3492 Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Proposed Rules

1 61 FR 19869 (May 3, 1996).

2Pub. L. No. 102–546, § 217, 106 Stat. 3590

(1992).

3For 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).

operations—14 CFR part 255—will

expire on March 31, 1999, unless the

Department readopts them or changes

the rules’ termination date to a later

date. 62 FR 66272, December 18, 1997.

We published an advance notice of

proposed rulemaking to begin a

proceeding for reexamining the rules

and determining whether they should

be readopted and, if so, whether they

should be changed. 62 FR 47606,

September 10, 1997. Under our

modified schedule, the reply comments

are due January 23 (the comments were

due December 9). 62 FR 58700, October

30, 1997.

American Airlines, the principal

owner of Sabre, the largest system and

a major user of every system’s services,

has asked us to change the due date for

reply comments to February 3, 1998 (as

requested by our staff, American served

its request on every commenter, so that

all parties will be aware of its request).

American notes that many comments

were filed in response to our advance

notice, that those comments raised a

number of complex issues, and that

some parties did not file their comments

until well after the due date for

comments. American contends that an

extension of time for the reply

comments is needed to ensure that all

interested persons have a reasonable

opportunity to review the initial

comments and to prepare their reply

comments. We intend to complete our

rulemaking as soon as reasonably

possible, given the impact of computer

reservations system practices on airline

competition, the public’s ability to

obtain accurate and complete

information on airline services, and the

airline and travel agency businesses. We

have nonetheless decided to grant the

short extension requested by American.

Many parties filed comments, and those

comments dealt with a number of

difficult issues. We are likely to have a

better record for preparing a notice of

proposed rulemaking if we enable the

parties to prepare reply comments that

discuss in depth all of the issues. We

will therefore extend the due date for

reply comments to February 3.

Issued in Washington, D.C. on January 16,

1998.

Nancy E. McFadden,

General Counsel.

[FR Doc. 98–1595 Filed 1–22–98; 8:45 am]

BILLING CODE 4910–62–P

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Part 1

Voting by Interested Members of SelfRegulatory 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 1 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’’).2 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.

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].’’ 3 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.4 The Commission also

proposed to make related amendments

to existing Commission Regulations 1.3,

1.41 and 1.63.

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 originallyproposed 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
Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Proposed Rules 3493

5For 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.

6The 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.

7See footnote 6 above.

8Should 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.

9Regulation 1.41(f) establishes procedures for

SRO adoption of temporary emergency rules.

10Regulation 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.’’

this proposed rulemaking, and an

explanation of the Commission’s

rationale for amending the provision.5

A. Reason for Rulemaking

The Commission notes that in

addition to comments on particular

provisions, there also were several

general comments on the originallyproposed 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

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.

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

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.

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.
3494 Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Proposed Rules

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.

12The 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.

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.

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 inhouse 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

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

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.

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 originallyproposed definition did not include

persons authorized to take disciplinary

actions, such as floor committee
Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Proposed Rules 3495

14See originally-proposed Commission

Regulation 1.3(tt).

15The oversight panel definition would be

established by proposed Regulation 1.69(a)(4) and

not by Regulation 1.3 as originally proposed.

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.

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

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, originallyproposed 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 originallyproposed 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 originallyproposed 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
3496 Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Proposed Rules

16CEA 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.’’

17See 61 FR 19869, 19872 n. 12.

18For 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).

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

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 preestablished, 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.

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 Originallyproposed 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.

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 originallyproposed 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.
Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Proposed Rules 3497

19See footnote 10 above.

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.

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

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.

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
3498 Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Proposed Rules

21The 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.

22The definition of such significant actions is set

forth in proposed Regulation 1.69(a)(8) and is

discussed above in Section III.A.6.

23See 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.

with a matter’s named party in

interest.21

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

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, originallyproposed 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 originallyproposed 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

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.
Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Proposed Rules 3499

24There 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.

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 conflictcreating 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, timeconsuming burdens on SRO staffs. The

CME suggested that the informationgathering 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
3500 Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Proposed Rules

25Whenever 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.’’

26There 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.

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.

28SRO 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.

significant actions and temporary

emergency rules.25

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

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 overthe-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

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

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, originallyproposed 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, originallyproposed 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 nonparticipation; and (3) whether the
Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Proposed Rules 3501

29The 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.

30Commission 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).

31See originally-proposed Commission

Regulation 1.69(b)(4)(i)(A).

32See 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 nonconflicted member of the same committee.

34This 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)).

35This 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.

member’s participation in deliberations

would be necessary for the committee to

obtain a quorum.29

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.

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

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.

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

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.
3502 Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Proposed Rules

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, originallyproposed 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 selfinterested 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
Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Proposed Rules 3503

36Regulation 1.63 requires that persons with

certain disciplinary histories be disqualified from

serving on, among other things, SRO disciplinary

committees.

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.

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
3504 Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Proposed Rules

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:

§ 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 § 1.69 shall

not be counted in determining whether

such a rule was approved by the twothirds 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:

§ 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:

§ 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 selfregulatory 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 selfregulatory 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 selfregulatory 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 § 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 § 1.3(ee) and includes a

‘‘clearing organization’’ as defined in

§ 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

§ 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 selfregulatory 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 selfregulatory 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

§ 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 § 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
Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Proposed Rules 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 selfregulatory 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 nonexchange 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 selfregulatory organization in the member’s

personal accounts or ‘‘controlled

accounts,’’ as defined in § 1.3(j);

(B) Gross positions held at that selfregulatory organization in proprietary

accounts, as defined in § 1.17(b)(3), at

the member’s affiliated firm;

(C) Gross positions held at that selfregulatory organization in accounts in

which the member is a principal, as

defined in § 3.1(a);

(D) Net positions held at that selfregulatory organization in ‘‘customer’’

accounts, as defined in § 1.17(b)(2), at

the member’s affiliated firm; and

(E) Any other types of positions,

whether maintained at that selfregulatory 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 selfregulatory 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

INTERNATIONAL TRADE

COMMISSION

19 CFR Parts 201 and 207

Proposed Amendments to Rules of

Practice and Procedure; Hearing

Regarding Five-Year Reviews

AGENCY: United States International

Trade Commission.

ACTION: Proposed rule; notice of public

hearing.

SUMMARY: On October 23, 1997, the

Commission published proposed rules

to establish procedures for the conduct

of five-year reviews of antidumping and

countervailing duty orders and

suspension agreements (62 FR 55185).

The notice of proposed rulemaking

indicated that the Commission would

hold a hearing concerning the

procedural matters discussed in the

notice of proposed rulemaking as well

as methodological and analytical issues

relating to five-year reviews. The

hearing will include panel discussions

on topics of significant interest.

Interested persons with similar

viewpoints are encouraged to

consolidate testimony. After reviewing

the requests, the Commission will notify

participants of panel assignments and

time allocations. The Commission will