[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