Commissioner Michael V. Dunn, writing separately
The proposed acceptable practices published today represent an important step forward in ensuring the fairness and transparency of our commodity markets. I wish to comment on two aspects of the proposal.
First, the proposed rule notes that exchanges that elect to forgo the safe harbor of the best practices outlined in this proposal can still demonstrate compliance with Core Principle 15 through showing they have procedures and safeguards in place to address potential conflicts of interest. For these exchanges, the Commission will continue its current practice of reviewing the activities of these exchanges to ensure they are in compliance with Core Principle 15. Therefore, while the proposed acceptable practices offer a safe harbor for complying with Core Principle 15, they are not the only method of demonstrating compliance.
Second, efficient, transparent, and open markets bring great benefits to their participants and the public. The Commodity Futures Modernization Act of 2000 (CFMA) , sought to safeguard these values by placing a much greater emphasis on industry self-regulation: setting out core principles registrants have to meet and giving industry flexibility in choosing how to comply.
While the Commission has final responsibility to ensure the fairness and transparency of the markets it regulates, its effectiveness in doing so relies heavily upon the presence of a robust self-regulatory system. Registered Futures Associations (RFAs) are provided for in the CEA to complement the Commission’s oversight of commodities markets and to bring industry knowledge and experience to bear on regulatory issues affecting those markets.[1] In its June 2004 request for comments on SRO governance that led to this proposal, the Commission asked, “Should registered futures associations that are functioning as SROs also be subject to governance standards?” In its response, the National Futures Association (“NFA”), the sole RFA, wrote that “registered futures associations should be subject to the same governance standards as the other SROs,” as long as these standards are flexible.
As the sole RFA, NFA occupies a unique position in the futures markets’ system of self-regulation. NFA is entrusted with overseeing a wide variety of futures market intermediaries, cutting across different segments of the futures industry, including futures commission merchants, commodity pool operators (“CPOs”), commodity trading advisers (“CTA”), and introducing broker-dealers (“IBs”). NFA’s functions are as varied as the members it oversees. NFA performs registration and fitness screening functions, conducts audits and surveillance of its members to enforce compliance with financial requirements, establishes and enforces rules and standards for customer protection, and conducts arbitration of futures-related disputes. NFA also has taken certain functions delegated to it by the Commission and more recently, has assumed trade practice and market surveillance activities for a number of exchanges.[2]
In light of the concerns raised in this proposal regarding conflicts of interest and self-regulation, I believe the Commission needs to review the conflicts of RFAs as well as exchanges. In this proposal, the Commission indicates in footnote 4 that we will be considering this matter further, and I look forward to that consideration.
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[1] See generally Section 17 of the Act, 7 U.S.C. § 21. An RFA must be determined by the Commission to be in the public interest. Id. at Section 17(b)(1), 7 U.S.C. § 21(b)(1).
[2] When an RFA extends its sphere of operation beyond traditional, self-regulatory roles to include such ancillary activities, it appropriately should reexamine the methods it uses to manage and minimize conflicts of interests, to determine whether these methods remain adequate to meet changed circumstances.
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Last Updated: April 2, 2010