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