[Federal Register: January 23, 1998 (Volume 63, Number 15)]
[Proposed Rules]
[Page 3492-3505]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23ja98-15]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
Voting by Interested Members of Self-Regulatory Organization
Governing Boards and Committees
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: On May 3, 1996, the Commodity Futures Trading Commission
("Commission") published for comment in the Federal Register a
proposed new Regulation 1.69 <SUP>1</SUP> that would implement the
statutory directives of Section 5a(a)(17) of the Commodity Exchange Act
("CEA") as it was amended by Section 217 of the Futures Trading
Practices Act of 1992 ("FTPA").<SUP>2</SUP> The Commission received
eleven comment letters in response to the proposed rulemaking. Based
upon those comments, the Commission has amended its proposed rulemaking
and has determined to publish a revised proposed rulemaking for
additional public comment.
---------------------------------------------------------------------------
\1\ 61 FR 19869 (May 3, 1996).
\2\ Pub. L. No. 102-546, Sec. 217, 106 Stat. 3590 (1992).
---------------------------------------------------------------------------
Proposed Commission Regulation 1.69 would require self-regulatory
organizations ("SRO") to adopt rules prohibiting governing board,
disciplinary committee, and oversight panel members from deliberating
or voting on certain matters where the member had either a relationship
with the matter's named party in interest or a financial interest in
the matter's outcome. The proposed rulemaking also would amend
Commission Regulations 1.41 and 1.63 to make modifications made
necessary by proposed Commission Regulation 1.69.
DATES: Comments on the proposed rule and rule amendments must be
received by February 23, 1998.
FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Special Counsel,
Division of Trading and Markets, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581;
Telephone: (202) 418-5481.
SUPPLEMENTARY INFORMATION:
I. Introduction
Section 217 of the FTPA amended Section 5a(a)(17) of the CEA to
require that contract markets "provide for the avoidance of conflict
of interest in deliberations by [their] governing board[s] and any
disciplinary and oversight committee[s]." <SUP>3</SUP> On May 3, 1996,
the Commission published for public comment in the Federal Register a
proposed new Regulation 1.69 which required SROs to adopt rules
prohibiting governing board, disciplinary committee and oversight panel
members from deliberating and voting on certain matters where the
member had either a relationship with the matter's named party in
interest or a financial interest in the matter's outcome.<SUP>4</SUP>
The Commission also proposed to make related amendments to existing
Commission Regulations 1.3, 1.41 and 1.63.
---------------------------------------------------------------------------
\3\ For the purposes of this release, the term committee
generally will be used to include governing boards, disciplinary
committees and oversight panels unless otherwise specified. This
proposed rulemaking's definitions of governing board, disciplinary
committee, oversight panel and SRO are discussed below in Section
III.A.
\4\ 61 FR 19869 (May 3, 1996). In that same Federal Register
release, the Commission also published for public comment a proposed
new Regulation 156.4 which required contract markets to make more
readily available to the public the identity of members of broker
associations at their respective exchanges. The Commission adopted
Regulation 156.4, with minor modifications, on August 2, 1996. 61 FR
41496 (August 9, 1996).
---------------------------------------------------------------------------
II. Comments Received
The Commission received eleven comment letters in response to its
proposed rulemaking. The comment letters were submitted by six futures
exchanges (the Chicago Board of Trade ("CBT"), the Chicago Mercantile
Exchange ("CME"), the Coffee, Sugar & Cocoa Exchange, Inc. ("CSC"),
the Kansas City Board of Trade ("KCBT"), the New York Cotton Exchange
("NYCE"), and the New York Mercantile Exchange ("NYMEX")); two
futures clearing organizations (the Board of Trade Clearing Corporation
("BOTCC") and the Commodity Futures Clearing Corporation of New York
("CFCCNY")); two futures trade associations (the Equity Owners'
Association of the CME ("EOA") and the Futures Industry Association
("FIA")); and a registered futures association ("RFA") (the
National Futures Association ("NFA")).
The Commission has reviewed these comments carefully and has
decided to issue for public comment re-proposed versions of Regulation
1.69 and amended Regulations 1.41 and 1.63 with modifications from the
originally-proposed versions. The following section of this release
analyzes the Commission's rulemaking. Each provision of the
Commission's originally-proposed rulemaking is described along with a
discussion of comments which were made on that particular provision, an
indication of how the provision has been amended in
[[Page 3493]]
this proposed rulemaking, and an explanation of the Commission's
rationale for amending the provision.\5\
---------------------------------------------------------------------------
\5\ For ease of reference, this release will henceforth refer to
the rulemaking published on May 3, 1996, as the originally-proposed
rulemaking. The release will refer to the currently-proposed
rulemaking version as the proposed rulemaking.
---------------------------------------------------------------------------
A. Reason for Rulemaking
The Commission notes that in addition to comments on particular
provisions, there also were several general comments on the originally-
proposed rulemaking. The BOTCC, CBT and CFCCNY each commented that no
provision of CEA Section 5a(a)(17) requires that the Commission adopt a
conflict of interest regulation other than Section 5a(a)(17)(C)'s
requirement that the Commission establish conditions under which
committee members required to abstain from voting on significant
actions in which they have a substantial financial interest may
nevertheless participate in deliberations. The NYCE similarly commented
that Regulation 1.69 should be confined to the areas specified by CEA
Section 5a(a)(17) and that, instead of a Commission rulemaking, SRO
committees should only have to follow the traditional "bad faith"
standard when determining conflicts of interest.\6\
---------------------------------------------------------------------------
\6\ The governing boards of futures exchanges are legally bound
not to act in "bad faith" when taking actions on behalf of an
exchange. This "bad faith" standard was first articulated in
Daniel v. Board of Trade of the City of Chicago, 164 F. 2d 815 (7th
Cir. 1947), a case arising from CBT emergency actions raising the
price limits on various grain futures contracts due to price
volatility. The plaintiffs in that case lost money on their grain
positions as a result of the CBT's actions and claimed that the
CBT's Board members acted "willfully, maliciously, and for their
own personal gain" in imposing emergency price limits. Id. at 818.
In the Daniel case, the Court recognized that while exchange boards
have a "duty" to address market emergencies, they also have a
"relation to the public" which requires that they "act with the
utmost objectivity, impartiality, honesty, and good faith." Id. at
819-20. In order to prevail in a suit challenging an emergency
action, the Court determined that the plaintiff must show "bad
faith amounting to fraud," since fraud would imply a board's breach
of its public trust. Id. The "bad faith" standard governing
exchange boards has been consistently followed and further refined
by the Commission and the courts.
---------------------------------------------------------------------------
The commenters are correct in stating that paragraph (C) of Section
5a(a)(17) is the only provision that requires Commission rulemaking.
The other provisions require SRO rules. Such rules, however, must be
submitted for Commission review pursuant to either CEA Section
5a(a)(12)(A), in the case of contract markets, and CEA Section 17(j),
in the case of registered futures associations. The Commission
believes, therefore, that it is appropriate to establish by rulemaking
the standards with which such SRO rules must conform.
While proposed Regulation 1.69 would implement the provisions of
CEA Section 5a(a)(17), the proposed rulemaking also would give content
to the "bad faith" standard traditionally applied to futures exchange
governing boards.\7\ By establishing specific factors to be considered
with respect to barring persons with potential financial or personal
interests from deliberating and voting on committee decisions, the
Commission believes that proposed Regulation 1.69 would reduce the
potential for collateral attack of such committee decisions on the
grounds that they were made in "bad faith." The Commission has
structured proposed Regulation 1.69 to provide guidance to SROs,
consistent with the new provisions of the CEA, on what type of
circumstances could be the basis for "bad faith" challenges.
---------------------------------------------------------------------------
\7\ See footnote 6 above.
---------------------------------------------------------------------------
The BOTCC commented that the SROs, not the Commission, should adopt
procedures to address conflict of interest situations. The Commission
notes that, while proposed Regulation 1.69 would establish minimum
standards for conflict of interest restrictions, the SROs would have a
large degree of discretion when they formulated their required
implementing rules to adopt the procedures that were most compatible
with their committees' structures and practices.
B. Enforcement of SRO Implementing Rules
The EOA commented that it believes that recently the SROs have
often ignored their written and unwritten standards regarding
participation in governance and committee matters. The Commission's
proposed rulemaking would address this concern to the extent that it
would require SROs to codify their conflict of interest standards
consistent with Regulation 1.69. The Commission reminds the SROs that
they would be required to enforce any such implementing rules pursuant
to Section 5a(a)(8) of the CEA and that SRO enforcement of such rules
would be monitored by the Commission as part of its ongoing rule
enforcement review program.\8\
---------------------------------------------------------------------------
\8\ Should it ever become necessary, the Commission could
enforce SRO rules implementing Regulation 1.69. For example, under
CEA Section 8c(a)(1), the Commission can "suspend, expel, or
otherwise discipline" an SRO committee member for violating an SRO
Regulation 1.69-implementing rule should the subject SRO fail to
take disciplinary action against such a committee member.
---------------------------------------------------------------------------
C. Other Related Regulatory Provisions
The CBT commented that Regulation 1.69, as originally proposed, was
inconsistent with Regulations 1.41(f) \9\ and 8.17(a)(1).\10\ The CBT
did not specify how these provisions were inconsistent with originally-
proposed Regulation 1.69. While Regulation 1.69 pertains to some of the
same subject matter areas covered by Regulations 1.41(f) and
8.17(a)(1), the Commission believes that proposed Regulation 1.69's
requirements would not conflict with any aspect of these provisions. In
fact, proposed Regulation 1.69(b)(2)(iii), which lists the types of
positions that SROs must review when determining the existence of a
conflict of interest, is based upon the position information which
contract markets already are required to gather and to provide to the
Commission upon the adoption of temporary emergency rules, pursuant to
Regulation 1.41(f)(3)(ii). In the case of Regulation 8.17(a)(1),
proposed Regulation 1.69 merely would clarify the requirements of that
provision by enumerating what constituted a "financial, personal or
other direct interest" in a disciplinary committee matter.
---------------------------------------------------------------------------
\9\ Regulation 1.41(f) establishes procedures for SRO adoption
of temporary emergency rules.
\10\ Regulation 8.17(a)(1) prohibits a person from serving on a
contract market disciplinary committee if "he or any person or firm
with which he is affiliated has a financial, personal or other
direct interest in the matter under consideration."
---------------------------------------------------------------------------
III. Proposed Rulemaking
A. Definitions
1. Self-Regulatory Organization
i. Application to Clearing Organizations
The Commission originally proposed to apply Regulation 1.69's
conflict of interest restrictions to the governing board, disciplinary
committees and oversight panels of each SRO. Originally-proposed
Regulation 1.69(a)(6)'s definition of SRO included contract markets,
clearing organizations and RFAs. While Section 217 of the FTPA
specifies that "contract markets" must adopt conflict of interest
provisions, the Commission indicated in its originally-proposed
rulemaking that it believed that it would be appropriate for Regulation
1.69's conflict of interest restrictions to extend to clearing
organizations and RFAs as well. The Commission particularly sought
comment on the definition of SRO and whether it would be consistent
with the principles endorsed by CEA Section 5a(a)(17) to extend the
conflict of interest restrictions to clearing organizations and RFAs.
[[Page 3494]]
The FIA commented that it did not object to Regulation 1.69's
requirements being applied to clearing organizations. The BOTCC and
CFCCNY commented that CEA Section 5a(a)(17) only applies to contract
markets and that, accordingly, Congress was clearly only referring to
futures exchanges, not clearing organizations. The BOTCC and CFCCNY
also commented that applying conflict of interest restrictions to
exchanges alone would be consistent with the different natures of
exchange and clearing organization actions. They stated that exchanges
can take actions that are specifically designed to have a market impact
and, thus, possibly affect the positions of board members (e.g.,
ordering liquidation trading, changing delivery dates, etc.). The BOTCC
and CFCCNY contended that clearing organizations do not generally
regulate trading but instead take actions to maintain the financial
integrity of the clearing system and, thus, do not take actions that
directly affect the positions of particular board members.
The Commission notes that, while CEA Section 5a(a)(17) applies to
"contract markets," the provision also specifies that its conflict of
interest restrictions shall apply to committees handling certain types
of margin changes. Margin levels in the futures industry are
established by both contract markets and clearing organizations. The
Commission also notes that there have been previous occasions when CEA
requirements for contract markets have been applied to clearing
organizations. For example, Section 5a(a)(12)(A) of the CEA mandates
Commission review of "contract market" rules, while Commission
Regulation 1.41, which establishes procedures for Commission review of
proposed rules, specifically includes clearing organizations within its
definition of contract markets for these purposes. In addition,
clearing organizations already are subject to regulatory requirements
that are comparable to Regulation 1.69 such as Regulation 1.41(f)'s
emergency action provisions and Regulation 1.63's prohibition on
committee service by persons with disciplinary histories. Finally, some
contract markets have in-house clearing organizations (e.g., CME and
NYMEX), while other contract markets are cleared by independent
clearing organizations (e.g., CBT and NYCE). Applying Regulation 1.69
to clearing organizations, as well as contract markets, would ensure
that there would not be differing treatment of contract markets based
on whether or not they had an in-house or independent clearing
mechanism. For these reasons, the Commission has determined that it
would be appropriate to treat clearing organizations as included in the
definition of "contract markets" in CEA Section 5a(a)(17) and to make
clearing organizations subject to proposed Regulation 1.69.
ii. Application to RFAs
The Commission also has decided to include RFAs within the
definition of SRO in order to ensure that their committees would be
subject to proposed Regulation 1.69. This would reduce the potential
for committee member bias and self-interest in RFA proceedings as
well.\11\
---------------------------------------------------------------------------
\11\ In its comment letter, NFA did not object to the inclusion
of RFA's in the definition of an SRO. NFA did request, however, that
the definition be clarified with respect to the handling of conflict
of interests due to a committee member's financial interest in a
significant action. As explained in Section III.B.2.i.d. below, the
proposed rulemaking has been revised in this regard.
---------------------------------------------------------------------------
2. Governing Board
As originally proposed, Regulation 1.69's definition of governing
board included any SRO "board of directors, board of governors, board
of managers, or similar body" and any subcommittee thereof, such as an
executive committee, that is authorized to take action on behalf of its
SRO. The CBT commented that the Commission should confirm that a
subcommittee of a governing board when not authorized to act on behalf
of an SRO or when formulating recommendations to the board on a matter
is neither a "governing board" nor an "oversight panel" under
Regulation 1.69. The Commission believes that the recommendations of
governing board subcommittees often are adopted in full by governing
boards because the boards rely heavily on their subcommittees'
recommendations. Accordingly, the Commission has revised the proposed
rulemaking's definition of governing board to apply to SRO boards or
board subcommittees that are authorized "to take action or to
recommend the taking of action" on behalf of an SRO.
3. Disciplinary Committee
As originally proposed, Regulation 1.69 defined an SRO
"disciplinary committee" to mean a body that was authorized by an SRO
"to conduct disciplinary proceedings, to settle disciplinary charges,
to impose sanctions, or to hear appeals thereof."
i. Issuing Disciplinary Charges
The CBT commented that the Commission should confirm that
Regulation 1.69's disciplinary committee definition does not include
committees that issue disciplinary charges. In fact, the Commission
believes that disciplinary committee members with conflicts of interest
can have a significant influence on the disciplinary process during the
charging stage. Accordingly, the Commission has modified proposed
Regulation 1.69 to include the issuance of disciplinary charges as one
defining characteristic of a disciplinary committee.\12\
---------------------------------------------------------------------------
\12\ The Commission also has proposed a conforming amendment to
Regulation 1.63's definition of disciplinary committee. See Section
III.E. below for a description of proposed amended Regulation 1.63.
---------------------------------------------------------------------------
ii. Minor Rule Violations
The CBT, CME, FIA, NYCE and NYMEX each commented that Regulation
1.69's definition of disciplinary committee should exclude committees
that deal with decorum and recordkeeping violations. The Commission
agrees that the conflict of interest requirements need not apply to
disciplinary committees that handle minor disciplinary matters but only
to the extent that such matters are handled in a summary manner.
Accordingly, the Commission has revised final Regulation 1.69(a)(1)'s
definition of "disciplinary committee" to exclude committees that
"summarily impose minor penalties for violating rules regarding
decorum, attire, the timely submission of accurate records for clearing
or verifying each day's transactions or other similar activities."
\13\ This revision, which incorporates elements of Commission
Regulation 8.27's summary disciplinary provision, is only intended to
create an exclusion for committees that handle minor disciplinary
matters where it is important to impose sanctions in a prompt manner.
---------------------------------------------------------------------------
\13\ Insofar as such types of rule violations are not dealt with
in a summary manner, they would not be excluded under the proposed
definition.
---------------------------------------------------------------------------
iii. Committees Versus Committee Members
In its originally-proposed rulemaking release, the Commission
sought particular comment on the aspect of the definition of
disciplinary committee under which the conflict of interest
restrictions applied to members of disciplinary committees when they
deliberated and voted on matters as a body, but did not apply to
members of disciplinary committees when they exercised disciplinary
powers individually. Thus, the originally-proposed definition did not
include persons authorized to take disciplinary actions, such as floor
committee
[[Page 3495]]
members, who dispose of minor disciplinary violations by individually
issuing fines or penalties, but did apply in instances when more than
one committee member was required to endorse such an action. No
commenter addressed this issue.
The Commission has decided to revise proposed Regulation 1.69's
disciplinary committee definition so that there would be no distinction
between disciplinary matters that were handled by full committees and
those handled by individual committee members. Instead, as discussed
above, the Commission has determined to incorporate into the definition
a functional exclusion for committees that summarily impose minor
penalties for decorum, attire and certain recordkeeping violations.
Thus, the disciplinary committee definition would apply to any entity
with disciplinary authority, whether a single person or a body of
persons.
4. Oversight Panel
In the originally-proposed rulemaking, the Commission defined
"oversight panel" as an SRO committee authorized to "review,
recommend, or establish policies or procedures with respect to the
[SRO's] surveillance, compliance, rule enforcement, or disciplinary
responsibilities." \14\ The CBT and NYCE commented that this
definition was too broad and should not include committees which review
or recommend policies as such a definition would deter people, inside
and outside of the futures industry, from serving on task forces and
planning committees that formulate ideas that are helpful to the SROs.
---------------------------------------------------------------------------
\14\ See originally-proposed Commission Regulation 1.3(tt).
---------------------------------------------------------------------------
The Commission believes that SRO policies with respect to
surveillance, compliance, rule enforcement and disciplinary
responsibilities are an important part of the self-regulatory process
and that persons who are entrusted with such responsibilities should be
free from conflicts of interests.
The CBT and NYCE suggested that the definition of oversight panel
be limited to panels that establish self-regulatory policies or
procedures because they are the panels that adopt measures on behalf of
their SROs. Presumably, the CBT and NYCE suggested excluding panels
that review or recommend such policies or procedures because their
actions may only be implemented upon adoption by some other authority,
such as an SRO's governing board or membership. The Commission
believes, however, that often the recommendation of an oversight panel
with respect to self-regulatory policies or procedures can be
tantamount to the establishment of such policies or procedures because
the adopting authority relies on the panel's recommendation.
Accordingly, the Commission has determined that the proposed
rulemaking's definition of oversight panel should apply to SRO bodies
that "recommend or establish" possible self-regulatory policies or
procedures for an SRO, while excluding bodies that review such measures
on behalf of their SRO.\15\
---------------------------------------------------------------------------
\15\ The oversight panel definition would be established by
proposed Regulation 1.69(a)(4) and not by Regulation 1.3 as
originally proposed.
---------------------------------------------------------------------------
5. Family Relationship
As further discussed below, originally-proposed Regulation 1.69
prohibited committee members from deliberating and voting on committee
matters in which any member of their immediate family was a named party
in interest. For these purposes, originally-proposed Regulation 1.69
defined "immediate family" to mean a person's "spouse, parent,
stepparent, child, stepchild, sibling, stepbrother, stepsister, or in-
law." Although no commenters addressed the originally-proposed
definition, the Commission has decided to modify the definition in two
respects for this proposed rulemaking.
First, consistent with the terminology used in CEA Section
5a(a)(17), the Commission proposes to use the defined term "family
relationship" instead of the originally-proposed "immediate family."
Second, the Commission has decided to amend the provision substantively
by defining family relationship to mean a committee member's "spouse,
former spouse, parent, stepparent, child, stepchild, sibling,
stepbrother, stepsister, grandparent, grandchild, uncle, aunt, nephew,
niece or in-law." The Commission believes that these levels of
familial relations are sufficiently close that they could unduly
influence a committee member's decisionmaking. Accordingly, the
proposed definition should help to assure that committee decisions
would be the result of fair deliberations and would not be tainted by
the real or perceived self-interest of committee members.
6. Significant Actions
In the originally-proposed rulemaking, Regulation 1.69's conflict
of interest restrictions were applied to SRO committees whenever they
considered any "significant action which would not be submitted to the
Commission for its prior approval." The originally-proposed definition
of that term included, at a minimum, two types of SRO actions: (1) SRO
actions or rule changes that addressed emergencies as defined by
Commission Regulation 1.41(a)(4) and (2) SRO margin changes that
responded to extraordinary market conditions when such conditions were
likely to have a substantial effect on prices in any contract traded or
cleared at the SRO.
Proposed Regulation 1.69's definition of this term has been
modified in several respects to accommodate suggestions made by
commenters. In addition, for ease of reference, instead of
"significant action which would not be submitted to the Commission for
its prior approval," proposed Regulation 1.69 uses the defined term
"significant action." The proposed "significant action" definition,
though, continues to be limited to SRO actions which are not submitted
to the Commission for prior approval.
i. Scope of Definition
Four commenters--the CBT, FIA, NYMEX and BOTCC--suggested that the
significant action definition not be modified by the term "at a
minimum," as originally proposed. The commenters believed that the use
of this modifier deprived SROs of notice of what actions would be
deemed significant and could potentially subject some committee actions
to second-guessing. The Commission agrees that the inclusion of this
phrase could lead to distracting collateral attacks on the actions of
committees that are not subject to the conflict of interest
restrictions. Accordingly, proposed Regulation 1.69(a)(8)'s definition
of significant action does not include the "at a minimum" modifier.
ii. Nonphysical Emergency Rules
The BOTCC, CBT and FIA commented that CEA Section 5a(a)(17)
requires that conflict of interest requirements apply to SRO committees
when they consider "any nonphysical emergency rule," while proposed
Regulation 1.69's definition included both physical and nonphysical
emergency rules. These commenters urged the Commission to adhere to
Congress' mandate and to limit the significant action definition to
include only nonphysical emergencies. The Commission concurs with the
commenters and has revised the proposed definition, which incorporates
portions of Regulation 1.41(a)(4)'s definition of emergency, to include
committee actions that respond to
[[Page 3496]]
nonphysical emergencies (see Regulations 1.41(a)(4)(i) through (iv) and
(vi) through (viii)) and to exclude committee actions that respond to
physical emergencies (see Regulation 1.41(a)(4)(v)).
iii. Types of Margin Changes
The CME commented that Regulation 1.69's significant action
definition should include margin changes that are used for regulatory
purposes. In addition, the CBT, CME, FIA and NYMEX commented that,
instead of margin changes that respond to market conditions that are
likely to have a substantial effect on contract prices, the significant
action definition should only include margin changes that are likely to
have a substantial effect on contract prices. The commenters contended
that their suggested approach would more closely conform with CEA
Section 5a(a)(17).\16\
---------------------------------------------------------------------------
\16\ CEA Section 5a(a)(17) states that the term "significant
action that would not be submitted to the Commission for its prior
approval" shall include "any changes in margin levels designed to
respond to extraordinary market conditions that are likely to have a
substantial affect [sic] on prices in any contract traded on such
contract market."
---------------------------------------------------------------------------
The Commission believes that the decisionmaking ability of
committee members is most likely to be influenced by their personal
interests when they consider actions which could impact them
monetarily. Accordingly, the definition of significant action should
focus on committee actions which have the most potential for affecting
prices in particular contracts. Consistent with that rationale, the
Commission has decided to include aspects of both of the above
suggestions in its proposed rulemaking. Thus, proposed Regulation
1.69(a)(8)(ii)'s definition of an SRO significant action includes
changes in margin levels that: (1) are designed to respond to
extraordinary market conditions such as actual or attempted corners,
squeezes, congestion, or undue concentrations of positions or (2) are
likely to have a substantial effect on prices in any contract traded or
cleared at the SRO.
The NYCE suggested that the Commission modify its significant
action definition to pertain to margin changes that respond to price
changes that are greater than some pre-established, one-day percentage
market move. The Commission believes that such an approach could be an
acceptable way of defining SRO committee significant actions that
should be subject to Regulation 1.69's conflict of interest
requirements. The Commission is not prepared, however, to establish a
quantifiable industry-wide standard as part of this proposed
rulemaking. The Commission believes that it would be difficult to
establish such a standard at this time given the wide variety of types
of SROs and futures contracts that exist. Instead, the Commission in
its proposed rulemaking has adopted a "significant action" definition
that would address the requirements explicitly set forth in CEA Section
5a(a)(17), but that, at the same time, would give each SRO the
flexibility to adopt implementing measures that would be sensitive to
the circumstances of its particular markets.
In its originally-proposed rulemaking, the Commission sought
comment on whether there were any other types of SRO actions or rule
changes that should be subject to Regulation 1.69's requirement. As
examples, the Commission asked whether "changes to a price quote on a
price change register, setting modified closing call ranges, or
establishing settlement prices" should be included in Regulation
1.69's significant action definition.\17\ The CBT, CME and NYMEX
opposed classifying price change register revisions as significant
actions, while the CBT and CME similarly opposed the inclusion of the
establishment of modified closing call ranges and settlement prices.
Generally, the commenters felt that subjecting such actions to conflict
of interest requirements would be a cumbersome burden for SRO
committees that carry out these functions. Accordingly, the Commission
has decided not to revise proposed Regulation 1.69's significant action
definition in this regard.
---------------------------------------------------------------------------
\17\ See 61 FR 19869, 19872 n. 12.
---------------------------------------------------------------------------
B. Self-Regulatory Organization Rules
1. Relationship With a Named Party in Interest
i. Nature of Relationship
Originally-proposed Regulation 1.69(b)(1) mandated that SROs
implement rules requiring that committee members abstain from
deliberating and voting on any matter in which they had a significant
relationship with the matter's "named party in interest." \18\
Originally-proposed Regulation 1.69(b)(1) listed the types of
relationships between a committee member and named party in interest
that required abstention, including family, employment, broker
association and "significant, ongoing business" relationships.
Several commenters suggested ways in which the Commission could clarify
the types of relationships that would be the grounds for an abstention.
---------------------------------------------------------------------------
\18\ For these purposes, originally-proposed Commission
Regulation 1.69 defined a named party in interest as a "party who
is identified as the subject of any matter being considered" by an
SRO committee. This same definition has been used in this proposed
rulemaking as Regulation 1.69(a)(6).
---------------------------------------------------------------------------
a. Clearing Relationships.--The CME, FIA and NFA commented that SRO
committee members should not be required to abstain from committee
matters if they use the same clearing member as a matter's named party
in interest. The Commission agrees that sharing a clearing member
should not, by itself, influence a committee member's decisionmaking.
Accordingly, proposed Regulation 1.69(b)(1)(i)(D) explicitly provides
that such a relationship shall not require a committee member to
abstain from a matter.
The CBT commented that relationships between a clearing firm's
employees or principals and the SRO members who are cleared by the firm
should not be considered a "significant, ongoing business
relationship" under Regulation 1.69(b)(1). The Commission believes
that two parties to such a clearing relationship may not always be
totally impartial if one party is involved in considering an SRO
committee action that directly bears upon the other, especially in
instances where a cleared member constitutes a significant portion of a
firm's clearing activity. Accordingly, the Commission has decided not
to exclude such relationships from proposed Regulation 1.69(b)(1)(i).
b. Specificity of Relationship Standard.--The Commission also
received two general comments on originally-proposed Regulation
1.69(b)(1) from the CME and NYCE. The CME stated that the provision
went too far in specifying the details as to what constituted a
significant relationship that required abstention. By contrast, the
NYCE suggested that originally-proposed Regulation 1.69(b)(1) was not
sufficiently detailed and should include an objective standard to
identify disqualifying relationships based upon: (1) the length of the
relationship and (2) the amount of monies that are earned by the
parties as a result of the relationship.
In formulating proposed Regulation 1.69(b)(1)(i), the Commission
has attempted to establish a categorical listing of the types of
personal and business relations that have the potential to influence
committee members unduly. SROs always would have the discretion, of
course, to include any additional disqualifying criteria in their own
implementing rules.
[[Page 3497]]
c. Confidentiality of Proceedings.--Under originally-proposed
Regulation 1.69(b)(1), SROs were required to adopt rules prohibiting
committee members from engaging in any type of deliberations or voting
on matters where they had a significant relationship with the matter's
named party in interest. The CBT noted that CEA Section 5a(a)(17)
limits this requirement to "confidential" deliberations and voting.
For this proposed rulemaking, the Commission would require that
committee members abstain from any type of deliberation and voting on
matters where they had a relationship with the named party in interest,
whether the deliberation was confidential or non-confidential.
Theoretically, non-confidential committee meetings would permit
outsiders to monitor the fairness of a committee's decisionmaking
processes. The Commission does not believe, however, that it is likely
that there would be an effective outside presence at such committee
meetings given the SROs' traditional practice of closing committee
meetings to the public. In addition, even open committee meetings would
not prevent a committee member's decisionmaking from being influenced
by self-interest, especially since the particulars of a committee
member's personal interest in a matter might not be known to any
outsiders attending committee meetings.
CEA Section 5a(a)(17) states that "at a minimum" the named party
in interest conflict of interest restrictions shall apply to the
"confidential deliberations and voting" of contract market governing
boards, disciplinary committees and oversight panels. Because CEA
Section 5a(a)(17) merely sets a minimum baseline as to the application
of conflict of interest requirements, the Commission has decided to
propose the more prophylactic approach of applying Regulation
1.69(b)(1)'s requirements to all deliberations, whether confidential or
not. The Commission notes that this approach also is consistent with
the existing conflict of interest requirements of Regulation 8.17(a)(1)
which do not distinguish between confidential and non-confidential
disciplinary committee proceedings.\19\
---------------------------------------------------------------------------
\19\ See footnote 10 above.
---------------------------------------------------------------------------
d. Time Frame of Relationship.--In addition, the Commission wishes
to clarify that conflict of interest determinations under proposed
Regulation 1.69(b)(1)(i) should be based upon circumstances at the time
of a committee's consideration of a matter. Accordingly, if a committee
member had some significant business relationship with a matter's named
party in interest prior to, but not concurrent with, his or her
committee's consideration of the matter, proposed Regulation 1.69(b)(1)
would not prohibit the committee member from participating.\20\ The
Commission believes that this approach is most appropriate for two
reasons. First, current relationships clearly have a greater potential
influence on committee members' decisionmaking than past relationships.
Second, if proposed Regulation 1.69's restrictions were based on past
relationships it would vastly expand the administrative burden for SRO
compliance with Regulation 1.69 and, thus, potentially could compromise
the ability of SRO committees to dispose of matters in an expeditious
manner.
---------------------------------------------------------------------------
\20\ In addition, the Commission would view it as an improper
circumvention of proposed Regulation 1.69 if a committee member were
to drop out of a broker association, as that term is defined by
Commission Regulation 156.1, or end a significant, ongoing business
relationship simply in order to avoid having to abstain from a
committee matter.
---------------------------------------------------------------------------
e. Non-Disciplinary Matters. While the Commission anticipates that
proposed Regulation 1.69(b)(1)'s restrictions usually would be applied
to disciplinary cases because they always would involve named
respondents, the Commission notes that the provision would pertain to
any matter handled by an SRO governing board, disciplinary committee or
oversight panel in which there was a particular named party in
interest. Accordingly, the proposed conflicts restrictions would apply,
for example, to such committees whenever they reviewed a membership
application or considered some regulatory action with respect to a
particular individual, such as directing a person to reduce his or her
position in a contract. The Commission invites comment on whether the
proposed named party in interest provision should be clarified to
pertain to any other type of SRO committee action. For example, should
committees be subject to Regulation 1.69(b)(1) when they revise price
change registers or certify the late submission of pit cards in
response to requests by particular members?
ii. Disclosure of Relationship
Originally-proposed Regulation 1.69 did not explicitly require that
committee members inform their SRO whether they had a relationship with
a matter's named party in interest. In order to help ensure that SROs
are able to enforce their Regulation 1.69-implementing rules, proposed
Regulation 1.69(b)(1)(ii) would require that SRO committee members
disclose to the appropriate SRO staff whether he or she has any one of
the relationships listed in Regulation 1.69(b)(1)(i) with respect to a
matter's named party in interest.
iii. Procedure for Determination
a. Sources of Information.--Originally-proposed Regulation 1.69 did
not explicitly address how SROs must enforce any rule prohibiting
committee members from participating in matters where they had a
relationship with the named party in interest. The CSC commented that
the relationships enumerated in Regulation 1.69(b)(1), as originally
proposed, would not generally be known to SRO staff when they attempted
to enforce this prohibition. Accordingly, the CSC requested that the
Commission clarify that SROs have no responsibility to discern
relationships between committee members and named parties in interest
that are not readily available from SRO records.
The Commission recognizes that SROs often do not have knowledge of
all possible aspects of the relationships that may exist between a
committee's members and named parties in matters being considered by
the committee. Accordingly, proposed Commission Regulation
1.69(b)(1)(iii) establishes the SROs' responsibilities in this regard.
Under this provision, SROs would be required, at a minimum, to base
their conflict of interest determinations upon: (1) information
provided by the committee members themselves (proposed Regulation
1.69(b)(1)(iii)(A)), and (2) any other source of information that was
"reasonably available" to the SRO (proposed Regulation
1.69(b)(1)(iii)(B)).
Consistent with proposed Regulation 1.69(b)(1)(ii)'s requirement
that committee members disclose any relationship with a matter's named
party in interest, proposed Regulation 1.69(b)(1)(iii)(A) would require
that SROs ascertain from each committee member whether his or her
relationship with a matter's named party in interest fell into one of
the "conflict of interest" categories listed in proposed Regulation
1.69(b)(1)(i) (A) through (E). Proposed Regulation 1.69 does not
prescribe the manner in which SROs must gather this information from
committee members. The Commission would expect SROs to engage each
committee member directly in this regard, whether through oral
questioning, a written questionnaire or some sort of committee member
pledge, to determine any possible relationship
[[Page 3498]]
with a matter's named party in interest.\21\
---------------------------------------------------------------------------
\21\The Commission believes that this approach would be
consistent with some of the SRO practices already in place to
enforce SRO conflict of interest requirements. In the context of
disciplinary matters, for example, the CME has each of its
disciplinary committee members sign a pledge each year which
explains the CME's conflict of interest requirements and requires
committee members to withdraw from considering any committee matter
that raises a conflict of interest for them. At NYMEX, staff
explains the exchange's conflict of interest restrictions before
each disciplinary committee meeting and then asks whether there are
any disciplinary committee members who believe they could have a
conflict in any of the upcoming matters.
---------------------------------------------------------------------------
Under proposed Regulation 1.69(b)(1)(ii)(B), SROs also would be
required to consult any other source of information that was
"reasonably available" to them before making a conflict of interest
determination. The Commission believes that this standard appropriately
accommodates the time and resource constraints that SROs often face
when administering SRO committee matters.
b. Responsibility for Determinations.--The Commission notes that
several commenters objected to originally-proposed Regulation 1.69's
requirement that conflict of interest determinations be made by SRO
staffs. The BOTCC and CBT commented that CEA Section 5a(a)(17) does not
mandate who must make these decisions. The CSC and KCBT also contended
that it may be difficult for SRO staff to direct committee members to
abstain and that, accordingly, such determinations would be best made
by the SRO committee involved.
Based upon these comments, the Commission has decided to revise
proposed Regulation 1.69 so that it states only that SROs must make
determinations as to the existence of conflicts of interest under
Regulation 1.69, but does not identify any particular SRO personnel or
committee that must make these determinations. This approach would
enable each SRO to allocate the responsibility for these determinations
as it saw fit, whether it be to SRO staff, the presiding committee, or
some other party. The Commission would expect each SRO, however, to
specify in its rules and procedures implementing Regulation 1.69 the
person or group of persons who would have these responsibilities.
2. Financial Interest in a Significant Action
i. Nature of Interest
As originally proposed, Commission Regulation 1.69 required that
SRO committee members abstain from committee deliberations and voting
on certain matters in which they "knowingly [had] a direct and
substantial financial interest." This restriction would have applied
whenever a committee considered significant actions that would not be
submitted to the Commission for its prior approval.\22\
---------------------------------------------------------------------------
\22\ The definition of such significant actions is set forth in
proposed Regulation 1.69(a)(8) and is discussed above in Section
III.A.6.
---------------------------------------------------------------------------
In determining a committee member's financial interest in a
possible committee action, originally-proposed Regulation 1.69 required
SROs to review certain positions held by the member, the member's
immediate family, the member's firm and the customers of the member's
firm in any contract that could be affected by the committee action.
With respect to a committee member's personal positions, originally-
proposed Regulation 1.69 specifically required that SROs consider gross
positions held in the member's personal accounts, the member's
Regulation 1.3(j) controlled accounts, and any accounts in which the
member had a significant financial interest. With respect to the
positions of the member's immediate family, Regulation 1.69, as
originally proposed, required that SROs consider gross positions held
in the personal accounts or Regulation 1.3(j) controlled accounts of
the member's immediate family. With respect to customer positions, the
originally-proposed version of Regulation 1.69 required that SROs
consider gross positions held in proprietary accounts at the committee
member's firm, net positions held in customer accounts at the member's
firm, and gross positions held by any customers who constituted a
significant proportion of business for the member's firm.
The Commission received a wide range of comments on the originally-
proposed rulemaking's provisions regarding conflicts of interest due to
financial interest in a significant action. Subject to the limits
mandated by CEA Section 5a(a)(17) with respect to conflict of interest
requirements, the Commission has attempted to incorporate into proposed
Regulation 1.69 many of the suggestions made by the commenters.
a. Committee Member Expertise--The KCBT commented that under the
Commission's original proposal, committee members who were actively
involved with a contract on a daily basis likely would be the very same
committee members who would have to abstain from participating in
committee deliberations and voting on significant actions concerning
such contracts. Thus, according to the KCBT, these committee members
would have no input in deciding whether a significant action was in the
best interests of the contract, and consequently such decisions would
be left to persons who were less familiar with the contract. The
Commission recognizes that this tension is inherent in the conflict of
interest requirements imposed by CEA Section 5a(a)(17) and Regulation
1.69. To the extent possible, the Commission has attempted to alleviate
this concern in the proposed rulemaking by permitting otherwise
conflicted committee members to deliberate on matters when they, among
other things, have "unique or special expertise, knowledge or
experience in the matter under consideration."\23\
---------------------------------------------------------------------------
\23\ See proposed Commission Regulation 1.69(b)(3)(i)(B). See
also Section III.B.3. below for a discussion of the conditions under
which otherwise conflicted committee members would be permitted to
participate in committee matters.
---------------------------------------------------------------------------
b. Small Exchanges.--The KCBT also commented that nearly all
committee members at small exchanges have a substantial financial
interest in the exchange's primary products. Thus, under originally-
proposed Regulation 1.69, a high percentage of committee members at
such exchanges would be disqualified from participating in significant
actions concerning such contracts. The Commission understands that the
requirements of Regulation 1.69 may be difficult for small exchanges to
adhere to in this regard. As discussed below, however, proposed
Regulation 1.69 would provide each SRO with some flexibility in
formulating its implementing rules. Moreover, the Commission believes
that the potential for this problem would be greatly reduced if the
exchanges ensured that their committees represented a wide diversity of
membership interests, including representatives from various trading
pits, consistent with the composition requirements of Regulation 1.64.
c. Position Size.--As noted, while Commission Regulation 1.69, as
originally proposed, required that committee members abstain from
deliberating and voting on significant actions when they had a "direct
and substantial financial interest" in the outcome of the matter, it
did not set any specific standards as to what financial interest or
position size warranted a member's abstention. Instead, the Commission
originally proposed that each SRO adopt its own standards in this
regard as part of its implementing rules and procedures.
[[Page 3499]]
The NYCE commented that Regulation 1.69 should establish some
objective threshold in this area based upon the potential financial
loss or gain which a committee member could incur as a result of his or
her committee's possible significant action. The CBT commented that
SROs should have the discretion to decide when a committee member's
financial interest in a matter was direct and substantial. The CME
contended that the wide disparity in sizes among the exchanges and
their contracts would make it difficult for a regulation to specify a
particular position size that would constitute a "direct and
substantial financial interest."
At the present time, the Commission has decided not to incorporate
into proposed Regulation 1.69 any numerical thresholds as to what
constitutes a committee member's direct and substantial financial
interest in a significant action. Instead, the SROs could include
standards in their implementing rules that were appropriate to their
markets. Any such criteria should be premised on, among other things,
the extent to which a committee member was exposed to market risk, the
size of the member's positions, whether or not the positions were
market neutral and, with respect to a member's affiliated firm, the
potential effect on the firm's capital. In addition, the Commission
would expect each SRO to assess the magnitude and probable market
impact of the underlying significant action being considered by the SRO
committee.
d. Application to RFAs.--The NFA commented that RFAs do not
consider "significant actions," as that term was defined by
originally-proposed Regulation 1.69, and that, accordingly, RFAs should
be excluded from Regulation 1.69's conflict of interest requirements
with respect to SRO committees that handle significant actions. The
Commission agrees that RFA committees do not take such significant
actions and, accordingly, has revised proposed Regulation 1.69(a)(7)'s
definition of SRO to exclude RFAs from the conflict of interest
requirements in those instances.
ii. Disclosure of Interest
Under originally-proposed Commission Regulation 1.69, whenever an
SRO committee considered a significant action, each member of the
committee would have been required to disclose to the SRO's staff any
position information that was known or should have been known by the
member with respect to the positions listed in proposed Regulation
1.69(b)(2) (i.e., positions held by the member, the member's family,
the member's firm and certain customers of the member's firm). For the
purposes of this provision, committee members were presumed to have
knowledge with respect to certain of these positions.
a. Presumption of Knowledge.--The CBT, CME and FIA each commented
that this presumption of knowledge provision would force a large number
of committee members to abstain voluntarily from matters for fear that
they would be presumed to have knowledge of position information. The
CBT and CME contended that the provision should not be a part of any
conflict of interest requirement because committee members who are not
aware of their financial interest in a committee matter cannot be
motivated by that interest. The CSC and FIA commented that the
provision presumed committee member knowledge of position information
that members might not know. Thus, the provision could have the
consequence of creating conflicts of interest as it could force
committee members to inquire about conflict-creating positions of which
they otherwise would be ignorant. Each of these commenters recommended
deleting the presumption of knowledge provision.
The Commission has revised proposed Regulation 1.69(b)(2)(ii) so
that it does not presume committee member knowledge of any position
information. Instead, a committee member would be required, under each
SRO's Regulation 1.69-implementing rule, to disclose to the SRO
relevant position information that was "known to him or her." A
failure to disclose any such information should be considered a
violation of the SRO implementing rule. This approach would be
consistent with proposed Regulation 1.69(b)(2)(i), which would prohibit
committee members from participating in committee decisions where they
"knowingly [had] a direct and substantial financial interest in the
result of the vote."
iii. Procedure for Determination
As originally proposed, Commission Regulation 1.69 mandated
procedures for SROs when they determined whether an SRO committee
member should abstain from deliberations and voting on a significant
action due to a conflict of interest. In ascertaining information
relevant to a committee member's possible interest in such an action,
the original proposal permitted SRO staff to rely upon:
(1) the most recent large trader reports and clearing records available
to the staff;
(2) position information provided to the staff by the committee member;
and
(3) any other source of position information which was readily
available to the staff.
a. Review of Positions.--The BOTCC commented that assembling all of
the position information required by originally-proposed Regulation
1.69 would impose significant, time-consuming burdens on SRO staffs.
The CME suggested that the information-gathering requirement be limited
to information that was reasonably available to the SRO.
The BOTCC, CSC and NYMEX commented that committees which undertake
significant actions must act in a swift and decisive manner. They
contended that the number of categories of positions to be reviewed by
SROs in applying Regulation 1.69 to committees considering significant
actions would be so extensive that it would cause substantial delays
and, thus, hinder an SRO's ability to respond to emergencies promptly.
The CBT recommended that given that some significant actions under
originally-proposed Regulation 1.69 also are temporary emergency
actions under Regulation 1.41(f),\24\ the list of positions to be
reviewed under Regulation 1.69 should be modified to follow the
position review criteria already required by Regulation 1.41(f)(3)(v)
and, thus, avoid creating different position review burdens for
[[Page 3500]]
significant actions and temporary emergency rules.\25\
---------------------------------------------------------------------------
\24\ There would be some overlap between the bases for
Regulation 1.41 temporary emergency rules and the bases for proposed
Regulation 1.69 significant actions. Proposed Regulation 1.69
significant actions would include temporary emergency rules which
address: (1) manipulative activity (Regulation 1.41(a)(4)(i)); (2)
corners, congestion or undue concentrations of positions (Regulation
1.41(a)(4)(ii)); (3) circumstances which could materially affect the
performance of contracts (Regulation 1.41(a)(4)(iii)); (4) any
sovereign or exchange action which could have a direct impact on
trading at the contract market (Regulation 1.41(a)((4)(iv)); (5) the
bankruptcy of a member or a legal action which could affect the
ability of a member to perform on its contracts (Regulation
1.41(a)(4)(vi)); (6) any circumstance where a member's condition
jeopardizes the safety of customer funds, the contract market or the
contract market's members (Regulation 1.41(a)(4)(vii)); and (7) any
other unusual, unforeseeable and adverse circumstance for which it
is not practicable for a contract market to submit a rule to the
Commission for prior review (Regulation 1.41(a)(4)(viii)). Proposed
Regulation 1.69 significant actions would diverge from Regulation
1.41 temporary emergency rules, however, by: (1) not including
temporary emergency rules which address physical emergencies
(Regulation 1.41(a)(4)(v)) and (2) including margin level changes
which either respond to extraordinary market conditions or which are
likely to have a substantial effect on contract prices.
\25\ Whenever a contract market implements a temporary emergency
rule, Regulation 1.41(f)(3) requires that it submit various
information to the Commission with respect to the action. Among
other things, the exchange must provide the Commission "a summary
of any disclosure by a [board member] of his or her positions in any
subject contract market, including disclosure of positions held in
any personal account, controlled account, other account in which
[the member] has an interest, and customer and proprietary accounts
at [the member's] affiliated firm."
---------------------------------------------------------------------------
Consistent with the CBT's suggestion, the Commission has modeled
proposed Regulation 1.69(b)(2)(iii) list of positions to be reviewed
for conflict of interest determinations after the list of positions
that must be reviewed by exchanges when they adopt temporary emergency
actions pursuant to Regulation 1.41(f)(3)(v). Accordingly, under
proposed Regulation 1.69, whenever an SRO committee handled a
significant action, the SRO would be required to consider the following
types of positions in determining whether any of the committee's
members had a direct and substantial financial interest in the matter:
(1) gross positions at that self-regulatory organization held in each
committee member's personal accounts or Regulation 1.31(j) controlled
accounts (proposed Regulation 1.69(b)(2)(iii)(A));
(2) gross positions at that self-regulatory organization held in
Regulation 1.17(b)(3) proprietary accounts at each committee member's
affiliated firm (proposed Regulation 1.69(b)(2)(iii)(B));
(3) gross positions at that self-regulatory organization held in
accounts in which a committee member was a Regulation 3.1(a) principal
(proposed Regulation 1.69(b)(2)(iii)(C)); and
(4) net positions at that self-regulatory organization held in
Regulation 1.17(b)(2) customer accounts at each member's affiliated
firm (proposed Regulation 1.69(b)(2)(iii)(D)).\26\
---------------------------------------------------------------------------
\26\ There would be one minor variation between the lists of
positions that must be reviewed in conflict of interest and
temporary emergency rule situations. Prior to the adoption of
temporary emergency rules, Regulation 1.41(f)(3)(v) requires that
exchanges review "gross positions held in any * * * other account
[beside personal or controlled accounts] in which the governing
board member has an interest." For the purposes of conflict of
interest determinations, the Commission has determined, under
proposed Regulation 1.69(b)(2)(iii)(C), to limit this aspect of
position review to gross positions held in accounts in which a
committee member is a Regulation 3.1(a) principal. Thus, the
proposed provision includes positions in which committee members
would probably have the greatest economic interest.
b. Positions Outside of SRO.--The CME commented that the list of
positions to be reviewed under originally-proposed Regulation 1.69
could be interpreted to include positions at other exchanges, in over-
the-counter derivatives and in the cash market. The CME believed that
it was inappropriate to require an SRO to undertake the same level of
review for positions acquired outside the SRO than for positions
acquired at some other SRO. The Commission has revised proposed
Regulation 1.69 to address conflicts of interest based upon positions
held by an SRO committee member outside of his or her SRO. First,
proposed Regulation 1.69(b)(2)(i) would explicitly require committee
members to abstain from deliberations and voting on significant actions
if the member had a "direct and substantial financial interest" in
the matter based upon "exchange or non-exchange positions that
reasonably could be expected to be affected by the action."
The Commission believes that any positions held by a committee
member that can be impacted by a committee action, whether or not it is
held at the member's home SRO, has the potential to influence the
member's views on committee matters. Given that proposed Regulation
1.69 is intended to promote fairness and integrity in the SRO committee
decisionmaking process, the Commission believes that it would be
appropriate to include such positions as the possible basis for a
conflict of interest determination.
The Commission also is aware that SROs may not have complete
knowledge of their committee members' outside financial interests. To
address this situation, proposed Regulation 1.69(b)(2)(iii)(E) states
that in reviewing position information in the course of a conflict of
interest determination, SROs should include a review of "any other
types of positions, whether maintained at that self-regulatory
organization or elsewhere, that the self-regulatory organization
reasonably expects could be affected by the significant action." By
requiring that the SRO itself determine what positions it "reasonably
expects could be affected by the significant action," the Commission
believes that this provision would provide SROs with the latitude
necessary to decide what "outside" financial interests of an SRO
committee member to consider when making conflict of interest
determinations. Each SRO's responsibilities in this regard would be
further circumscribed by only having to base conflict determinations on
the limited sources of information specified in proposed Regulation
1.69(b)(2)(iv).\27\
---------------------------------------------------------------------------
\27\ In this connection, the Commission plans to have its staff
determine whether it would be feasible to provide each SRO with
access to position information maintained by the Commission with
respect to positions held by an SRO's committee members at other
SROs.
---------------------------------------------------------------------------
iv. Bases for Determination
While the Commission in this proposed rulemaking has not modified
the sources of information that SROs should consult when making
conflict of interest determinations, proposed Regulation 1.69(b)(2)(iv)
now provides that, when making such determinations, an SRO may take
"into consideration the exigency of the significant action." The
Commission believes that this modification would provide SROs with the
flexibility to make conflict decisions in an expeditious manner that
would not prevent SRO committees from promptly handling significant
actions.\28\
---------------------------------------------------------------------------
\28\ SRO committees should not abuse this provision by delaying
the consideration of significant actions in order to create exigent
circumstances which would lessen the SRO's information-gathering
responsibilities. The Commission would particularly evaluate the
SROs' application of this provision in any rule enforcement review
of Regulation 1.69-implementing rules.
---------------------------------------------------------------------------
3. Participation in Deliberations
CEA Section 5a(a)(17) recognizes that in some instances a committee
member with a conflict in a particular committee matter also might have
special knowledge or experience regarding that matter. Accordingly, in
a limited number of circumstances, originally-proposed Commission
Regulation 1.69 permitted SRO committees to allow a committee member
who otherwise would be required to abstain from deliberations and
voting on a matter because of a conflict to deliberate but not vote on
the matter. This "deliberation exception" was only made applicable to
matters in which a committee member had a "direct and substantial
financial interest" in the result of a vote on a significant action.
Consistent with CEA Section 5a(a)(17), originally-proposed Regulation
1.69's deliberation exception did not apply to matters in which a
committee member had a conflict due to his or her relationship with a
matter's named party in interest.
In determining whether to permit a "conflicted" committee member
to deliberate on a matter, originally-proposed Regulation 1.69 required
that the presiding committee consider a number of factors including:
(1) Whether the member had special expertise in the matter involved
that few or no other members of the committee had; (2) whether the
committee's ability to meaningfully deliberate would be adversely
affected by the member's non-participation; and (3) whether the
[[Page 3501]]
member's participation in deliberations would be necessary for the
committee to obtain a quorum.\29\
---------------------------------------------------------------------------
\29\ The Commission, in its originally-proposed rulemaking,
indicated that it believed that, given the factors that must be
considered, deliberation exception determinations should be made by
the committee involved, rather than SRO staff. For any particular
SRO committee matter, the committee members themselves would be in a
better position than SRO staff to assess their individual levels of
expertise in the matter and their need for input during
deliberations from the committee member who otherwise would be
required to abstain. The Commission continues to adhere to this
view, although no commenters on the originally-proposed rulemaking
addressed this issue. Accordingly, proposed Regulation 1.69
specifically confers the responsibility for deliberation exception
determinations on the SRO committee involved.
---------------------------------------------------------------------------
The Commission has decided to retain a "deliberation exception"
provision in this proposed rulemaking, but it has modified Regulation
1.69 to simplify the factors that should be considered in making such a
determination. The Commission believes that this proposed provision
strikes a balance between ensuring that SRO committees make well-
informed decisions and minimizing the influence of a committee member's
potential bias or self-interest in a matter. In this respect, the
Commission has incorporated some of the suggestions made by several of
the commenters on Regulation 1.69 as originally proposed.
i. Diversity of Membership Interests
The CBT and CSC suggested that the diversity of membership
interests represented on a committee should be included as a factor in
deciding whether to allow an otherwise conflicted committee member to
participate in deliberations. The Commission recognizes that promoting
the diversity of SRO committees is an important regulatory goal, as
exemplified by Regulation 1.64.\30\ The Commission believes, however,
that ensuring fair and objective committees, free of the influence of
self-interest, is of paramount importance. Accordingly, the Commission
does not believe that it would be beneficial to include committee
diversity as a factor when making deliberation exception decisions. The
Commission also does not believe that it is necessary to amend
Regulation 1.64 to accommodate Regulation 1.69's conflict of interest
requirements. While Regulation 1.64(b) establishes composition
requirements for SRO governing boards, the provision pertains to the
"regular voting members" of a board and not to the composition of a
board each time that it meets. Thus, for instance, an SRO whose
governing board consists of ten percent or more commercial interest
directors will not be in violation of Regulation 1.64(b)(1) if, when
considering any particular board matter, such directors comprise less
than ten percent of the presiding directors because some or all of them
are not present for any reason, including abstentions due to conflicts
of interest.
---------------------------------------------------------------------------
\30\ Commission Regulation 1.64 establishes composition
standards for certain types of SRO committees, including governing
boards. Regulation 1.64 requires that boards meaningfully represent
the following general membership interest groups: (1) futures
commission merchants; (2) floor traders; (3) floor brokers; (4)
participants in a variety of trading pits; and (5) other market
users and participants such as banks and pension funds. In addition,
Regulation 1.64 requires that at least ten percent of the regular
voting members of each SRO board must consist of directors
representing commercial interests such as producers, consumers,
processors, distributors and merchandisers of commodities underlying
the SRO's futures products, and that at least twenty percent of the
regular voting members of each board must consist of non-member
representatives (i.e., persons who are not members of the SRO and
are knowledgeable about either the futures markets or financial
regulation).
---------------------------------------------------------------------------
ii. Committee Member Expertise
The CSC commented that two of the deliberation exception factors
listed in originally-proposed Commission Regulation 1.69 seemed to
overlap. The CSC commented that a committee with a member with special
expertise in a particular subject \31\ always would be affected
adversely \32\ if the member was required to abstain from deliberations
on matters involving the subject. In response, the Commission has
revised proposed Regulation 1.69(b)(3)(ii)(B) to require that
committees in granting a deliberation exception must consider whether
the conflicted committee member has "unique or special expertise,
knowledge or experience" in the subject matter of the significant
action.\33\
---------------------------------------------------------------------------
\31\ See originally-proposed Commission Regulation
1.69(b)(4)(i)(A).
\32\See originally-proposed Commission Regulation
1.69(b)(4)(i)(B).
\33\ In applying this proposed provision, a conflicted committee
member should not be considered to have "unique or special
expertise, knowledge or experience" in a particular subject matter
if the member's expertise, knowledge or experience was similar to
that of some other non-conflicted member of the same committee.
---------------------------------------------------------------------------
iii. Disclosure of Positions
The CBT, CSC and NYCE commented that under Regulation 1.69 as
originally proposed a committee member with a conflict of interest
could participate in deliberations on a matter without disclosing his
or her positions, and concomitant biases, to the other committee
members. The Commission agrees that the disclosure of a committee
member's interest in a matter should help to mitigate any prejudicial
influence such member's views could have on other committee members
during the course of deliberations.
Proposed Commission Regulation 1.69(b)(3)(iii) would require that,
whenever an SRO committee determined whether to grant a deliberation
exception to a committee member, the committee must consider all of the
position information which served as the basis for the member's
conflict of interest in the matter.\34\ This requirement would serve
two purposes. First, it would ensure that the committee would be fully
apprised of the nature of the committee member's conflict when it made
its deliberation exception determination. Second, as suggested by the
CBT, CSC and NYCE, the provision also would ensure that, should a
committee member with a conflict of interest be allowed to deliberate,
his or her fellow committee members should be aware of the member's
interest in the matter and could appropriately evaluate the views
expressed by such member during deliberations.
---------------------------------------------------------------------------
\34\ This information would include not only the position
information supplied to the SRO by the committee member (proposed
Regulation 1.69(b)(2)(iv)(B)), but also position information
garnered by the SRO from large trader reports and clearing records
(proposed Regulation 1.69(b)(2)(iv)(A)) and any other sources
reasonably available to the SRO (proposed Regulation
1.69(b)(2)(iv)(C)).
---------------------------------------------------------------------------
iv. Public Member Approval
In order to promote a "neutral" determination, originally-
proposed Regulation 1.69 required that any deliberation exception must
be approved by all "public" members of the presiding committee (i.e.,
committee members who were not members of the SRO) who were present
when the committee made such a determination.\35\
---------------------------------------------------------------------------
\35\ This requirement did not apply to SRO governing boards,
disciplinary committees or oversight committees which do not have
public members. See Commission Regulations 1.64(b) and (c) which
respectively require governing boards and disciplinary committees in
certain circumstances to include non-SRO member representatives.
---------------------------------------------------------------------------
The CBT and CME commented that requiring that deliberation
exceptions be approved by each public representative on an SRO
committee would have the un-democratic effect of giving a single
committee member the power to veto another committee member's
participation in deliberations. The two exchanges urged the Commission
to delete this requirement. Based on these comments, the Commission has
decided to delete the provision from proposed Regulation 1.69.
[[Page 3502]]
v. Abstention Procedures
Two other commenters asked the Commission to clarify certain
aspects of Regulation 1.69's deliberation exception provision. The CSC
asked whether a person who was permitted to deliberate but not vote on
a matter would be required to leave the committee meeting for any vote
on the matter. As part of this proposed rulemaking, the Commission
wishes to make clear that a committee member who was required to
abstain from any committee matter due to a conflict of interest under
proposed Regulation 1.69, whether it be deliberation or voting, must
leave the committee meeting prior to such deliberation and/or voting.
The Commission believes that even the silent presence of a committee
member could influence a committee to the extent that it impeded free
and open discourse among the other members of a committee.
vi. Public Member Conflicts of Interest
The CBT questioned whether a public representative to an SRO
committee who has a possible conflict of interest could participate in
determining whether he or she should receive a deliberation exception
under Regulation 1.69. The Commission stresses that, under proposed
Regulation 1.69, an SRO committee member, whether public or non-public,
could not participate in any committee vote on whether he or she should
abstain from voting and/or deliberating on a matter due to a conflict
of interest.
vii. Public Interest
The Commission emphasizes that proposed Regulation 1.69(b)(3)(ii)'s
list of circumstances would merely be the factors to be considered by
SROs when making deliberation exception decisions and the presence or
absence of any one factor should not be dispositive in making such
decisions. Consistent with CEA Section 5a(a)(17)(c), SROs ultimately
could only permit committee members with conflicts to participate in
deliberations if it would be "consistent with the public interest."
4. Documentation of Determination
Whenever an SRO made a conflict of interest determination,
originally-proposed Regulation 1.69 required the SRO committee
considering the underlying substantive matter to include certain
information regarding the determination in the minutes of its meeting.
Such a record was required to indicate: (1) the committee members who
attended the meeting, (2) the staff member(s) who reviewed the
committee members' positions, (3) a listing of the position information
reviewed for each committee member, (4) the names of any committee
members directed to abstain and the reasons therefor, (5) a description
of the procedures followed by the SRO in making an abstention decision,
and (6) in those instances when a committee member was granted a
deliberation exception, a full description of the views expressed by
the member during the committee's deliberations.
i. Documenting Position Information
Several commenters responded to the original proposal's
documentation requirements. The CBT and CME suggested that the
provision be modified to make clear that confidential information, such
as position information, need not be disclosed in a committee meeting's
minutes. The Commission has revised proposed Regulation 1.69(b)(4) to
require that SRO committees "reflect in their minutes or otherwise
document" their conflict of interest determinations. With this
approach, SRO committees would not be required to disclose position
information in their minutes. However, they would have to document any
position information and any other information relied upon in making a
conflict of interest determination and would be required to retain such
information in a manner consistent with Commission Regulation 1.31.
ii. Views of Conflicted Members
The CBT commented that the originally-proposed requirement that
committee minutes reflect the views expressed by "conflicted" members
who were granted deliberation exceptions was counterproductive and
would inhibit such members from candidly expressing their opinions and
sharing their expertise. The Commission disagrees. The recordation of
such committee members' views should help to deter them from offering
strictly self-interested opinions to their fellow committee members.
The Commission notes, however, that it has attempted to reduce the
burden of this provision in this proposed rulemaking by requiring that
SROs record only "a general description of the views expressed by such
member during deliberations." See proposed Commission Regulation
1.69(b)(4)(iv) (emphasis added).
iii. Determination Procedures
The CME commented that a description of the procedures used in
making a conflict of interest determination should only have to be
included in a committee's minutes when the procedures vary from the
SRO's normal procedures. The Commission has decided to delete this
provision in its entirety from proposed Regulation 1.69.
iv. Relationship With Named Party in Interest
The Commission stresses that, while many of proposed Regulation
1.69(b)(4)'s requirements would apply only to conflicts of interest
where a committee member had a "direct and substantial financial
interest" in a significant action, the provision also would pertain to
conflicts due to a member's relationship with a matter's named party in
interest. Accordingly, in named party in interest conflicts, the
presiding committee would be required to record: (1) the names of
committee members who participated in deliberation and voting on a
matter in which a member abstained due to a conflict of interest
(proposed Regulation 1.69(b)(4)(i)) and (2) the names of any committee
members who recused themselves voluntarily or who were required to
abstain due to a conflict of interest (proposed Regulation
1.69(b)(4)(ii)). The documentation requirements of proposed Regulation
1.69(b)(4) (i) and (ii) would only be appropriate for financial
interest conflicts of interests and would not be applicable to named
party in interest conflicts.
C. Violations of SRO Rules
Originally-proposed Commission Regulation 1.69(d) made it a
violation of Regulation 1.69 for an SRO to permit a committee member to
participate in deliberations or voting on a matter if such
participation violated any SRO rule implementing the conflict of
interest restrictions of Commission Regulation 1.69.
The CBT commented that this provision would not increase any SRO's
incentive to comply with Regulation 1.69's standards and that,
accordingly, the benefits of the provision did not justify the costs to
the Commission of enforcing the provision. The FIA commented that the
requirement was redundant and only gave the impression that SROs cannot
be entrusted to regulate their own affairs. Both the CBT and FIA
recommended that the provision be deleted.
The Commission has decided not to include this provision in
proposed Regulation 1.69. The Commission reminds the SROs, however,
that they would have the responsibility, under Section 5a(a)(8) of the
CEA, to enforce any "bylaws, rules, regulations, and resolutions"
implementing proposed Regulation 1.69. The Commission
[[Page 3503]]
believes that it would be able to monitor adequately the SROs'
enforcement of their implementing rules in the ordinary course of its
rule enforcement review program.
D. Liability to Other Parties
As originally proposed, Commission Regulation 1.69(e) protected
SROs, SRO officials and SRO staffs involved in reviewing committee
member positions and making abstention decisions, pursuant to
Regulation 1.69, from liability for such actions to any party other
than the Commission. The CBT, CSC and FIA each suggested that the
Commission revise the wording of this provision so that it more closely
conformed with the wording of CEA Section 5a(a)(17). Rather than
proposing a regulatory provision in addition to the statutory provision
in this regard, the Commission has decided to delete this provision
from this proposed rulemaking. The Commission believes that this
approach would eliminate any confusion between Regulation 1.69 and CEA
Section 5a(a)(17).
E. Amendments to Other Commission Regulations Made Necessary by Final
Commission Regulation 1.69
Section 213 of the FTPA amended Section 5a(a)(12)(B) of the CEA to
require that the Commission issue regulations establishing "terms and
conditions" under which contract markets may take temporary emergency
actions without prior Commission approval. Section 5a(a)(12)(B) and
Regulation 1.41(f), the Commission's implementing regulation, require
that any such temporary emergency action be adopted by a two-thirds
vote of a contract market's governing board. In recognition of the fact
that governing board members may be required to abstain from
deliberations and voting on such actions under contract market rules
implementing Regulation 1.69, the Commission, as part of its conflict
of interest rulemaking, originally proposed to amend Regulation 1.41(f)
to provide that such abstaining board members not be included in
determining whether a temporary emergency action has been approved by a
two-thirds majority of a governing board.
The CBT in its comment letter requested that the Commission confirm
that SROs would be able to include governing board members who abstain
from voting on temporary emergency rules, pursuant to a Regulation
1.69-implementing rule, in determining whether the board has a quorum
of members necessary for it to conclude business. In this proposed
rulemaking, the Commission would revise Regulation 1.41(f)(10) to
provide that such abstaining members may be included for quorum
purposes.
As indicated in Section III.A.3. above, the Commission also has
proposed to revise Commission Regulation 1.63's definition of
disciplinary committee so that, like proposed Regulation 1.69's
definition of the same term, it would include the issuance of
disciplinary charges as a defining characteristic.\36\ Regulation
1.63's disciplinary committee definition would include all committees
and persons with disciplinary authority and, unlike proposed Regulation
1.69, would not exclude persons who summarily impose penalties for
minor rule violations.
---------------------------------------------------------------------------
\36\ Regulation 1.63 requires that persons with certain
disciplinary histories be disqualified from serving on, among other
things, SRO disciplinary committees.
---------------------------------------------------------------------------
F. Conclusion
The Commission believes that proposed Regulation 1.69 and the
proposed amendments to Regulations 1.41 and 1.63 would meet the
statutory directives of Section 5a(a)(17) of the CEA as it was amended
by Section 217 of the FTPA. The proposed rulemaking would establish
guidelines and factors to be considered in determining whether an SRO
committee member was subject to a conflict of interest which could
potentially restrict his or her ability to make fair and impartial
decisions in a matter and, thus, warranted abstention from
participation in committee deliberations and voting.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (1988),
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The Commission has previously
determined that contract markets are not "small entities" for
purposes of the Regulatory Flexibility Act. 47 FR 18618, 18619 (April
30, 1982). Furthermore, the then Chairman of the Commission previously
has certified on behalf of the Commission that comparable rules
affecting clearing organizations and registered futures associations
did not have a significant economic impact on a substantial number of
small entities. 51 FR 44866, 44868 (December 12, 1986).
This proposed rulemaking would affect individuals who served on SRO
governing boards, disciplinary committees and oversight panels. The
Commission believes that this proposed rulemaking would not have a
significant economic impact on these SRO committee members. This
proposed rulemaking would require these committee members to disclose
to their SROs certain information which was known to them at the time
that their committees considered certain types of matters. The
Commission believes that this requirement would not have any
significant economic impact on such members because the information
which they would be required to provide should be readily available to
them.
Accordingly, the Chairperson, on behalf of the Commission, hereby
certifies, pursuant to Section 3(a) of the Regulatory Flexibility Act,
5 U.S.C. 605(b), that the action proposed to be taken herein would not
have a significant economic impact on a substantial number of small
entities.
B. Agency Information Activities
When publishing proposed rules, the Paperwork Reduction Act of 1995
("PRA") (Pub. L. 104-13 (May 13, 1995)) imposes certain requirements
on federal agencies (including the Commission) in connection with their
conducting or sponsoring any collection of information as defined by
the PRA. In compliance with the PRA, the Commission, through this rule
proposal, solicits comments to:
(1) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including the validity of the methodology and assumptions used; (2)
evaluate the accuracy of the agency's estimate of the burden of the
proposed collection of information, including the validity of the
methodology and assumptions used; (3) enhance the quality, utility, and
clarity of the information to be collected; and (4) minimize the burden
of the collection of information on those who are to respond, including
through the use of appropriate automated, electronic, mechanical or
other technological collection techniques or other forms of information
technology (e.g., permitting electronic submission of responses).
The Commission has submitted this proposed rule and its associated
information collection requirements to the Office of Management and
Budget ("OMB"). The burden associated with this entire collection
(3038-0022), including this proposed rule, is as follows:
Average burden hours per response--3,547.01
Number of respondents--11,011.00
Frequency of response--On Occasion
[[Page 3504]]
The burden associated with this specific proposed rule is as
follows:
Average burden hours per response--2.00
Number of respondents--20
Frequency of response--On Occasion
Persons wishing to comment on the information required by this
proposed rule should contact the Desk Officer, Commodity Futures
Trading Commission, OMB, Room 10201, NEOB, Washington, DC 20503, (202)
395-7340. Copies of the information collection submission to OMB are
available from the Commission Clearance Office, 1155 21st Street NW,
Washington, DC 20581, (202) 418-5160.
List of Subjects in 17 CFR Part 1
Commodity futures, Contract markets, Clearing organizations,
Members of contract market.
In consideration of the foregoing, and based on the authority
contained in the Commodity Exchange Act and, in particular, Sections 3,
4b, 5, 5a, 6, 6b, 8, 8a, 9, 17, and 23(b) thereof, 7 U.S.C. 5, 6b, 7,
7a, 8, 13a, 12, 12a, 13, 21 and 26(b), the Commission is proposing to
amend Title 17, Chapter I, Part 1 of the Code of Federal Regulations as
follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for Part 1 would continue to read as
follows:
Authority: 7 U.S.C. 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,
6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 8, 9, 12, 12a, 12c, 13a, 13a-
1, 16, 19, 21, 23, and 24, unless otherwise stated.
2. Section 1.41(f)(10) would be proposed to be added to read as
follows:
Sec. 1.41 Contract market rules; submission of rules to the
Commission; exemption of certain rules.
* * * * *
(f) * * *
(10) Governing board members who abstain from voting on a temporary
emergency rule pursuant to Sec. 1.69 shall not be counted in
determining whether such a rule was approved by the two-thirds vote
required by this section. Such members can be counted for the purpose
of determining whether a quorum exists.
* * * * *
3. Section 1.63(a)(2) would be proposed to be revised to read as
follows:
Sec. 1.63 Service on self-regulatory organization governing boards or
committees by persons with disciplinary histories.
(a) * * *
(2) Disciplinary committee means any person or committee of
persons, or any subcommittee thereof, that is authorized by a self-
regulatory organization to issue disciplinary charges, to conduct
disciplinary proceedings, to settle disciplinary charges, to impose
disciplinary sanctions, or to hear appeals thereof.
* * * * *
4. Section 1.69 would be proposed to be added to read as follows:
Sec. 1.69 Voting by interested members of self-regulatory organization
governing boards and various committees.
(a) Definitions. For purposes of this section:
(1) Disciplinary committee means any person or committee of
persons, or any subcommittee thereof, that is authorized by a self-
regulatory organization to issue disciplinary charges, to conduct
disciplinary proceedings, to settle disciplinary charges, to impose
disciplinary sanctions, or to hear appeals thereof in cases involving
any violation of the rules of the self-regulatory organization except
those cases where a single person is authorized to summarily impose
minor penalties for violating rules regarding decorum, attire, the
timely submission of accurate records for clearing or verifying each
day's transactions or other similar activities.
(2) A person's family relationship means the person's spouse,
former spouse, parent, stepparent, child, stepchild, sibling,
stepbrother, stepsister, grandparent, grandchild, uncle, aunt, nephew,
niece or in-law.
(3) Governing board means a self-regulatory organization's board of
directors, board of governors, board of managers, or similar body, or
any subcommittee thereof, duly authorized, pursuant to a rule of the
self-regulatory organization that has been approved by the Commission
or has become effective pursuant to either Section 5a(a)(12)(A) or
17(j) of the Act, to take action or to recommend the taking of action
on behalf of the self-regulatory organization.
(4) Oversight panel means any panel, or any subcommittee thereof,
authorized by a self-regulatory organization to recommend or establish
policies or procedures with respect to the self-regulatory
organization's surveillance, compliance, rule enforcement, or
disciplinary responsibilities.
(5) Member's affiliated firm is a firm in which the member is a
"principal," as defined in Sec. 3.1(a), or an employee.
(6) Named party in interest means a party who is the subject of any
matter being considered by a governing board, disciplinary committee,
or oversight panel.
(7) Self-regulatory organization means a "self-regulatory
organization" as defined in Sec. 1.3(ee) and includes a "clearing
organization" as defined in Sec. 1.3(d), but excludes registered
futures associations for the purposes of paragraph (b)(2) of this
section.
(8) Significant action includes any of the following types of self-
regulatory organization actions or rule changes that can be implemented
without the Commission's prior approval:
(i) Any actions or rule changes which address an "emergency" as
defined in Sec. 1.41(a)(4) (i) through (iv) and (vi) through (viii);
and
(ii) Any changes in margin levels that are designed to respond to
extraordinary market conditions such as an actual or attempted corner,
squeeze, congestion or undue concentration of positions, or that
otherwise are likely to have a substantial effect on prices in any
contract traded or cleared at such self-regulatory organization; but
does not include any rule not submitted for prior Commission approval
because such rule is unrelated to the terms and conditions of any
contract traded at such self-regulatory organization.
(b) Self-regulatory organization rules. Each self-regulatory
organization shall maintain in effect rules that have been submitted to
the Commission pursuant to Section 5a(a)(12)(A) of the Act and
Sec. 1.41 or, in the case of a registered futures association, pursuant
to Section 17(j) of the Act, to address the avoidance of conflicts of
interest in the execution of its self-regulatory functions. Such rules
must provide for the following:
(1) Relationship with named party in interest.--(i) Nature of
relationship. A member of a self-regulatory organization's governing
board, disciplinary committee or oversight panel must abstain from such
body's deliberations and voting on any matter involving a named party
in interest where such member:
(A) Is the named party in interest;
(B) Is an employer, employee, or fellow employee of the named party
in interest;
(C) Is associated with the named party in interest through a
"broker association" as defined in Sec. 156.1;
(D) Has any other significant, ongoing business relationship with
the named party in interest, not including relationships limited to
executing futures or option transactions opposite each other or to
clearing futures or option transactions through the same clearing
member; or
[[Page 3505]]
(E) Has a family relationship with the named party in interest.
(ii) Disclosure of relationship. Prior to the consideration of any
matter involving a named party in interest, each member of a self-
regulatory organization governing board, disciplinary committee or
oversight panel must disclose to the appropriate self-regulatory
organization staff whether he or she has one of the relationships
listed in paragraph (b)(1)(i) of this section with the named party in
interest.
(iii) Procedure for determination. Each self-regulatory
organization must establish procedures for determining whether any
member of its governing board, disciplinary committees or oversight
committees is subject to a conflicts restriction in any matter
involving a named party in interest. Such determinations shall be based
upon:
(A) Information provided by the member pursuant to paragraph
(b)(1)(ii) of this section; and
(B) Any other source of information that is reasonably available to
the self-regulatory organization.
(2) Financial interest in a significant action--(i) Nature of
interest. A member of a self-regulatory organization's governing board,
disciplinary committee or oversight panel must abstain from such body's
deliberations and voting on any significant action if the member
knowingly has a direct and substantial financial interest in the result
of the vote based upon either exchange or non-exchange positions that
reasonably could be expected to be affected by the action.
(ii) Disclosure of interest. Prior to the consideration of any
significant action, each member of a self-regulatory organization
governing board, disciplinary committee or oversight panel must
disclose to the appropriate self-regulatory organization staff the
position information referred to in paragraph (b)(2)(iii) of this
section that is known to him or her.
(iii) Procedure for determination. Each self regulatory
organization must establish procedures for determining whether any
member of its governing board, disciplinary committees or oversight
committees is subject to a conflicts restriction under this section in
any significant action. Such determination must include a review of:
(A) Gross positions held at that self-regulatory organization in
the member's personal accounts or "controlled accounts," as defined
in Sec. 1.3(j);
(B) Gross positions held at that self-regulatory organization in
proprietary accounts, as defined in Sec. 1.17(b)(3), at the member's
affiliated firm;
(C) Gross positions held at that self-regulatory organization in
accounts in which the member is a principal, as defined in Sec. 3.1(a);
(D) Net positions held at that self-regulatory organization in
"customer" accounts, as defined in Sec. 1.17(b)(2), at the member's
affiliated firm; and
(E) Any other types of positions, whether maintained at that self-
regulatory organization or elsewhere, that the self-regulatory
organization reasonably expects could be affected by the significant
action.
(iv) Bases for determination. Taking into consideration the
exigency of the significant action, such determinations should be based
upon:
(A) The most recent large trader reports and clearing records
available to the self-regulatory organization;
(B) Position information provided by the member pursuant to
paragraph (b)(2)(ii) of this section; and
(C) Any other source of information that is reasonably available to
the self-regulatory organization.
(3) Participation in deliberations. (i) Under the rules required by
this section, a self-regulatory organization governing board,
disciplinary committee or oversight panel may permit a member to
participate in deliberations prior to a vote on a significant action
for which he or she otherwise would be required to abstain pursuant to
paragraph (b)(2) of this section if such participation would be
consistent with the public interest and the member recuses himself or
herself from voting on such action.
(ii) In making a determination as to whether to permit a member to
participate in deliberations on a significant action for which he or
she otherwise would be required to abstain, the deliberating body
should consider the following factors:
(A) Whether the member's participation in deliberations is
necessary for the deliberating body to achieve a quorum in the matter;
and
(B) Whether the member has unique or special expertise, knowledge
or experience in the matter under consideration.
(iii) Prior to any determination pursuant to paragraph (b)(3)(i) of
this section, the deliberating body must fully consider the position
information which is the basis for the member's direct and financial
interest in the result of a vote on a significant action pursuant to
paragraph (b)(2) of this section.
(4) Documentation of determination. Self-regulatory organization
governing boards, disciplinary committees, and oversight panels must
reflect in their minutes or otherwise document that the conflicts
determination procedures required by this section have been followed.
Such records also must include:
(i) The names of all members who attended the meeting in person or
who otherwise were present by electronic means;
(ii) The name of any member who voluntarily recused himself or
herself or was required to abstain from deliberations and/or voting on
a matter and the reason for the recusal or abstention, if stated;
(iii) Information on the position information that was reviewed for
each member; and
(iv) In those instances when a committee member who otherwise would
be required to abstain from deliberating and voting on a matter is
permitted to deliberate on a significant action, a general description
of the views expressed by such member during deliberations.
Issued in Washington, D.C. on January 16, 1998, by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 98-1619 Filed 1-22-98; 8:45 am]
BILLING CODE 6351-01-P
======== RETURN TO INDEX ========