Received CFTC 

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NATIONAL FUTURES ASSOCIATION 

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COMMENT 

Via E-Mail (secretary@cftc.gov) 

Ms. Eileen A. Donovan 

Office of the Secretariat 

Commodity Futures Trading Commission 

Three Lafayette Centre 

April 25, 2007 • ) 

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1155 21st Street, N.W. ::.. ' \'-_~ : 

Washington, DC 20581 .. - ' -· 

Re: Regulatory Governance 

Dear Ms. Donovan: 

NFA appreciates the opportunity to comment upon the Commission's 

proposed amendments to the Acceptable Practices for Section 5(d)(15) of the 

Commodity Exchange Act. These proposed amendments seek to clarify the definition 

of "public director" contained in the Acceptable Practices. As you are aware, the 

Acceptable Practices for Section 5(d)(15) do not apply to NFA's governance and NFA 

again applauds the Commission's decision not to include registered futures 

association's in the current Acceptable Practices. 

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As we have noted several times, NFA faces different challenges than 

SROs that operate a market and governance standards should be sufficiently flexible to 

account for those differences. NFA's Board is comprised of representatives from 

contract markets, FCMs, IBs, CPOs, CTAs, and the public. This diversity ensures that 

no one constituency can dominate NFA's Board actions. NFA's Board has always had 

public representatives, and their participation is an important protection for those market 

participants- primarily retail customers and end users- who are not otherwise 

represented on NFA's Board. 

NFA believes that a self-regulatory organization's ("SROs") public 

representatives should be appropriately diverse and adequately represent the interests 

of non-Members. Over the years, NFA has been very fortunate to attract a diverse 

group of public directors, who have included bankers, academics, former Congressmen, 

200 West Madison Street Suite 1600 Chicago, Illinois 60606 312.781.1300 800.621.3570 312.781. 1467fax www.nfa.futures.org 

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and end-users, among others. Many of our public representatives have been 

individuals with industry experience or affiliations and NFA has found that these 

individuals have brought unique perspectives to the Board and have made many 

positive contributions to NFA's success. 

Unfortunately, if the CFTC's Public Director Acceptable Practice ("PDAP") 

applied to NFA, we are uncertain that our past success in attracting high-caliber public 

representatives would continue. For the reasons explained below, this uncertainty 

exists even with the Commission's March 26, 2007 proposal to clarify the definition of 

"public director" and is caused primarily by the inclusion of "firm" and "member'' in the 

payment-providers provision. 

The Commission, of course, recognizes the importance of attracting highcaliber public representatives to exchange Boards. In responding to comments on the 

PDAP, the Commission noted its belief that exchanges are fully capable of finding a 

sufficient number of qualified directors. The Commission further indicated that these 

directors may be drawn from a large pool of talented candidates with relevant and 

related industry experience, including retired futures industry insiders; scholars whose 

research focuses on the futures markets and related disciplines; officers and executives 

of many sophisticated corporate entities; persons with expertise in the securities 

industry which may translate well into futures; and other members of the legal, 

business, and regulatory communities. NFA strongly believes, however, that the 

payment-providers provision severely limits the number of talented candidates that can 

be drawn from these pools and places SROs in an unworkable position in determining if 

an individual is "public." 

For example, if the proposed PDAP applied to NFA, then NFA's Board on 

the record must determine that an individual qualifies as a public director. Due to the 

payment-providers provision, this determination by necessity includes a review of 

whether any firm in which the potential public director is an employee, officer, director or 

partner has received more than $100,000 in combined annual payments for 

professional services-an undefined term-from NFA or NFA's 3,825 Members or from 

the countless number of those firms' officers or directors. Additionally, the Acceptable 

Practices require that this inquiry include a determination as to whether such payments 

were made to any firms in which the public director's "immediate family" members (i.e. 

spouse, parents, children, and siblings) are an employee, officer, director or partner. 

Neither NFA nor any individual seeking to serve as a public director can reasonably 

make these inquiries and, as a result, qualified high-caliber individuals-particularly 

those drawn from the legal, business, and regulatory communities-will be eliminated 

from the pool of individuals from which public directors can be drawn. 

Due to the payment-providers provision, three of NFA's five current public 

directors would likely be disqualified due to professional service payments. Two of 

these individuals are employed by professional service firms-legal and financial 

consultancy-which likely receive payments in excess of $100,000 from NFA Members, 

and the third is also a director at an exchange that makes payments of over $100,000 to 

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NFA for professional regulatory services. All three of these public directors are highcaliber individuals with diverse interests and valuable prior industry experience. They 

have served on NFA's Board for terms ranging from one to seven years. From a 

practical standpoint, in NFA's twenty-five year history, only once have payments by NFA 

Members to a public director's firm raised a conflict of interest on an issue before the 

Board. This conflict was appropriately addressed pursuant to NFA's Board conflicts 

policy by this director identifying the conflict for the Board and abstaining from voting on 

the issue. 

Due to the many problems associated with the proposed paymentproviders provision, NFA believes that the Commission should eliminate from the 

provision any criteria based upon payments to "firms" by "members." The recently 

proposed changes do not appropriately clarify the definition of "public director." In 

NFA's view, a preferable change to the criteria would base this disqualification from 

service as a public director upon the individual alone receiving more than $100,000 in 

combined annual payments from the contract market, any affiliate of the contract market 

or from a member or an officer or director of a member. This test is essentially the one 

proposed by the Commission in July 2006. As demonstrated above, no SRO can 

reasonably make the inquiry posed by the recently proposed criteria and the inability to 

do so causes significant problems for SROs seeking to attract high-caliber individuals to 

serve as public directors. 

Thank you again for the opportunity to comment upon the proposed 

amendments relating to regulatory governance. If you have any questions, please do 

not hesitate to contact me at (312) 781-1413. 

m:\tws\PDC comment 

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Sincerely, 

Thomas W. Sexton 

General Counsel