a customer as to the trade execution and/or clearing of the 
derivatives transaction.
    (f) All records that a futures commission merchant or introducing 
broker is required to maintain pursuant to this regulation shall be 
maintained in accordance with Commission Regulation Sec.  1.31 and 
shall be made available promptly upon request to representatives of the 
Commission.

    Issued in Washington, DC, on November 10, 2010, by the 
Commission.
David A. Stawick,
Secretary of the Commission.

Statement of Chairman Gary Gensler

Implementation of Conflicts of Interest Policies and Procedures by 
Futures Commission Merchants and Introducing Brokers

    I support the proposed rulemakings that establish firewalls to 
ensure a separation between the research arm, the trading arm and the 
clearing activities of swap dealers, major swap participants, futures 
commission merchants and introducing brokers. This rule proposal 
relates to the conflicts-of-interest provisions of the Dodd-Frank Act 
that direct swap dealers and major swap participants to have 
appropriate informational partitions. The proposal builds upon similar 
protections in the securities markets as mandated in the Sarbanes-Oxley 
Act. The proposed rules will protect market participants and the public 
while also promoting the financial integrity of the marketplace.

[FR Doc. 2010-29003 Filed 11-16-10; 8:45 am]
BILLING CODE 6351-01-P