COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
Final Rulemaking Concerning Voting by Interested Members of Self-Regulatory Organization Governing Boards and Committees
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rulemaking.
____________________________________________________________
SUMMARY: The Commodity Futures Trading Commission ("Commission" or "CFTC") has adopted a new Regulation 1.69 that implements the statutory directives of Section 5a(a)(17) of the Commodity Exchange Act ("CEA") as it was amended by Section 217 of the Futures Trading Practices Act of 1992 ("FTPA").(1)
New Commission Regulation 1.69 requires self-regulatory organizations ("SRO") to adopt rules prohibiting governing board, disciplinary committee and oversight panel members from deliberating or voting on certain matters where the member has either a relationship with the matter's named party in interest or a financial interest in the matter's outcome. This final rulemaking also has amended Commission Regulations 1.41 and 1.63 to make modifications made necessary by new Commission Regulation 1.69.
EFFECTIVE DATE: 60 days after publication in the Federal Register.
FOR FURTHER INFORMATION CONTACT: David P. Van Wagner,
Acting Associate Director, or Martha A. Mensoian, Attorney-Advisor,
Division of Trading and Markets, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C.
20581. Telephone: (202) 418-5490.
SUPPLEMENTARY INFORMATION
I. Introduction
Section 217 of the FTPA amended Section 5a(a)(17) of the CEA to
"provide for the avoidance of conflict of interest in
deliberations by the governing board and any disciplinary and
oversight committee."(2)� On May 3, 1996, the
Commission published for public comment in the Federal
Register a proposed new Regulation 1.69 and related amendments to
existing Commission Regulations 1.41 and 1.63 which would have
required SROs to adopt rules prohibiting governing board, disciplinary
committee and oversight panel members from deliberating and voting on
certain matters where the member had either a relationship with the
matter's named party in interest or a financial interest in the
matter's outcome.(3) � In
response to that proposed rulemaking release, the Commission received
letters from eleven commenters. After reviewing those comments, the
Commission decided to incorporate into its rulemaking many of the
suggestions made by the commenters and to issue for public comment
re-proposed versions of Regulation 1.69 and amended Regulations 1.41
and 1.63. The Commission published its re-proposed rulemaking in the
Federal Register on January 23, 1998.(4)� That release extensively discusses
the comments that were made on the originally proposed rulemaking,
indicates whether and how the re-proposed rulemaking responds to the
comments and explains the Commission's reasons for proposing a
re-proposed version of the rulemaking. The comment period for the
re-proposed rulemaking expired on March 25, 1998.
II. Comments Received
The Commission received ten comment letters in response to its
re-proposed rulemaking. The comment letters were submitted by five
futures exchanges (the Chicago Board of Trade ("CBT"), the
Chicago Mercantile Exchange ("CME"), the Coffee, Sugar &
Cocoa Exchange, Inc. ("CSCE"), the Minneapolis Grain
Exchange ("MGE"), and the New York Mercantile Exchange
("NYMEX")); a futures clearing organization (the Board of
Trade Clearing Corporation ("BOTCC")); two trade
associations (the Futures Industry Association ("FIA") and
the National Grain Trade Council ("NGTC")); a futures
commission merchant (American Futures Group, Inc. ("AFG"))
and Mr. Evan Tucker, an individual who was formerly an associated
person with AFG.
The Commission has carefully reviewed these comments and has decided
to issue new Regulation 1.69 and amended Regulations 1.41 and 1.63 as
final with certain modifications from the re-proposed version of the
rulemaking. The following sections of this release analyze the
Commission's final rulemaking. Each section describes a provision
of the Commission's re-proposed rulemaking, discusses comments
which were made on that particular provision, indicates how the
provision has been adopted in the final rulemaking, and explains the
Commission's rationale for adopting the provision. (For ease of
reference, the re-proposed rulemaking will be referred to as the
"proposed" rulemaking throughout the remainder of this
release.)
III. Final Rulemaking
A. Definitions (Regulation 1.69(a))
1. Disciplinary Committee (Regulation 1.69(a)(1))
As proposed, Regulation 1.69(a)(1) defined "disciplinary
committee" to mean "any person or committee of persons, or
any subcommittee thereof" that is authorized by an SRO "to
issue disciplinary charges, to conduct disciplinary proceedings, to
settle disciplinary charges, to impose disciplinary sanctions, or to
hear appeals thereof" in any case involving a violation of an
SRO's rules. The proposed definition excluded persons who were
individually authorized by an SRO to impose sanctions summarily for
decorum-type rule violations. CBT, CME, CSCE, FIA and NYMEX each
commented that the definition should exclude any person or committee
of persons that summarily imposed minor disciplinary fines. These
commenters contended that imposing conflict of interest restrictions
on anyone taking summary actions, whether a single person or a
committee, would be cumbersome for SROs to implement.
The Commission has reviewed these comments and concurs that applying
conflict of interest requirements to SRO disciplinary authorities when
they take summary actions for minor rule violations could be
administratively burdensome and might hamper the SROs' ability to
take quick, decisive actions in these circumstances. Accordingly, the
Commission has determined to establish a disciplinary committee
definition that would exclude committees and persons who summarily
issue minor penalties for violating rules regarding "decorum,
attire, the timely submission of accurate records for clearing or
verifying each day's transactions or other similar
activities."
2. Family Relationship (Regulation 1.69(a)(2))
As further discussed below, proposed Regulation 1.69(b)(1)(i)(E)
prohibited committee members from deliberating and voting on committee
matters in which they had a "family relationship" with the
matter's named party in interest. For these purposes, proposed
Regulation 1.69(a)(2) defined "family relationship" to mean
a person's "spouse, former spouse, parent, stepparent, child,
stepchild, sibling, stepbrother, stepsister, grandparent, grandchild,
uncle, aunt, nephew, niece or in-law."
CBT commented that the inclusion of "former spouses" in the
definition ran counter to the approach taken in proposed Regulation
1.69(b)(1)(i)(D) where conflicts of interests were limited to current,
"ongoing" business relationships with the named party in
interest. The Commission believes that the two types of relationships
cited by the CBT are distinguishable. The rationale for limiting
conflict of interest requirements to committee members with
"ongoing" business relationships is that, when a member and
a matter's named party in interest have an ongoing business
relationship, a committee action that could impact the party
financially also could redound to the financial advantage or
disadvantage of anyone who is doing business with the party at that
point in time, including the committee member. Once a business
relationship between two parties no longer exists, however, presumably
the financial health of the two parties no longer has any degree of
interdependence. By contrast, a committee member's relationship
with a former spouse may have emotional and financial implications
that continue after their marriage, especially if there is any sort of
monetary support arrangement between the former spouses. Accordingly,
the Commission has determined to include former spouses in the final
definition of family relationship and to adopt the definition as
proposed.
3. Governing Board (Regulation 1.69(a)(3))
As proposed, Regulation 1.69(a)(3)'s definition of
"governing board" included any SRO "board of directors,
board of governors, board of managers, or similar body, or any
subcommittee thereof," such as an executive committee that was
authorized to "take action or to recommend the taking of
action" on behalf of its SRO. The CBT commented that the
definition should not include governing board subcommittees because
any potential harm from any conflict of interest on such a
subcommittee would be cured by the fact that its actions would be
subject to the independent review and oversight of a governing board.
The Commission believes that, although board subcommittee actions
usually have to be ratified by governing boards, oftentimes
recommendations of such subcommittees are the primary influence on
board decisions. Accordingly, in order to advance the integrity of the
SRO committee decision-making process, the Commission has decided to
apply its conflict of interest restrictions to governing board
subcommittees and to adopt the same governing board definition as
proposed.
4. Oversight Panel (Regulation 1.69(a)(4))
In the proposed rulemaking, the Commission defined "oversight
panel" as an SRO committee authorized to "recommend or
establish policies or procedures with respect to the [SRO's]
surveillance, compliance, rule enforcement, or disciplinary
responsibilities."(5) The CBT and
NYCE commented that this definition was too broad and should not
include committees which recommend policies as such a definition would
deter people, inside and outside of the futures industry, from serving
on task forces and planning committees that formulate ideas that are
helpful to the SROs.
The Commission believes that SRO policies with respect to
surveillance, compliance, rule enforcement and disciplinary
responsibilities are an integral part of the self-regulatory process
and that persons who are entrusted with recommending such policies
should be free from conflicts of interests. Accordingly, the
Commission has decided to adopt the proposed definition of oversight
panels.
5. Member's Affiliated Firm (Regulation 1.69(a)(5))
Under proposed Regulation 1.69(a)(5), a "member's affiliated
firm" was defined as any firm at which a committee member was
either: (1) a principal, as defined by Regulation 3.1(a), or (2) an
employee. The term became operative under proposed Regulation
1.69(b)(2)(iii) which required SROs to review positions at a committee
member's "affiliated firm" when determining whether the
member had a direct and substantial financial interest in the outcome
of a significant action. CME commented that the "member's
affiliated firm" definition should be limited to firms where the
member was a principal. CME contended that firms which employ
committee members should not be included in the definition as firm
employees have much less knowledge regarding their firms'
positions than do principals. The Commission believes the potential
for a committee member to be influenced by an employment relationship
is sufficient to warrant his or her disqualification from deliberating
and voting on significant actions which might impact the member's
employer. Many firm employees have as much knowledge of their
firm's positions as do the firm's principals. In fact, the
Commission believes that in some instances an employment relationship
may have an even greater influence on a committee member than an
ownership relationship in that employees may be under the control of
their employing firm. Accordingly, the Commission has determined not
to modify this aspect of the definition of "member's
affiliated firm" but rather to adopt the definition as
proposed.
6. Named Party in Interest (Regulation 1.69(a)(6))
In its proposed rulemaking, the term "named party in
interest" was defined to mean a party who was "the subject
of any matter being considered" by an SRO committee. In its
comment letter, CBT suggested that "named party in interest"
be defined to mean a "person who is identified by name to a
governing board, disciplinary committee or oversight panel as the
subject of a matter to be considered by it." The Commission
believes the CBT's suggestion would help to clarify the named
party in interest definition. Accordingly, the Commission has adopted
the substance of CBT's proposed definition with the modification
that the provision include any "person or entity" that is
identified by name as a subject of a committee action. In adopting
this definition of "named party in interest," the Commission
reminds the SROs that it would be inconsistent with the intent of
Regulation 1.69 for SROs to shield the identities of named parties in
interests from committee members in order to circumvent the conflict
of interest requirements.
7. Self-Regulatory Organization (Regulation 1.69(a)(7))
Proposed Regulation 1.69 defined SROs to include exchanges, clearing
organizations and registered futures associations ("RFAs")
(with RFAs being excluded from the definition for the purposes of
Regulation 1.69(b)(2) "financial interest" conflicts of
interest). BOTCC and CBT both objected to the inclusion of clearing
organizations in the definition of SRO on the ground that CEA Section
5a(a)(17), Regulation 1.69's statutory enabling provision, only
applies to contract markets and not clearing organizations.
The Commission believes that BOTCC's and CBT's suggestions
would lead to significant inconsistencies in the application of
Regulation 1.69. Some contract markets have in-house clearing
organizations (e.g., CME and NYMEX), while other
contract markets are cleared by independent clearing organizations
(e.g., CBT and CSCE). Applying Regulation 1.69 to
clearing organizations, as well as contract markets, would ensure that
there would not be differing treatment of contract markets based on
whether or not they had an in-house or independent clearing
mechanism.
The Commission notes that, while CEA Section 5a(a)(17) only specifies
"contract markets," the provision also requires that its
conflict of interest restrictions shall apply to committees handling
certain types of margin changes. Margin levels in the futures industry
are established by both contract markets and clearing organizations.
The Commission also notes that there have been previous occasions when
CEA requirements for contract markets have been applied to clearing
organizations. For example, Section 5a(a)(12)(A) of the CEA mandates
Commission review of "contract market" rules, while
Commission Regulation 1.41, which establishes procedures for
Commission review of proposed rules, specifically includes clearing
organizations within its definition of contract markets for these
purposes. In addition, clearing organizations already are subject to
regulatory requirements that are comparable to Regulation 1.69 such as
Regulation 1.41(f)'s emergency action provisions and Regulation
1.63's prohibition on committee service by persons with
disciplinary histories.
For each of the above reasons, the Commission has determined that it
is appropriate to make clearing organizations subject to Regulation
1.69 and to include them in the definition of SRO.
8. Significant Actions (Regulation 1.69(a)(8))
Proposed Regulation 1.69(b)(2) applied conflict of interest
restrictions to SRO committees whenever they considered any
significant action. The term "significant action" was
proposed to mean: (1) actions or rule changes that address Regulation
1.41(a)(4) non-physical emergencies; (2) margin changes that respond
to extraordinary market conditions, such as "an actual or
attempted corner, squeeze, congestion or undue concentration of
positions"; and (3) margin changes that are likely to have a
substantial effect on contract prices of any contract traded or
cleared at the particular SRO. BOTCC and CBT commented that this
provision should track the language of the CEA and that, accordingly,
the rulemaking should pertain only to those contract market margin
changes that respond to extraordinary market conditions that are
likely to have a substantial effect on contract prices.
The Commission believes that margin changes that are made in response
to corners, squeezes, congestion, or undue concentrations of positions
serve important market integrity purposes and that committee members
should not be influenced by their personal interests when considering
such decisions. Accordingly, the Commission has determined not to
reduce the scope of the significant action definition, but rather to
adopt the provision as it was proposed.
B. Self-Regulatory Organization Rules (Regulation
1.69(b))
Proposed Commission Regulation 1.69(b) required SROs to adopt rules
prohibiting committee members from deliberating and voting on certain
types of matters as to which they had conflicts of interest. Proposed
Regulation 1.69(b)(1) restricted committee participation for members
who had a relationship with a matter's named party in interest.
Proposed Regulation 1.69(b)(2) restricted committee participation for
members who had a "direct and substantial financial
interest" in certain types of committee actions that do not
require prior Commission review and approval. Proposed Commission
Regulations 1.69(b)(1) and (2) also mandated certain procedures that
SROs must follow when making a determination as to the existence of a
conflict of interest.
1. Conflict of Interest Due to a Relationship With Named Party in
Interest (Regulation 1.69(b)(1))
a. Nature of Relationship (Regulation 1.69(b)(1)(i))
Under proposed Regulation 1.69(b)(1)((i), SRO committee members were
required to abstain from deliberating and voting on any matter where
they had a significant relationship with the "named party in
interest." These relationships would include family, employment,
broker association and "significant, ongoing business"
relationships. In its comment letter, the CBT noted that CEA Section
5a(a)(17) limits this abstention requirement to
"confidential" deliberations and voting. Accordingly, CBT
suggested that Regulation 1.69(b)(1)(i) should be revised to conform
with Section 5a(a)(17) in this regard.
Although the CEA only mandates that, at a minimum, committee members
must abstain from confidential deliberations on matters in which they
have a relationship with a named party in interest, the Commission
believes that adopting a more prophylactic approach in these types of
matters would ensure that SRO committees could not undermine the
intent of this provision by declaring "open" committee
meetings in lieu of applying conflict of interest restrictions.
Accordingly, the Commission has decided to adopt Regulation
1.69(b)(1)(i) as proposed and to apply its requirements to all
committee deliberations, regardless of whether they are confidential
or not.
CME, CSCE and NYMEX commented that the Commission should clarify
Regulation 1.69(b)(1)(i) so that it does not apply to committee
actions such as price change register revisions and the certification
of the late submission of pit cards. The commenters contended that
these situations already are addressed by their own existing
procedures and that, accordingly, a Commission rulemaking in this area
would be an unnecessary administrative encumbrance.
The fact that these commenters already have their own conflict of
interest requirements for price change register revisions and late pit
card certifications does not obviate the need for the Commission to
establish an industry-wide standard in this area. In addition, the
existence of such requirements at these exchanges also would seem to
contradict the contention that Commission-established requirements
would be administratively cumbersome to enforce. Accordingly, in
connection with this provision, the Commission wishes to clarify that,
if a particular, identifiable person approaches an SRO committee
member to request sign-off on a price change register revision or a
late pit card certification, Regulation 1.69(b)(1) should apply, and
the committee member should abstain from handling the matter if his or
her relationship with the requesting member falls within the
parameters of Regulation 1.69(b)(1)(i).(6)
The Commission recognizes that a floor committee would not be subject
to Regulation 1.69(b)(1)'s requirements when taking summary
disciplinary actions for minor rule violations,(7) while the same committee would be
subject to Regulation 1.69(b)(1)'s requirements when taking
actions such as price change register revisions and the certification
of the late submission of pit cards. This distinction reflects the
important regulatory interests implicated by these latter actions but
not summary actions for minor rule violations.
AFG and Mr. Tucker each suggested that Regulation 1.69(b)(1)(i)'s
restrictions should extend to relationships where a committee member
and a matter's named party in interest may have shared liability
for facts that are under consideration by a committee. AFG and Mr.
Tucker indicated that their suggestions were prompted by a particular
SRO enforcement case in which a member of the disciplinary committee
hearing the case potentially shared liability with the case's
named party. The Commission believes that the proposed provision would
be difficult to formulate and would likely be overbroad in
application. In addition, the types of relationships described by the
commenters would probably qualify as employment or significant
business relationships and, thus, would already appear to qualify as
one of Regulation 1.69(b)(1)(i)'s list of disqualifying
relationships.
MGE commented that, because of its small size, some of its broker
associations contain practically all of the exchange's floor
brokers and consequently, under proposed Regulation 1.69(b)(1)(i)(C),
a large number of MGE committee members would be disqualified in
matters where a floor broker was a named party in interest. In order
to address possible hardships that Regulation 1.69 may impose on
smaller futures exchanges, the Commission has decided to consider
granting small exchanges exemptions from certain provisions of
Regulation 1.69 on a case-by-case basis. In making a request for such
an exemption, the requesting exchange must: (1) demonstrate that the
pertinent provision of Regulation 1.69 would create a material
hardship and (2) provide for alternative procedures that are not
inconsistent with the policy considerations underlying Regulation
1.69.
b. Disclosure of Relationship (Regulation
1.69(b)(1)(ii))
Proposed Regulation 1.69(b)(1)(ii) required that SRO committee
members disclose to the appropriate SRO staff whether they had any one
of the relationships listed in Regulation 1.69(b)(1)(i) with respect
to a matter's named party in interest. No commenter addressed this
provision, and the Commission has determined to adopt Regulation
1.69(b)(1)(ii) as proposed.
c. Procedures for Determination (Regulation
1.69(b)(1)(iii))
Proposed Regulation 1.69(b)((1)(iii) required that SROs establish
procedures for determining whether committee members had a
disqualifying relationship with a matter's named party in
interest. The provision mandated that the determination must be based
upon: (1) information provided by the committee members to the
appropriate SRO staff (Regulation 1.69(b)(1)(iii)(A)), and (2)
"any other source of information that is reasonably
available" to the SRO (Regulation 1.69(b)(1)(iii)(B)).
The CBT, CSCE and NYMEX each proposed amendments to the clause
covering "any other source of information reasonably
available" to the SRO. CBT suggested that SROs be able to rely
upon "any information of which the [SRO] has actual
knowledge." CSCE suggested that SROs be able to rely upon
"any information otherwise known to the SRO in the ordinary
course of business." Finally, NYMEX proposed that SROs be
permitted to rely upon information in their membership and broker
association files.
The Commission believes that CBT's and CSCE's respective
proposed changes could create an undesirable incentive for SROs to
remain ignorant of their committee members' relationships. On the
other hand, the Commission believes that NYMEX's proposed change
is too limited in that it would permit SROs to overlook committee
member information they may hold somewhere other than in their
membership or broker association files.
In order to avoid the ambiguities and compliance issues created by
proposed Regulation 1.69(b)(1)(iii)(B)'s knowledge standard, the
Commission has determined to establish a more defined, narrower scope
for SRO reviews undertaken to determine whether committee members have
a conflict of interest with a named party in interest. Accordingly, in
addition to the particular information required to be provided to SROs
by committee members pursuant to Regulation 1.69(b)(1)(iii)(A), final
Regulation 1.69(b)(1)(iii)(B) requires that SROs review information
that is "held by and reasonably available" to them.
NYMEX also suggested that SROs be permitted to take into account the
"exigency" of a committee action in determining what type of
information to review when assessing committee member relationships
with named parties in interest. The Commission has determined to adopt
NYMEX's suggestion and has incorporated an "exigency"
modifier into final Regulation 1.69(b)(1)(iii). The Commission notes
that the revision parallels what proposed Regulation 1.69(b)(2)(iv)
already provided in connection with SRO determinations of conflicts
due to financial interests in significant actions.
2. Conflict of Interest Due to a Financial Interest in a
Significant Action (Regulation 1.69(b)(2))
Proposed Regulation 1.69(b)(2) required committee members to abstain
from "significant actions" by their committees, as that term
is defined in Regulation 1.69(a), if the member knowingly had a direct
and substantial financial interest in the outcome of the matter.
While most of the comments addressing proposed Commission Regulation
1.69(b)(2) focused on the provisions that mandated SRO procedures for
implementing this provision, See Regulations 1.69(b)(2)(ii)
through (iv), MGE and NGTC both contended that Regulation
1.69(b)(2)'s basic restriction would adversely impact small
exchanges. They commented that small exchanges often have a single
dominant contract that most of the exchange members (and hence most
committee members) trade. According to these commenters, applying
Regulation 1.69(b)(2) to significant actions concerning these
contracts would cause a large number of committee members to abstain
and would cripple the decisionmaking ability of small exchange
committees.
The Commission is prepared to consider granting small exchanges
exemptions from Regulation 1.69(b)(2), on a case-by-case basis. In
applying for such an exemption, an exchange must: (1) demonstrate that
Regulation 1.69(b)(2) would create a material hardship (e.g.,
an exchange that has a single large contract which is traded by a
large majority of its members), and (2) provide for alternative
procedures that are not inconsistent with the policy considerations
underlying Regulation 1.69(b)(2).
a. Nature of Interest (Regulation 1.69(b)(2)(i))
Proposed Commission Regulation 1.69(b)(2)(i) required that SRO
committee members abstain from committee deliberations and voting on
certain matters in which they "knowingly [had] a direct and
substantial financial interest." The proposed restriction applied
whenever a committee considered significant actions.(8) No commenter addressed this
provision in particular. Accordingly, the Commission has determined to
adopt Regulation 1.69(b)(2)(i) as proposed. In adopting this
provision, however, the Commission emphasizes that Regulation
1.69(b)(2)(i) itself states that the bases for a committee
member's direct and substantial financial interest in a
significant action are limited to exchange and non-exchange positions
that "reasonably could be expected to be affected by the
action." SROs should follow this standard in establishing the
level of disclosure made by committee members pursuant to Regulation
1.69(b)(2)(ii) and the level of position review made by them and their
staffs pursuant to Regulations 1.69(b)(2)(iii) and (iv).(9)
b. Disclosure of Interest (Regulation 1.69(b)(2)(ii))
Proposed Regulation 1.69(b)(2)(ii) required that, prior to the
consideration of a significant action, committee members must disclose
to appropriate SRO staff prescribed position information that was
"known" to the committee member.
BOTCC, CBT, CME and FIA each suggested that Regulation 1.69
specifically permit a committee member to recuse himself/herself from
deliberating and voting on a matter without having to make the
required disclosure pursuant to Regulation 1.69(b)(2)(ii). The
commenters' suggestions are consistent with the Commission's
original intent in proposing Regulation 1.69(b)(2)(ii). Accordingly,
the Commission has made responsive changes to the final
provision.
c. Procedure for Determination (Regulation
1.69(b)(2)(iii))
In determining a committee member's financial interest in a
significant action, proposed Regulation 1.69(b)(2)(iii)(A) through (D)
required SROs to review certain types of positions held at the SRO by
the member, the member's affiliated firm, and customers of the
member's firm in any contract that could be affected by the
committee's significant action. In addition, Regulation
1.69(b)(2)(iii)(E) required SROs to review "any other types of
positions, whether at that [SRO] or elsewhere," that the SRO
"reasonably expect[ed] could be affected by the significant
action."
CBT commented that the review of positions held outside of the
particular SRO should be limited to positions owned or controlled by
the committee member himself or herself and should not include outside
positions held by the member's firm or customers of the
member's firm. The Commission concurs with this suggestion insofar
as it pertains to positions held outside of an SRO by customers of a
committee member's firm. Such positions would be both difficult to
ascertain and would be less likely to influence a committee
member's decisionmaking. In contrast, positions held by a
committee member are certainly less difficult to ascertain, and both
positions held by a member and in the proprietary accounts of a
member's affiliated firm are more likely to influence a committee
member's decisionmaking. Accordingly, the Commission has amended
final Regulation 1.69(b)(2)(iii)(E) to require SRO review of outside
positions held in a member's personal accounts or the proprietary
accounts of a member's affiliated firm.
CME suggested that it was not necessary to have an SRO conduct the
same level of review for positions held outside of the SRO as for
positions held at the SRO and that Regulation 1.69(b)(2)(iii) should
be appropriately amended. The Commission does not believe that it is
appropriate to establish some lessened level of review standard for
positions held outside of the subject SRO. Regulation 1.69(b)(2)
already includes provisions that serve the same purpose. For example,
Regulation 1.69(b)(2)(i) limits the bases for conflict of interest
determinations to positions that "reasonably" could be
expected to be affected by a significant action. In addition,
Regulation 1.69(b)(2)(iv) states that SROs may take into account
"the exigency of the significant action" when undertaking a
review of the various sources of information to be considered when
making a conflict of interest determination.
d. Bases for Determination (Regulation 1.69(b)(2)(iv))
Proposed Regulation 1.69(b)(2)(iv) specified what sources of
information SROs should rely upon in determining whether a committee
member had a conflict of interest in a significant action. Generally,
the provision directed SROs to consult: (1) the most recent large
trader reports and clearing records available to the SRO (Regulation
1.69(b)(2)(iv)(A)); (2) position information provided to the SRO by
the committee member (Regulation 1.69(b)(2)(iv)(B)); and (3) any other
source of information that was "held by and reasonably
available" to the SRO, whether it be from inside or outside the
SRO (Regulation 1.69(b)(2)(iv)(C)).
CBT and CSCE each suggested replacement language for Regulation
1.69(b)(2)(iv)(C)'s requirement that SROs consult "any other
source of information that is reasonably available" to the SRO.
CBT suggested that SROs be permitted to rely on "any information
of which the [SRO] has actual knowledge." CSCE suggested that
SROs be able to rely on "any information otherwise known to [the
SRO] in the ordinary course of business."
The Commission does not believe that either of these suggested review
standards would be appropriate in that they could create a
disincentive for SROs to remain apprised of their committee
members' positions. The Commission has adopted an alternative
revision to Regulation 1.69(b)(2)(iv)(C) which provides that SROs
consult "any other source of information that is held by and
reasonably available" to the SRO. The Commission notes that this
revision parallels the standard which the Commission has adopted in
Regulation 1.69(b)(1)(iii) with respect to information that SROs
should consult in determining whether a committee member has a
conflict due to a relationship with a matter's named party in
interest.
3. Participation in Deliberations (Regulation
1.69(b)(3))
CEA Section 5a(a)(17) recognizes that in some instances a committee
member with a conflict in a particular committee matter also might
have special knowledge or experience regarding that matter.
Accordingly, in a limited number of circumstances, proposed Commission
Regulation 1.69(b)(3) permitted SRO committees to allow a committee
member, who otherwise would be required to abstain from deliberations
and voting on a matter because of a conflict, to deliberate but not to
vote on the matter. This "deliberation exception" was only
made applicable to matters in which a committee member had a conflict
of interest as the result of having a "direct and substantial
financial interest" in the outcome of a vote on a significant
action under Regulation 1.69(b)(2). Consistent with Section 5a(a)(17),
proposed Regulation 1.69(b)(3)'s deliberation exception did not
apply to matters in which a committee member had a conflict due to his
or her relationship with a matter's named party in interest under
Regulation 1.69(b)(1).
In determining whether to permit a "conflicted" committee
member to deliberate on a matter, proposed Regulation 1.69(b)(3)
required that the presiding committee consider a number of factors
including: (1) whether the member had unique or special expertise,
knowledge or experience in the matter involved, and (2) whether the
member's participation in deliberations would be necessary for the
committee to obtain a quorum.(10)
Proposed Regulation 1.69(b)(3)(iii) also required that when SRO
committees determine whether to grant a deliberation exception, they
"must fully consider the position information" which
evidences the committee member's financial interest in the
matter.
The Commission has decided to retain the basic requirements of
proposed Regulation 1.69(b)(3)'s deliberation exception provision
in this final rulemaking. The Commission believes that the provision
strikes a reasonable balance between ensuring that SRO committees make
well-informed decisions while minimizing the influence of a committee
member's potential bias or self-interest in a matter.
Only two commenters addressed proposed Regulation 1.69(b)(3).
Specifically, CBT and CSCE commented that Regulation 1.69(b)(3)(iii)
should not be interpreted to mean that a member's precise position
information must be disclosed to the entire SRO committee and that,
instead, some sort of general summary of the member's positions
should be sufficient disclosure.
The disclosure of a "conflicted" committee member's
position information to the committee, pursuant to Regulation
1.69(b)(3)(iii), generally serves two purposes. First, it enables the
committee to evaluate the depth of a committee member's financial
interest in the outcome of a significant action and to balance whether
his or her participation in deliberations would be worthwhile. Second,
in the case of a committee member who receives a deliberation
exception, the disclosure of the member's interest to his or her
fellow committee members should help to mitigate any prejudicial
influence such member's views could have on the other members
during the course of deliberations. In light of this important need
for accurate position information, the Commission does not believe
that it would be appropriate for SRO committees to make deliberation
exception determinations based upon a general summary of a conflicted
member's position information. Accordingly, the Commission has not
revised this provision in the final rulemaking.
4. Documentation of Determination (Regulation
1.69(b)(4))
Whenever an SRO committee made a conflict of interest determination,
proposed Regulation 1.69(b)(4) required that certain information
regarding the abstention determination be recorded. Such a record was
required to indicate: (1) the committee members who attended the
meeting (Regulation 1.69(b)(4)(i)), (2) the name of any committee
member who was directed to abstain or who voluntarily recused himself
or herself and the reasons why (Regulation 1.69(b)(4)(ii)), (3) a
listing of the position information reviewed for each committee member
(Regulation 1.69(b)(4)(iii)), and (4) in those instances when a
committee member was granted a deliberation exception, a general
description of the views expressed by the member during the
committee's deliberations on the underlying significant action
(Regulation 1.69(b)(4)(iv)).
The CSCE commented that, under the proposal, committee members who
received a deliberation exemption would be "chilled" from
expressing their opinions by the requirement that their views be
particularly recorded. The Commission concurs with CSCE's comment
and, accordingly, has deleted this requirement from final Regulation
1.69.
C. Amendments to Other Commission Regulations Made Necessary by
Final Commission Regulation 1.69
Section 213 of the FTPA amended Section 5a(a)(12)(B) of the CEA to
require that the Commission issue regulations establishing "terms
and conditions" under which contract markets may take temporary
emergency actions without prior Commission approval. Section
5a(a)(12)(B) and Regulation 1.41(f), the Commission's implementing
regulation, require that any such temporary emergency action be
adopted by a two-thirds vote of a contract market's governing
board. In recognition of the fact that governing board members may be
required to abstain from deliberations and voting on such actions
under contract market rules implementing Regulation 1.69, the
Commission, as part of its proposed conflict of interest rulemaking,
proposed to amend Regulation 1.41(f) to provide that such abstaining
board members not be included in determining whether a temporary
emergency action has been approved by a two-thirds majority of a
governing board. Abstaining board members are, however, included for
quorum purposes so that the existence of conflicted members will not
prevent a board from taking temporary emergency actions.
No commenters addressed this provision, and the Commission has
determined to amend Regulation 1.41(f)(10) as proposed.
The Commission also proposed to amend Commission Regulation
1.63's definition of "disciplinary committee" so that it
more closely conformed with Regulation 1.69's definition of the
same term. As indicated above in Section III.A.1., the Commission now
has revised Regulation 1.69(a)(1)'s definition of disciplinary
committee to exclude committees and persons who summarily issue minor
penalties for minor offenses regarding "decorum, attire, the
timely submission of accurate records for clearing or verifying each
day's transactions or other similar activities." This
revision was made in response to the concern that the application of
conflict of interest requirements to SRO disciplinary authorities when
they take summary actions for minor rule violations would be
administratively burdensome and might hamper the SROs' ability to
take quick and decisive actions in such circumstances. The same
concerns are not presented by Regulation 1.63 which generally
prohibits persons with disciplinary histories from serving on
disciplinary committees for at least three years after the date of the
underlying disciplinary judgment or settlement agreement. Accordingly,
the Commission has determined to adopt Regulation 1.63(a)(2)'s
disciplinary committee definition as proposed. The definition is
identical to Regulation 1.69's disciplinary committee definition,
except that Regulation 1.63's definition does not exclude
committees that handle summary disciplinary matters.
Finally, the CME in its comment on proposed Regulation 1.69 suggested
that Commission Regulation 8.17(a)(1), which already imposes a general
conflict of interest requirement on disciplinary committees, be
amended to clarify that Regulation 1.69 pre-empts Regulation
8.17(a)(1). The Commission does not believe that compliance with
Regulation 1.69 will necessarily constitute compliance with Regulation
8.17(a)(1). Specifically, instances when a disciplinary committee
member is a witness to the alleged misconduct, testifies about the
alleged misconduct or investigates the alleged misconduct would not
constitute a conflict of interest pursuant to Regulation 1.69 but
would possibly be a conflict of interest pursuant to Regulation
8.17(a)(1) requiring the member's recusal from the disciplinary
committee. See In the Matter of Malato, [1987-1990
Transfer Binder] Comm. Fut. L. Rep. (CCH) � 24,084, at 34,704
(CFTC Dec. 22, 1987). Accordingly, for these reasons, the Commission
has determined not to amend Regulation 8.17(a)(1) as suggested by the
CME.
D. Conclusion
The Commission believes that final Regulation 1.69 and the amendments
to Regulations 1.41 and 1.63 meet the statutory directives of Section
5a(a)(17) of the CEA as it was amended by Section 217 of the FTPA. The
rulemaking establishes guidelines and factors to be considered in
determining whether an SRO committee member is subject to a conflict
of interest which could potentially impinge on his or her ability to
make fair and impartial decisions in a matter and, thus, warrants
abstention from participation in committee deliberations and
voting.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act ("RFA"), 5 U.S.C. 601
et seq. (1980), requires that agencies, in promulgating
rules, consider the impact of those rules on small businesses. The
Commission has previously determined that contract markets are not
"small entities" for purposes of the RFA. 47 Fed. Reg.
18618, 18619 (Apr. 30, 1982). Furthermore, the then Chairman of the
Commission previously has certified on behalf of the Commission that
comparable rules affecting clearing organizations and registered
futures associations did not have a significant economic impact on a
substantial number of small entities. 51 Fed. Reg. 44866, 44868 (Dec.
12, 1986).
This rulemaking will affect individuals who serve on SRO governing
boards, disciplinary committees and oversight panels. The Commission
believes that this rulemaking will not have a significant economic
impact on these SRO committee members. This rulemaking requires these
committee members to disclose to their SROs certain information which
is known to them at the time that their committees consider certain
types of matters. The Commission believes that this requirement will
not have any significant economic impact on such members because the
information which they are required to provide should be readily
available to them.
Accordingly, the Chairperson, on behalf of the Commission, hereby
certifies, pursuant to Section 3(a) of the RFA, 5 U.S.C. �
605(b), that the action taken herein will not have a significant
economic impact on a substantial number of small entities.
B. Agency Information Activities: Proposed Collection; Comment
Request
When publishing final rules, the Paperwork Reduction Act of 1995
("PRA") (Pub. L. 104-13 (May 13, 1995)) imposes certain
requirements on federal agencies (including the Commission) in
connection with their conducting or sponsoring any collection of
information as defined by PRA. In compliance with the Act, this final
rule informs the public of:
(1) the reasons the information is planned to be and/or has been
collected; (2) the way such information is planned to be and/or has
been used to further the proper performance of the functions of the
agency; (3) an estimate, to the extent practicable, of the average
burden of the collection (together with a request that the public
direct to the agency any comments concerning the accuracy of this
burden estimate and any suggestions for reducing this burden); (4)
whether responses to the collection of information are voluntary,
required to obtain or retain a benefit, or mandatory; (5) the nature
and extent of confidentiality to be provided, if any; and (6) the fact
that 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 Office of Management and Budget ("OMB")
control number.
The Commission previously submitted this rule in proposed form and
its associated information collection requirements to OMB. OMB
approved the collection of information associated with this rule on
October 24, 1998, and assigned OMB control number 3038-0022, Rules
Pertaining to Contract Markets and their Members, to the rule. The
burden associated with this entire collection, including this final
rule, is as follows:
�����������������������
Average burden hours per response
����������������������������
788,857
�����������������������
Number of respondents
�����������������������������������������������
434,052
�����������������������
Frequency of response
������������������������������������������������
On Occasion
The burden associated with this specific final rule, is as follows:
��� Average burden hours per response ������������������������������ 2.00
��� Number of respondents ���������������������������������������������������� 20
��� Frequency of response �������������������������������������������������� On Occasion
Persons wishing to comment on the information required by this final
rule should contact the Desk Officer, CFTC, Room 10202, NEOB,
Washington, D.C. 20503, (202) 395-7340. Copies of the information
collection submission to OMB are available from the CFTC Clearance
Officer, 1155 21st Street NW, Washington, D.C. 20581, (202)
418-5160.
List of Subjects in 17 CFR Part 1
Commodity futures, Contract markets, Clearing organizations, Members
of contract market.
In consideration of the foregoing, and based on the authority
contained in the Commodity Exchange Act and, in particular, Sections
3, 4b, 5, 5a, 6, 6b, 8, 8a, 9, 17, and 23(b) thereof, 7 U.S.C. 5, 6b,
7, 7a, 8, 13a, 12, 12a, 13, 21 and 26(b), the Commission hereby amends
Title 17, Chapter I, Part 1 of the Code of Federal Regulations as
follows:
PART 1-GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE
ACT
1. The authority citation for Part 1 continues to read as
follows:
Authority: 7 USC 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d,
6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 8, 9, 12, 12a, 12c,
13a, 13a-1, 16, 19, 21, 23, and 24, unless otherwise stated.
2. Section 1.41 is amended to read as follows:
� 1.41 Contract market rules; submission of rules to the
Commission; exemption of certain rules.
* * * * *
(f) * * * * *
(10) Governing board members who abstain from voting on a temporary
emergency rule pursuant to � 1.69 shall not be counted in
determining whether such a rule was approved by the two-thirds vote
required by this regulation. Such members can be counted for the
purpose of determining whether a quorum exists.
3. Section 1.63 is amended to read as follows:
� 1.63 Service on self-regulatory organization governing
boards or committees by persons with disciplinary
histories.
(a) * * * * *
(2) "Disciplinary committee" means any person or committee
of persons, or any subcommittee thereof, that is authorized by a
self-regulatory organization to issue disciplinary charges, to conduct
disciplinary proceedings, to settle disciplinary charges, to impose
disciplinary sanctions or to hear appeals thereof.
4. Section 1.69 is added to read as follows:
��1.69 Voting by interested members of
self-regulatory organization governing boards and various
committees.
(a) Definitions. For purposes of this section:
(1) "Disciplinary committee" means any person or committee
of persons, or any subcommittee thereof, that is authorized by a
self-regulatory organization to issue disciplinary charges, to conduct
disciplinary proceedings, to settle disciplinary charges, to impose
disciplinary sanctions, or to hear appeals thereof in cases involving
any violation of the rules of the self-regulatory organization except
those cases where the person or committee is authorized summarily to
impose minor penalties for violating rules regarding decorum, attire,
the timely submission of accurate records for clearing or verifying
each day's transactions or other similar activities.
(2) A person's "family relationship" means the
person's spouse, former spouse, parent, stepparent, child,
stepchild, sibling, stepbrother, stepsister, grandparent, grandchild,
uncle, aunt, nephew, niece or in-law.
(3) "Governing board" means a self-regulatory
organization's board of directors, board of governors, board of
managers, or similar body, or any subcommittee thereof, duly
authorized, pursuant to a rule of the self-regulatory organization
that has been approved by the Commission or has become effective
pursuant to either Section 5a(a)(12)(A) or 17(j) of the Act to take
action or to recommend the taking of action on behalf of the
self-regulatory organization.
(4) "Oversight panel" means any panel, or any subcommittee
thereof, authorized by a self-regulatory organization to recommend or
establish policies or procedures with respect to the self-regulatory
organization's surveillance, compliance, rule enforcement, or
disciplinary responsibilities.
(5) "Member's affiliated firm" is a firm in which the
member is a "principal," as defined in � 3.1(a), or an
employee.
(6) "Named party in interest" means a person or entity that
is identified by name as a subject of any matter being considered by a
governing board, disciplinary committee, or oversight panel.
(7) "Self-regulatory organization" means a
"self-regulatory organization" as defined in � 1.3(ee)
and includes a "clearing organization" as defined in �
1.3(d), but excludes registered futures associations for the purposes
of subparagraph (b)(2) of this section.
(8) "Significant action" includes any of the following
types of self-regulatory organization actions or rule changes that can
be implemented without the Commission's prior approval:
(i) any actions or rule changes which address an
"emergency" as defined in � 1.41(a)(4)(i) through (iv)
and (vi) through (viii); and,
(ii) any changes in margin levels that are designed to respond to
extraordinary market conditions such as an actual or attempted corner,
squeeze, congestion or undue concentration of positions, or that
otherwise are likely to have a substantial effect on prices in any
contract traded or cleared at such self-regulatory organization; but
does not include any rule not submitted for prior Commission approval
because such rule is unrelated to the terms and conditions of any
contract traded at such self-regulatory organization.
(b) Self-Regulatory Organization Rules. Each
self-regulatory organization shall maintain in effect rules that have
been submitted to the Commission pursuant to Section 5a(a)(12)(A) of
the Act and � 1.41 or, in the case of a registered futures
association, pursuant to Section 17(j) of the Act, to address the
avoidance of conflicts of interest in the execution of its
self-regulatory functions. Such rules must provide for the
following:
(1) Relationship With Named Party in Interest.
(i) Nature of Relationship. A member of a
self-regulatory organization's governing board, disciplinary
committee or oversight panel must abstain from such body's
deliberations and voting on any matter involving a named party in
interest where such member:
(A) is a named party in interest;
(B) is an employer, employee, or fellow employee of a named party in
interest;
(C) is associated with a named party in interest through a
"broker association" as defined in � 156.1;
(D) has any other significant, ongoing business relationship with a
named party in interest, not including relationships limited to
executing futures or option transactions opposite of each other or to
clearing futures or option transactions through the same clearing
member; or,
(E) has a family relationship with a named party in interest.
(ii) Disclosure of Relationship. Prior to the
consideration of any matter involving a named party in interest, each
member of a self-regulatory organization governing board, disciplinary
committee or oversight panel must disclose to the appropriate
self-regulatory organization staff whether he or she has one of the
relationships listed in subparagraph (b)(1)(i) of this section with a
named party in interest.
(iii) Procedure for Determination. Each
self-regulatory organization must establish procedures for determining
whether any member of its governing board, disciplinary committees or
oversight committees is subject to a conflicts restriction in any
matter involving a named party in interest. Taking into consideration
the exigency of the committee action, such determinations should be
based upon:
(A) information provided by the member pursuant to subparagraph
(b)(1)(ii) of this section; and
(B) any other source of information that is held by and reasonably
available to the self-regulatory organization.
(2) Financial Interest in a Significant
Action.
(i) Nature of Interest. A member of a
self-regulatory organization's governing board, disciplinary
committee or oversight panel must abstain from such body's
deliberations and voting on any significant action if the member
knowingly has a direct and substantial financial interest in the
result of the vote based upon either exchange or non-exchange
positions that could reasonably be expected to be affected by the
action.
(ii) Disclosure of Interest. Prior to the
consideration of any significant action, each member of a
self-regulatory organization governing board, disciplinary committee
or oversight panel must disclose to the appropriate self-regulatory
organization staff the position information referred to in
subparagraph (b)(2)(iii) of this section that is known to him or her.
This requirement does not apply to members who choose to abstain from
deliberations and voting on the subject significant action.
(iii) Procedure for Determination. Each self
regulatory organization must establish procedures for determining
whether any member of its governing board, disciplinary committees or
oversight committees is subject to a conflicts restriction under this
section in any significant action. Such determination must include a
review of:
(A) gross positions held at that self-regulatory organization in the
member's personal accounts or "controlled accounts," as
defined in � 1.3(j);
(B) gross positions held at that self-regulatory organization in
proprietary accounts, as defined in � 1.17(b)(3), at the
member's affiliated firm;
(C) gross positions held at that self-regulatory organization in
accounts in which the member is a principal, as defined in �
3.1(a);
(D) net positions held at that self-regulatory organization in
"customer" accounts, as defined in � 1.17(b)(2), at the
member's affiliated firm; and,
(E) any other types of positions, whether maintained at that
self-regulatory organization or elsewhere, held in the member's
personal accounts or the proprietary accounts of the member's
affiliated firm that the self-regulatory organization reasonably
expects could be affected by the significant action.
(iv) Bases for Determination. Taking into
consideration the exigency of the significant action, such
determinations should be based upon:
(A) the most recent large trader reports and clearing records
available to the self-regulatory organization;
(B) information provided by the member with respect to positions
pursuant to subparagraph (b)(2)(ii) of this section; and,
(C) any other source of information that is held by and reasonably
available to the self-regulatory organization.
(3) Participation in Deliberations.
(i) Under the rules required by this section, a self-regulatory
organization governing board, disciplinary committee or oversight
panel may permit a member to participate in deliberations prior to a
vote on a significant action for which he or she otherwise would be
required to abstain, pursuant to subparagraph (b)(2) of this section,
if such participation would be consistent with the public interest and
the member recuses himself or herself from voting on such
action.
(ii) In making a determination as to whether to permit a member to
participate in deliberations on a significant action for which he or
she otherwise would be required to abstain, the deliberating body
shall consider the following factors:
(A) whether the member's participation in deliberations is
necessary for the deliberating body to achieve a quorum in the matter;
and
(B) whether the member has unique or special expertise, knowledge or
experience in the matter under consideration.
(iii) Prior to any determination pursuant to subparagraph (b)(3)(i)
of this section, the deliberating body must fully consider the
position information which is the basis for the member's direct
and substantial financial interest in the result of a vote on a
significant action pursuant to subparagraph (b)(2) of this
section.
(4) Documentation of Determination. Self-regulatory
organization governing boards, disciplinary committees, and oversight
panels must reflect in their minutes or otherwise document that the
conflicts determination procedures required by this section have been
followed. Such records also must include:
(i) the names of all members who attended the meeting in person or
who otherwise were present by electronic means;
(ii) the name of any member who voluntarily recused himself or
herself or was required to abstain from deliberations and/or voting on
a matter and the reason for the recusal or abstention, if stated;
and
(iii) information on the position information that was reviewed for
each member.
Issued in Washington, D.C. on December 23, 1998, by the
Commission.
Catherine D. Dixon
Assistant Secretary of the Commission
1���� Pub. L. No. 102-546, � 217, 106 Stat. 3590 (1992).
2�� �� For the purposes of this release, the term "committee" generally will be used to include governing boards, disciplinary committees and oversight panels unless otherwise specified.
3� ��� 61 Fed. Reg. 19869 (May 3, 1996).
4���� 63 Fed. Reg. 3492 (Jan. 23, 1998).
5��� See proposed Commission Regulation 1.69(a)(4).
6�� �� The Commission notes that committees which act in these capacities would qualify as oversight panels under Regulation 1.69(a)(4), rather than disciplinary committees or governing boards.
7� �� See discussion of Regulation 1.69(a)(1)'s definition of disciplinary committee in Section III.A.1 above.
8�� �� The definition of such significant actions is established by final Regulation 1.69(a)(8) and is discussed above in Section III.A.8.
9� ��� BOTCC, CBT and CME each requested clarification on this particular point in their respective comment letters.
10���� The Commission, in its proposed rulemaking, indicated that it believed that, given the factors that must be considered, deliberation exception determinations should be made by the committee involved, rather than SRO staff. For any particular SRO committee matter, the committee members themselves would be in a better position than SRO staff to assess their individual levels of expertise in the matter and their need for input during deliberations from the committee member who otherwise would be required to abstain. The Commission continues to adhere to this view, and no commenters on the proposed rulemaking addressed this issue. Accordingly, final Regulation 1.69 specifically confers the responsibility for deliberation exception determinations on the SRO committee involved.