[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]
[DOCID:fr26mr07-8]
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Proposed Rules
Federal Register
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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.
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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.
ACTION: Proposed rule.
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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
amendments.
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\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).
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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.
SUPPLEMENTARY INFORMATION:
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.
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\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.
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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.
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\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.
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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).
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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
``entity.''
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
(b)(2)(ii)(B).\8\
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\8\ Discussed in Section III(A) of this preamble.
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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\
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\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).
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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 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.
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\11\ 72 FR 6936 (February 14, 2007).
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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,
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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
entities.
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\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).
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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:
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 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]
BILLING CODE 6351-01-P
Last Updated: June 27, 2007