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  • [Federal Register: January 21, 2009 (Volume 74, Number 12)]

    [Proposed Rules]

    [Page 3475-3480]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr21ja09-30]

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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: http://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 http://

    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).

    ---------------------------------------------------------------------------

    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

    Last Updated: January 22, 2009



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