[Federal Register: March 26, 2007 (Volume 72, Number 57)]

[Proposed Rules]

[Page 14051-14053]

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



Proposed Rules

Federal Register


This section of the FEDERAL REGISTER contains notices to the public of

the proposed issuance of rules and regulations. The purpose of these

notices is to give interested persons an opportunity to participate in

the rule making prior to the adoption of the final rules.


[[Page 14051]]



17 CFR Part 38

RIN 3038-AC28

Conflicts of Interest in Self-Regulation and Self-Regulatory


AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.


SUMMARY: The Commission hereby proposes amendments to the Acceptable

Practices \1\ for section 5(d)(15) (``Core Principle 15'') of the

Commodity Exchange Act (``CEA'' or ``Act'').\2\ The amendments clarify

the definition of ``public director'' contained in the Acceptable

Practices.\3\ The Commission believes that the proposed amendments will

remove potential ambiguities and correct a technical drafting error.

The amendments are consistent with the Acceptable Practices' intent to

ensure the inclusion of truly public directors on designated contract

market (``DCM'') boards of directors and Regulatory Oversight

Committees (``ROCs''), as well as truly public persons on their

disciplinary panels. The Commission welcomes comment on the proposed



\1\ The acceptable practices for core principles reside in

Appendix B to Part 38 of the Commission's Regulations, 17 CFR Part

38, App. B.

\2\ The Act is codified at 7 U.S.C. 1 et seq. (2000).

\3\ Those Acceptable Practices were adopted by the Commission on

January 31, 2007, 72 FR 6936 (February 14, 2007), after having been

originally proposed by the Commission on June 28, 2006, 71 FR 38740

(July 7, 2006).


DATES: Comments should be submitted on or before April 25, 2007.

ADDRESSES: Comments should be sent to Eileen A. Donovan, Acting

Secretary, Commodity Futures Trading Commission, Three Lafayette

Centre, 1155 21st Street, N.W., 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 in written submissions. Comments may also be

submitted at http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Rachel F. Berdansky, Acting 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, NW., Washington, DC 20581.


I. Background

On February 14, 2007, the Commission published final Acceptable

Practices for Core Principle 15 of the Act.\4\ The published Acceptable

Practices are the first for Core Principle 15 and are applicable to all

DCMs.\5\ They pertain to minimizing conflicts of interest in decision

making by DCMs, and offer all DCMs a ``safe harbor'' by which they may

minimize such conflicts and thereby comply with Core Principle 15. To

receive safe harbor treatment, DCMs must implement the Acceptable

Practices' various operational provisions in their entirety, including

instituting boards of directors that are composed of at least 35%

public directors and establishing oversight of all regulatory functions

through ROCs consisting exclusively of public directors.\6\ In addition

to these operational provisions, the Acceptable Practices also set

forth a public director definition. The proposed amendments consist

exclusively of revisions to that definition.


\4\ Core Principle 15 states: ``CONFLICTS OF INTEREST--The board

of trade shall establish and enforce rules to minimize conflicts of

interest in the decisionmaking process of the contract market and

establish a process for resolving such conflicts of interest.'' CEA

Sec. 5(d)(15), 7 U.S.C. 7(d)(15).

\5\ Any board of trade that is registered with the Securities

and Exchange Commission as a national securities exchange, is a

national securities association registered pursuant to section

15(A)(a) of the Securities Exchange Act of 1934, or is an

alternative trading system, and that operates as a DCM in security

futures products under Section 5f of the Act and Commission

Regulation 41.31, is exempt from the core principles enumerated in

Section 5 of the Act and the acceptable practices thereunder.

\6\ The Acceptable Practices became effective on March 16, 2007.

Existing DCMs were given two years, measured from the effective

date, to achieve full compliance with Core Principle 15.


II. Need for Clarifying Amendments

The Commission proposes to amend two subsections of the Acceptable

Practices, Subsections (b)(2)(ii)(B) and (b)(2)(ii)(C), which together

with Subsections (b)(2)(i), (b)(2)(ii)(A) and (b)(2)(ii)(D), establish

the definition of a DCM public director.\7\ In general, the amendments

address ambiguities that may arise from those provisions' different

uses of the terms ``affiliate'' and ``affiliated.'' Such uses include

references to corporate affiliation; personal affiliation; affiliation

with a DCM member; and affiliation with a firm. The amendments also

correct a technical drafting error and define ``payments.'' The

proposed amendments are consistent with the intent of both the proposed

and final Acceptable Practices, and should not be interpreted as a

diminution in the level of independence that those criteria are

intended to ensure for public directors. In light of the nature of

these amendments, the Commission does not anticipate that it will be

necessary to extend the comment period.


\7\ Other than Subsections (b)(2)(ii)(B) and (b)(2)(ii)(C), the

Commission is not proposing changes to any other provision of the

Acceptable Practices for Core Principle 15.


III. Description of Clarifying Amendments

A. Subsection (b)(2)(ii)(B)

Subsection (b)(2)(ii)(B) precludes DCM members, employees of

members, and persons ``affiliated'' with members from service as public

directors. As adopted, 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.'' This impartiality provision reflects a qualitative test

intended to capture specific disqualifying relationships between

individuals and DCM members.

The Commission proposes to amend the definition of ``affiliated''

in Subsection (b)(2)(ii)(B) by removing any reference to the

qualitative ``impartiality'' test outlined above. This eliminates the

qualitative test and replaces it with an exact articulation of the

relationships that are prohibited under Subsection (b)(2)(ii)(B).

[[Page 14052]]

Specifically, the amendment states that a person is ``affiliated'' with

a DCM member, and thus disqualified as a public director, if he or she

is an ``officer, director, or partner of the member.''

B. Subsection (b)(2)(ii)(C)

Subsection (b)(2)(ii)(C) creates a bright-line, $100,000 combined

annual payments test for potential public directors and the firms with

which they are 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. The Commission

proposes to amend this subsection to define ``payment;'' clarify the

term ``affiliate,'' as used in the subsection; remove the term

``affiliated'' in referring to certain relationships and replace it

with the specific payment providers and recipients that the Commission

intends to reach; and correct a technical drafting error.

The first amendment defines the nature of ``payment,'' limiting it

to compensation for professional services rendered. The amendment

reflects the Commission's intent to capture those persons and firms

providing professional services to a DCM and/or its members, as well as

the employees, officers, directors, and partners of such firms.

The second amendment to Subsection (b)(2)(ii)(C) clarifies the

clause ``any affiliate of the contract market.'' Clarification is

provided via explicit cross-reference to Subsection (b)(2)(ii)(A),

which defines the affiliates of a contract market to include the

parents or subsidiaries of the contract market or entities that share a

common parent with the contract market. This proposed amendment is

consistent with the Commission's original intent.

Two other amendments to Subsection (b)(2)(ii)(C) address payment

providers and recipients, resolving potential ambiguities arising from

multiple uses of the term ``affiliated.'' In addition, one of the

amendments corrects a drafting error in this subsection which resulted

from the inadvertent inclusion of ``entity'' in the clause ``any person

or entity affiliated with a member of the contract market'' (``member

payment-providers provision''). The inclusion of ``entity'' in the

member payment-providers provision resulted in a standard that

encompassed a range of payment providers broader than the Commission

intended. The Commission proposes to remedy its error by deleting


With respect to ``affiliated,'' the Commission notes that the term

is not defined in the member payment-providers provision. Potential

ambiguity could arise in importing and applying a definition from

elsewhere in the Acceptable Practices. Accordingly, the Commission

proposes to amend and clarify the member payment-providers provision by

replacing the term ``affiliated'' with a precise articulation of the

member payment providers it intends to reach. Consistent with the

proposed Acceptable Practices, the Commission proposes to amend the

adopted member payment-providers provision so that it refers to

payments ``from a member or an officer or director of a member* * *.''

Similarly, the Commission has determined to specifically define the

payment recipients that it intends to reach. In the adopted Acceptable

Practices, the relevant recipients include ``a firm with which the

director is affiliated, as defined above,'' implying a cross-reference

to Subsection (b)(2)(ii)(B). Furthermore, through this cross-reference,

the payment recipients provision incorporates the qualitative

impartiality test embedded within the adopted Subsection



\8\ Discussed in Section III(A) of this preamble.


As previously noted, the Commission has determined that the

qualitative impartiality test in Subsection (b)(2)(ii)(B) is best

replaced with a specific articulation of the relevant relationships.

Similarly, the Commission believes that a specific articulation is

appropriate with respect to payment recipients in Subsection

(b)(2)(ii)(C), both to remove any ambiguities which may exist and to

eliminate the cross-reference upon which the payment recipients

provision currently relies. Accordingly, the Commission proposes to

amend Subsection (b)(2)(ii)(C) to reach payments made to the director

and payments made to firms ``of which the director is an employee,

officer, director, or partner.''

Finally, as adopted, the last sentence in Subsection (b)(2)(ii)(C)

states, in part, that ``compensation for services as a director does

not count toward the $100,000 payment limit.'' This provision was

intended to avoid the dilemma of DCM public directors forfeiting their

public director eligibility because of compensation received for

serving in such capacity. The Commission notes, however, that proposed

changes elsewhere in this Subsection contain new references to various

types of directors and that those changes may create uncertainty as to

the meaning of ``director'' in this context. Accordingly, the

Commission proposes to insert ``of the contract market'' after

``director,'' making clear that compensation for services as a director

of the contract market does not count toward the $100,000 payment cap.

IV. Related Matters

A. Cost-Benefit Analysis

Section 15(a) of the Act requires the Commission to consider the

costs and benefits of its action before issuing a new regulation or

order under the CEA.\9\ By its terms, Section 15(a) requires the

Commission to ``consider the costs and benefits'' of a subject rule or

order without requiring the Commission 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 interest considerations. In conducting

its analysis, the Commission may, in its discretion, give greater

weight to any one of the five enumerated areas of concern 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.\10\


\9\ 7 U.S.C. 19(a).

\10\ E.g, Fishermen's Dock Co-op., Inc. v. Brown. 75 F.3d 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

costs-benefits analyses).


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 a DCM's decision making

process.\11\ 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.


\11\ 72 FR 6936 (February 14, 2007).


The amendments herein to the adopted Acceptable Practices are

proposed to enhance regulatory certainty by addressing potential

definitional ambiguities and a drafting error. The removal of such

ambiguities will facilitate the inclusion of public directors on DCM

governing boards and committees and ensure that DCMs are able to comply

with the requirements of the Acceptable Practices. In turn,

[[Page 14053]]

compliance with the Acceptable Practices will assure DCMs of their

compliance with the requirements of Core Principle 15 as they pertain

to conflicts of interest in self-regulation and self-regulatory

organizations. The amendments should not impose additional costs, but

in fact may reduce costs of compliance in light of the removal of

ambiguities. They assure that what is intended to be a bright-line test

operates as such. After considering the above mentioned factors and

issues, the Commission has determined to propose these amendments to

the Acceptable Practices of Core Principle 15. The Commission

specifically invites public comment on its application of the criteria

contained in Section 15(a) of the Act and furthermore 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 of Core Principle 15.

B. Paperwork Reduction Act of 1995

These proposed amendments to the Acceptable Practices of Core

Principle 15 would 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 comment 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.\12\ Accordingly, the 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



\12\ See Policy Statement and Establishment of Definitions of

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

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


V. Text of Proposed Amendments to Acceptable Practices for Core

Principle 15

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:


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 Pub. L. 106-554, 114 Stat. 2763A-365.

2. In Appendix B to Part 38 amend paragraphs (b)(2)(ii)(B) and

(b)(2)(ii)(C) 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) * * *

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

employed by or affiliated with a member. ``Member'' is defined

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

Commission Regulation 1.3(q). In this context, a person is

``affiliated'' with a member if he or she is an officer, director,

or partner of the member;

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

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

in combined annual payments from the contract market, any affiliate

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

a member or an officer or director of a member of the contract

market. As used in this Subsection (2)(ii)(C), ``payments'' means

compensation for professional services. Compensation for services as

a director 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;

* * * * *

Issued in Washington, DC, on March 20, 2007 by the Commission.

Eileen A. Donovan,

Acting Secretary of the Commission.

[FR Doc. E7-5468 Filed 3-23-07; 8:45 am]


Last Updated: June 27, 2007