e9-891

[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 [email protected] ``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).

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After considering the above mentioned factors and issues, the

Commission has determined to propose these amendments to the acceptable

practices for Core Principle 15. The Commission specifically invites

public comment on its application of the criteria contained in Section

15(a) of the Act and further invites interested parties to submit any

quantifiable data that they may have concerning the costs and benefits

of the proposed amendments to the acceptable practices for Core

Principle 15.

B. Paperwork Reduction Act of 1995

These proposed amendments to the acceptable practices for Core

Principle 15 will not impose any new recordkeeping or information

collection requirements, or other collections of information that

require approval of the Office of Management and Budget under 44 U.S.C.

3501, et seq. Accordingly, the Paperwork Reduction Act does not apply.

We solicit comments on the accuracy of our estimate that no additional

recordkeeping or information collection requirements or changes to

existing collection requirements would result from the amendments

proposed herein.

C. Regulatory Flexibility Act

The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. requires

federal agencies, in promulgating rules, to consider the impact of

those rules on small entities. The proposed amendments to the

Acceptable Practices for Core Principle 15 affect DCMs. The Commission

has previously determined that DCMs are not small entities for purposes

of the Regulatory Flexibility Act.\24\ Accordingly, the Acting

Chairman, on behalf of the Commission, hereby certifies pursuant to 5

U.S.C. 605(b) that the proposed amendments to the acceptable practices

will not have a significant economic impact on a substantial number of

small entities.

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\24\ See Policy Statement and Establishment of Definitions of

``Small Entities'' for Purposes of the Regulatory Flexibility Act,

47 FR 18618, 18619 (Apr. 30, 1982).

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III. Text of Proposed Amendments

List of Subjects in 17 CFR Part 38

Commodity futures, Reporting and recordkeeping requirements.

In light of the foregoing, and pursuant to the authority in the

Act, and in particular, Sections 3, 5, 5c(a) and 8a(5) of the Act, the

Commission hereby proposes to amend Part 38 of Title 17 of the Code of

Federal Regulations as follows:

PART 38--DESIGNATED CONTRACT MARKETS

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

Authority: 7 U.S.C. 2, 5, 6, 6c, 7, 7a-2, and 12a, as amended by

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

2. In Appendix B to Part 38 revise paragraphs (b)(2)(ii) through

(b)(2)(v) of the acceptable practices for Core Principle 15 to read as

follows:

Appendix B to Part 38--Guidance on, and Acceptable Practices in,

Compliance With Core Principles

* * * * *

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

INTEREST

* * * * *

(b) * * *

(2) * * *

(ii) In addition, a director shall be considered to have a

``material relationship'' with the contract market if any of the

following circumstances exist:

(A) The director is an officer or employee of the contract

market or an officer or employee of its affiliate. In this context,

``affiliate'' includes parents or subsidiaries of the contract

market or entities that share a common parent with the contract

market;

(B) The director is a member of the contract market, or an

officer or director of a member. ``Member'' is defined according to

Section 1a(24) of the Commodity Exchange Act and Commission

Regulation 1.3(q);

(C) The director, or a firm with which the director is an

officer, director, or partner, receives more than $100,000 in

combined annual payments from the contract market, or any affiliate

of the contract market (as defined in Subsection (2)(ii)(A)), for

legal, accounting, or consulting services. Compensation for services

as a director of the contract market or as a director of an

affiliate of the contract market does not count toward the $100,000

payment limit, nor does deferred compensation for services prior to

becoming a director, so long as such compensation is in no way

contingent, conditioned, or revocable;

(D) Any of the relationships above apply to a member of the

director's ``immediate family,'' i.e., spouse, parents, children and

siblings.

(iii) All of the disqualifying circumstances described in

Subsection (2)(ii) shall be subject to a one-year look back.

(iv) A contract market's public directors may also serve as

directors of the contract market's affiliate (as defined in

Subsection (2)(ii)(A)) if they otherwise meet the definition of

public director in this Section (2).

(v) A contract market shall disclose to the Commission which

members of its board are public directors, and the basis for those

determinations.

* * * * *

Issued in Washington, DC, on January 12, 2009 by the Commission.

David Stawick,

Secretary of the Commission.

Concurring Statement of Commissioner Jill E. Sommers Regarding the

Withdrawal of Previously Proposed Amendments to the Acceptable

Practices for Core Principle 15 and Solicitation of Public Comments on

New Proposed Amendments

I fully support the Commission's decision to issue these proposed

amendments to the bright-line tests for determining when a board member

has a material relationship with an exchange such that he or she is

disqualified from serving as a public director. The proposed amendments

attempt to cure certain ambiguities and complexities that existed in

the acceptable practices adopted by the Commission on January 31, 2007,

and the proposed amendments thereto published on March 26, 2007. I

commend Commission staff for their dedication to this important project

and their resolve, through several changes in Commission membership, to

get it right. I believe the amendments proposed today provide a

workable method of discerning the existence of those relationships that

should be deemed automatically ``material,'' and appropriately leave to

the exchanges the responsibility for determining whether other

circumstances not specified in the bright-line tests may give rise to

potential conflicts of interest.

I write separately, however, to express my disagreement with

issuing the statement contained in footnote six of

[[Page 3480]]

the proposal, that ``the Commission believes DCMs benefit from

endeavoring to recruit their public directors from a broad and

culturally diverse pool of qualified candidates.'' The purpose of the

acceptable practices is to ``ensure that there is adequate independence

within [exchange] board[s] to insulate [their] regulatory functions

from the interests of the exchange's management, members and other

business interests of the market itself.'' 71 FR 38740 (July 7, 2006).

It is not clear to me how recruiting directors from a culturally

diverse pool of candidates advances that goal, nor is it a given that

seating a well-qualified board that is culturally diverse is something

that may be practicably accomplished. My primary objection, however, is

based on the fact that we have no legal authority to issue

pronouncements on the subject. We are not a commission of general

jurisdiction. Our authority and oversight responsibilities are

specifically limited by statute and do not include the promotion of

equal employment opportunity. Moreover, to the extent the Commission

may be suggesting that exchanges consider factors such as race, gender,

national origin, or religion in selecting public directors, we may be

encouraging activity that could potentially violate Title VII of the

Civil Rights Act of 1964.

Concurring Statement of Commissioner Bart Chilton Regarding the

Withdrawal of Previously Proposed Amendments to the Acceptable

Practices for Core Principle 15 and Solicitation of Public Comments on

New Proposed Amendments

I concur in the Commission's issuance of the above-referenced

action. I write separately, however, to comment on certain aspects of

the proposal of particular interest to me.

First, I am gratified to see language in the proposal relating to

my longstanding request that we note to designated contract markets the

benefits of diversity in recruiting public directors. While this is, as

stated, not a requirement under the acceptable practices, it is quite

obviously a laudable and attainable goal, and one that should be

encouraged.

Second, I would ask commenters to respond specifically as to

whether the Commission has included within the proposal all appropriate

decision-making bodies at designated contract markets, or whether the

class should be broadened to include entities other than boards of

directors, executive committees or similarly empowered bodies,

regulatory oversight committees, and disciplinary panels.

Lastly, I note with some concern the timeline of this proposal. In

November 2007, the Commission stayed the ``final'' acceptable practices

that had been issued in February 2007. This was a necessary action,

although unfortunate in that it created further delay in an already

protracted and flawed process. Even more unfortunate, swift action was

promised on this proposal in December 2007, yet it has taken more than

a full year to see any progress. As public servants, we can and should

do better to serve American consumers and businesses.

[FR Doc. E9-891 Filed 1-16-09; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: January 22, 2009