6936 Federal Register / Vol. 72, No. 30 / Wednesday, February 14, 2007 / Rules and Regulations 

1The acceptable practices for core principles 

reside in Appendix B to Part 38 of the 

Commission’s Regulations, 17 CFR Part 38, App. B. 

2Core Principle 15 states: ‘‘CONFLICTS OF 

INTEREST—The board of trade shall establish and 

enforce rules to minimize conflicts of interest in the 

decision-making process of the contract market and 

establish a process for resolving such conflicts of 

interest.’’ CEA § 5(d)(15), 7 U.S.C. 7(d)(15). 

3The Act is codified at 7 U.S.C. 1 et seq. (2000). 

4Any board of trade that is registered with the 

Securities and Exchange Commission (‘‘SEC’’) as a 

national securities exchange, is a national securities 

association registered pursuant to section 15(A)(a) 

of the Securities Exchange Act of 1934, or is an 

alternative trading system, and that operates as a 

designated contract market in security futures 

products under Section 5f of the Act and 

Commission Regulation 41.31, is exempt from the 

core principles enumerated in Section 5 of the Act, 

and the acceptable practices thereunder, including 

those adopted herein. 

Replacement of Left-Hand Windowsill Drain 

Hoses 

(h) Within 1,200 flight hours or 360 days 

after the effective date of this AD, whichever 

occurs first, do the actions required by 

paragraphs (h)(1) and (h)(2) of this AD, as 

applicable, in accordance with the 

Accomplishment Instructions of EMBRAER 

Service Bulletin 145LEG–30–0011, Revision 

01, dated June 7, 2006 (for Model EMB–135BJ 

airplanes); or EMBRAER Service Bulletin 

145–30–0041, Revision 01, dated June 5, 

2006 (for Model EMB–135ER, –135KE, 

–135KL, and –135LR airplanes; and Model 

EMB–145, –145ER, –145MR, –145LR, 

–145XR, –145MP, and –145EP airplanes); as 

applicable. 

(1) For all airplanes: Replace the left-hand 

windowsill drain hoses having P/N 123–

15435–401 and –403 with new, improved 

hoses having P/N 145–13044–001 and P/N 

145–13047–001, and replace the tiedown 

straps with new tiedown straps, in 

accordance with Figure 1 of the applicable 

service bulletin. 

(2) For Model EMB–135BJ airplanes: 

Reroute the drain hoses of the left cockpit 

horizontal linings, in accordance with Figure 

2 of the applicable service bulletin. 

Actions Accomplished According to 

Previous Issue of Service Bulletin 

(i) Any replacement/rerouting of the drain 

hoses accomplished before the effective date 

of this AD in accordance with EMBRAER 

Service Bulletin 145–30–0041 or 145LEG–

30–0011, both dated April 20, 2005, as 

applicable, is considered acceptable for 

compliance with the requirements of 

paragraphs (g) and (h) this AD. 

Alternative Methods of Compliance 

(AMOCs) 

(j)(1) The Manager, ANM–116, 

International Branch, Transport Airplane 

Directorate, FAA, has the authority to 

approve AMOCs for this AD, if requested in 

accordance with the procedures found in 14 

CFR 39.19. 

(2) Before using any AMOC approved in 

accordance with § 39.19 on any airplane to 

which the AMOC applies, notify the 

appropriate principal inspector in the FAA 

Flight Standards Certificate Holding District 

Office. 

Related Information 

(k) Brazilian airworthiness directive 2005–

08–04R1, effective July 27, 2006, also 

addresses the subject of this AD. 

Material Incorporated by Reference 

(l) You must use the applicable EMBRAER 

service bulletins specified in Table 1 of this 

AD to perform the actions that are required 

by this AD, unless the AD specifies 

otherwise. The Director of the Federal 

Register approved the incorporation by 

reference of these documents in accordance 

with 5 U.S.C. 552(a) and 1 CFR part 51. 

Contact Empresa Brasileira de Aeronautica 

S.A. (EMBRAER), P.O. Box 343—CEP 12.225, 

Sao Jose dos Campos—SP, Brazil, for a copy 

of this service information. You may review 

copies at the FAA, Transport Airplane 

Directorate, 1601 Lind Avenue, SW., Renton, 

Washington; or at the National Archives and 

Records Administration (NARA). For 

information on the availability of this 

material at NARA, call 202–741–6030, or go 

to: http://www.archives.gov/federal-register/ 

cfr/ibr-locations.html. 

TABLE 1.—MATERIAL INCORPORATED BY REFERENCE

EMBRAER— Revision level— Date—

Alert Service Bulletin 145–30–A050 .................................................................................................................. Original ............. May 31, 2006. 

Alert Service Bulletin 145LEG–30–A017 ........................................................................................................... Original ............. May 31, 2006. 

Service Bulletin 145–30–0041 ........................................................................................................................... 01 ..................... June 5, 2006. 

Service Bulletin 145LEG–30–0011 .................................................................................................................... 01 ..................... June 7, 2006. 

Issued in Renton, Washington, on February 

5, 2007. 

Ali Bahrami, 

Manager, Transport Airplane Directorate, 

Aircraft Certification Service. 

[FR Doc. E7–2413 Filed 2–13–07; 8:45 am] 

BILLING CODE 4910–13–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 38 

RIN 3038–AC28 

Conflicts of Interest in Self-Regulation 

and Self-Regulatory Organizations 

(‘‘SROs’’) 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commission hereby 

adopts final acceptable practices for 

minimizing conflicts of interest in 

decision making by designated contract 

markets (‘‘DCMs’’ or ‘‘exchanges’’),1

pursuant to Section 5(d)(15) (‘‘Core 

Principle 15’’) 2 of the Commodity 

Exchange Act (‘‘CEA’’ or ‘‘Act’’).3 The 

final acceptable practices are the first 

issued for Core Principle 15 and are 

applicable to all DCMs.4 They focus 

upon structural conflicts of interest 

within modern self-regulation, and offer 

DCMs a ‘‘safe harbor’’ by which they 

may minimize such conflicts and 

comply with Core Principle 15. To 

receive safe harbor treatment, DCMs 

must implement the final acceptable 

practices in their entirety, including 

instituting boards of directors that are at 

least 35% public and establishing 

oversight of all regulatory functions 

through Regulatory Oversight 

Committees (‘‘ROCs’) consisting 

exclusively of public directors. 

DATES: Effective Date: March 16, 2007. 

FOR FURTHER INFORMATION CONTACT: 

Rachel F. Berdansky, Acting Deputy 

Director for Market Compliance, (202) 

418–5429, or Sebastian Pujol Schott, 

Special Counsel (202) 418–5641, 

Division of Market Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction 

A. Overview of the Acceptable Practices 

B. Background 

II. Procedural History 

III. Public Comments Received and the 

Commission’s Response 

A. Legal Comments 

1. Overview of Commission’s Authority to 

Issue the Acceptable Practices 

2. Specific Legal Issues Raised by 

Commenters 

B. Policy Comments 

1. General Comments 

2. Comments With Respect to the Board 

Composition Acceptable Practice 

3. Comments With Respect to the Public 

Director Acceptable Practice 

4. Comments With Respect to the ROC 

Acceptable Practice 


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Federal Register / Vol. 72, No. 30 / Wednesday, February 14, 2007 / Rules and Regulations 6937 

5Conflicts of Interest in Self-Regulation and SelfRegulatory Organizations (‘‘Proposed Rule’’), 71 FR 

38740 (July 7, 2006). 

6 ‘‘Currently established’’ DCMs are those that are 

already designated at the time this release is 

published in the Federal Register 

5. Comments With Respect to the 

Disciplinary Committee Acceptable 

Practice 

IV. Specific Requests for Modifications and/ 

or Clarifications that the Commission has 

Determined to Grant or Deny 

A. Phase-in Period for the New Acceptable 

Practices 

B. Selection of Public Directors 

C. Compensation of Public Directors 

D. Overlapping Public Directors 

E. Jurisdiction of Disciplinary Panels and 

Definition of ‘‘Public’’ for Persons 

Serving on Disciplinary Panels 

F. ‘‘No Material Relationship Test’’

G. Elimination of ROCs’ Periodic Reporting 

Requirement 

V. Related Matters 

VI. Text of Acceptable Practices for Core 

Principle 15 

I. Introduction 

A. Overview of the Acceptable Practices 

The final acceptable practices 

recognize DCMs’ unique public-interest 

responsibilities as self-regulatory 

organizations (‘‘SROs’’) in the U.S. 

futures industry. They address conflicts 

of interest that exist within DCMs as 

they operate in an increasingly 

competitive environment and transform 

from member-owned, not-for-profit 

entities into diverse enterprises with a 

variety of business models and 

ownership structures. While continuing 

to meet their regulatory responsibilities, 

DCMs must now compete effectively to 

generate profits, advance their 

commercial interests, maximize the 

value of their stock, and/or serve 

multiple membership, ownership, 

customer, and other constituencies. The 

presence of these potentially conflicting 

demands within a single entity—

regulatory authority coupled with 

commercial incentives to misuse such 

authority—constitutes the new 

structural conflict of interest addressed 

by the acceptable practices adopted 

herein. 

The Commission has determined that 

the structural conflicts outlined above 

are appropriately addressed through 

reforms within DCMs themselves, 

including reforms of DCMs’ governing 

bodies. Accordingly, the Commission 

offers the new acceptable practices for 

Core Principle 15 as an appropriate 

method for minimizing such conflicts. 

The Commission believes that 

additional public directors on governing 

bodies, greater independence at key 

levels of decision making, and careful 

insulation of regulatory functions and 

personnel from commercial pressures, 

are important elements in ensuring 

vigorous, effective, and impartial selfregulation now and in the future. The 

new acceptable practices incorporate 

and emphasize each of these elements, 

and offer all DCMs clear instruction as 

to how they may comply with Core 

Principle 15. 

Although DCMs are free to comply 

with Core Principle 15 by other means, 

the Commission stresses that they all 

must address structural conflicts of 

interest and adopt substantive measures 

to protect their regulatory decision 

making from improper commercial 

considerations. DCMs must ensure that 

regulatory decisions are made on their 

own merits, and that they are not 

compromised by the commercial 

interests of the DCMs or the interests of 

their numerous constituencies. 

Likewise, DCMs’ regulatory operations 

and personnel must be insulated from 

improper influence and commercial 

considerations to ensure appropriate 

regulatory outcomes. 

The new acceptable practices are set 

forth in four component parts, and 

DCMs must meet all four to receive safe 

harbor treatment under Core Principle 

15. Each component part is summarized 

as follows: 

First, the Board Composition 

Acceptable Practice calls upon all DCMs 

to minimize conflicts of interest in selfregulation by establishing boards of 

directors that contain at least 35% 

‘‘public directors’’ (as defined by a 

separate Public Director Acceptable 

Practice discussed below). The Board 

Composition Acceptable Practice further 

requires that DCMs ensure that any 

executive committees (or similarly 

empowered bodies) also meet the 35% 

public director standard. This 35% 

standard in the new acceptable practices 

represents a modification from the 50% 

public director standard in the proposed 

acceptable practice.5

Second, the Regulatory Oversight 

Committee Acceptable Practice 

mandates that all DCMs establish 

Regulatory Oversight Committees, 

composed only of public directors, to 

oversee core regulatory functions and 

ensure that they remain free of improper 

influence. The Commission notes that 

ROCs are intended to insulate selfregulatory functions and personnel from 

improper influence. In fulfilling this 

role, however, ROCs are not expected to 

assume managerial responsibilities, or 

to isolate self-regulatory functions and 

personnel from others within the DCM. 

ROCs’ oversight and insulation should 

be aided by their DCMs’ chief regulatory 

officers (‘‘CROs’’). A full description of 

the responsibilities and authority of 

ROCs may be found in the text of the 

final acceptable practices. 

Third, the Disciplinary Panel 

Acceptable Practice states that DCM 

disciplinary panels should not be 

dominated by any group or class of 

DCM members or participants, and must 

include at least one ‘‘public person’’ on 

every panel. Under the Disciplinary 

Panel Acceptable Practice, disciplinary 

panels must keep thorough minutes of 

their meetings, including a full 

articulation of the rationale supporting 

their disciplinary decisions. 

Finally, the Public Director 

Acceptable Practice establishes specific 

definitions of ‘‘public’’ for DCM 

directors and for members of 

disciplinary panels. Public directors are 

persons who have no ‘‘material 

relationship’’ with their DCM, i.e., any 

relationship which could reasonably 

affect their independent judgment or 

decision making. In addition, public 

directors must meet a series of ‘‘brightline tests’’ which identify specific 

circumstances and relationships which 

the Commission believes are clearly 

material. For members of disciplinary 

panels, the definition of ‘‘public’’

includes the bright-line tests, but not the 

materiality criterion. 

The final acceptable practices also 

include clarifications to the acceptable 

practices originally proposed by the 

Commission on July 7, 2006. For 

example, the final acceptable practices 

clarify that a DCM’s public directors 

may also serve as public directors of its 

holding company under certain 

circumstances. These clarifications were 

made in response to public comments 

on the proposed acceptable practices. 

In addition, although the final 

acceptable practices are effective 30 

days after publication in the Federal 

Register, the Commission will permit 

currently established DCMs to 

implement responsive measures over a 

phase-in period of two years or two 

regularly-scheduled board elections, 

whichever occurs sooner.6 Responsive 

measures include implementing the 

final acceptable practices or otherwise 

fully complying with the requirements 

of Core Principle 15, including 

requirements to minimize the structural 

conflicts of interest discussed herein. 

The phase-in period and the modified 

public director requirements for boards 

and executive committees are the only 

significant changes between the 

proposed acceptable practices and those 

adopted today. 


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6938 Federal Register / Vol. 72, No. 30 / Wednesday, February 14, 2007 / Rules and Regulations 

7CEA § 3(a), 7 U.S.C. 5(a). 8 Id. 

9CEA § 3(b), 7 U.S.C. 5(b). 10 Id. 11 Id. 12 Id. 

B. Background 

U.S. futures markets are a critical 

component of the U.S. and world 

economies, providing significant 

economic benefits to market 

participants and the public at large. 

They provide an important hedging 

vehicle to individuals and firms in 

myriad industries, resulting in more 

efficient production, lower costs for 

consumers, and other economic 

benefits. By offering a competitive 

marketplace and focal point where 

traders can freely interact based on their 

assessments of supply and demand, 

futures markets also provide a vital 

forum for discovering prices that are 

generally considered to be superior to 

administered prices or prices 

determined privately. For this reason, 

futures markets are widely utilized 

throughout the global economy. 

Participants in the markets include 

virtually all economic actors, and the 

prices discovered on a daily basis 

materially affect a wide range of 

businesses in the agricultural, energy, 

financial, and other sectors. 

For the reasons outlined above, DCMs 

are not just typical commercial 

enterprises, but are commercial 

enterprises affected with a significant 

national public interest. Actions that 

distort prices or otherwise undermine 

the integrity of the futures markets have 

broad, detrimental implications for the 

economy as a whole and the public in 

general. Congress recognized the 

importance of futures trading in the Act, 

when it explicitly stated that futures 

transactions ‘‘are entered into regularly 

in interstate and international 

commerce and are affected with a 

national public interest * * *.’’ 7 It 

defined the public interest to include 

‘‘liquid, fair, and financially secure 

trading facilities.’’ 8 Congress also 

identified the purposes of the Act: ‘‘to 

deter and prevent price manipulation or 

any other disruptions to market 

integrity; to ensure the financial 

integrity of all transactions subject to 

this Act and the avoidance of systemic 

risk; and to protect all market 

participants from fraudulent or other 

abusive sales practices and misuses of 

customer assets.’’ 9 To accomplish these 

purposes, Congress established a 

statutory system of DCM self-regulation, 

combined with Commission oversight, 

to promote ‘‘responsible innovation and 

fair competition among boards of trade, 

other markets and market 

participants.’’ 10 Meeting these statutory 

obligations and purposes requires DCM 

self-regulation that is as vigorous, 

impartial, and effective as possible. 

All DCMs face unique and potentially 

conflicting regulatory obligations and 

commercial demands as they work to 

meet the statutory requirements 

outlined above. On the commercial side, 

they must attract trading to their 

markets, maximize the value of their 

stock, generate profits, satisfy the 

financial needs of their numerous 

stakeholders and constituencies, and/or 

meet the diverse business needs of their 

market participants. At the same time, 

as self-regulatory organizations, DCMs 

must exercise their authority 

judiciously, impartially, and in the 

public interest. As essential forums for 

the execution of futures transactions 

and for price discovery, DCMs must 

ensure fair and financially secure 

trading facilities. DCMs must also help 

to ‘‘serve’’ and ‘‘foster’’ the national 

public interest through self-regulatory 

responsibilities that include ensuring 

market integrity, financial integrity, and 

the strict protection of market 

participants.11

When DCMs were first entrusted with 

these extensive regulatory 

responsibilities, they were almost 

exclusively member-owned, not-forprofit exchanges facing little 

competition for customers or in their 

prominent contracts. Although conflicts 

of interest in self-regulation were a 

concern even then, such conflicts 

typically centered on individual 

exchange members policing one 

another. Today’s DCMs, however, are 

vibrant commercial enterprises 

competing globally in an industry 

whose ownership structures, business 

models, trading practices, and products 

are evolving rapidly. As a result, DCMs 

now face potential conflicts of interest 

between their critical self-regulatory 

responsibilities and their powerful 

commercial imperatives. Specifically, 

DCMs must: defend and expand their 

markets against others offering similar 

products or services; generate returns 

for their owners; and provide liquid 

markets where their members and 

customers may profit. At the same time, 

they must continue to meet fundamental 

public interest responsibilities through 

vigorous and impartial self-regulation. 

To reconcile these obligations, DCMs 

must acknowledge and guard against 

conflicts between their regulatory 

responsibilities and their commercial 

interests, and take measures to prevent 

improper influence upon self-regulation 

by their numerous constituencies, 

including members, owners, customers, 

and others. 

As explained in the proposing release, 

rapid and ongoing changes in the 

futures industry have raised concerns as 

to whether existing self-regulatory 

structures are equipped to manage 

evolving conflicts of interest. Selfregulation’s traditional conflict—that 

members will fail to police their peers 

with sufficient zeal—has been joined by 

the possibility that competing DCMs 

could abuse their regulatory authority to 

gain competitive advantage or satisfy 

commercial imperatives. Such conflicts 

of interest must be addressed promptly 

and proactively to prevent them from 

becoming real abuses, and to ensure 

continued public confidence in the 

integrity of the U.S. futures markets. 

After three-and-a-half years of careful 

study, the Commission has determined 

that the conflicts of interest identified 

above are inherent in any system of selfregulation conducted by competing 

DCMs, many of which operate under 

new ownership structures and business 

models, and all of which are possessed 

of strong commercial imperatives. The 

Commission has further determined that 

successfully addressing such conflicts, 

and complying with Core Principle 15, 

requires appropriate responses within 

DCMs. Only by reconciling the inherent 

tension between their self-regulatory 

responsibilities and their commercial 

interests, whether via the new 

acceptable practices or otherwise, can 

DCMs successfully minimize conflicts 

of interest in their decision-making 

processes and thereby ensure the 

integrity of self-regulation in the U.S. 

futures industry. 

The new acceptable practices for Core 

Principle 15 are a direct response to the 

industry changes outlined above. As 

required by the Act, they ‘‘promote 

responsible innovation and fair 

competition’’ among U.S. DCMs, and 

ensure that self-regulation remains 

compatible with the modern business 

practices of today’s DCMs.12 The new 

acceptable practices embody the 

Commission’s firm belief that effective 

self-regulation in an increasingly 

competitive, publicly traded, for-profit 

environment requires independent 

decision making at key levels of DCMs’

regulatory governance structures. The 

Commission further believes that the 

new acceptable practices constitute an 

ideal solution to emerging structural 

conflicts of interest in self-regulation. 

Both proactive and carefully targeted, 

the new acceptable practices for Core 

Principle 15 advance the public interest 

and ensure the continued strength and 


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Federal Register / Vol. 72, No. 30 / Wednesday, February 14, 2007 / Rules and Regulations 6939 

13 Governance of Self-Regulatory Organizations, 

69 FR 32326 (June 9, 2004). Comment letters 

received are available at: http://www.cftc.gov/foia/ 

comment04/foi04--005_1.htm. 

14Self-Regulation and Self-Regulatory 

Organizations in the Futures Industry, 70 FR 71090 

(Nov. 25, 2005). Comment letters received are 

available at http://www.cftc.gov/foia/comments05/ 

foi05--007_1.htm. 

15The NYSE’s corporate governance listing 

standards require listed companies to: have a 

majority of independent directors; meet materiality 

and bright-line tests for independence; convene 

regularly scheduled executive sessions of the board 

without management present; institute nominating/ 

governance, compensation, and audit committees 

consisting exclusively of public directors; etc. See 

NYSE Listed Company Manual, §§ 303A:00–14, 

available at: http://www.nyse.com/regulation/listed/ 

1101074746736.html. The NASDAQ Stock Market 

has adopted corporate governance listing standards 

similar to the NYSE’s. See the NASDAQ Stock 

Market Listing Standards and Fees, available at: 

http://www.nasdaq.com/about/ 

nasdaq_listing_req_fees.pdf. DCMs whose parent 

companies are listed on the NYSE include the 

CBOT, CME, NYBOT, and NYMEX. Although these 

DCMs themselves are not required to comply with 

the listing standards, they may be in de facto 

compliance if they have chosen to name identical 

boards of directors for both the listed parent and the 

DCM. 

16The Hearing Transcript is available at http:// 

www.cftc.gov/files/opa/ 

opapublichearing021506.final.pdf. 

17See supra note 5. 

18Comment letters in response to the Proposed 

Rules are available at: http://www.cftc.gov/foia/ 

comment06/foi06--004_1.htm. 

integrity of self-regulation in a rapidly 

evolving industry. 

The conflicts of interest described 

above require careful responses by all 

DCMs. The Commission believes that 

DCMs can comply with Core Principle 

15 by minimizing conflicts of interest 

between their regulatory responsibilities 

and their commercial interests or those 

of their membership, ownership, 

management, customer, and other 

constituencies. However, whether DCMs 

choose to comply with Core Principle 

15 via the acceptable practices adopted 

herein or by other means, the 

Commission recognizes that necessary 

measures may take time to implement. 

Accordingly, and at the request of 

public commenters, the Commission is 

adopting a phase-in period for full 

compliance with Core Principle 15. 

Within two years of this document’s 

effective date, or two regularlyscheduled board elections, whichever 

occurs first, all DCMs must be in full 

compliance with Core Principle 15, 

either by availing themselves of the new 

acceptable practices or undertaking 

other effective measures to address the 

structural conflicts of interest identified 

herein. Commission staff will contact all 

DCMs in six months of the effective date 

of these final acceptable practices to 

learn of their plans for full compliance. 

Established DCMs must demonstrate 

substantial compliance with Core 

Principle 15, and plans for full 

compliance, well before the phase-in 

period’s expiration. New candidates for 

designation as contract markets should 

be prepared to demonstrate compliance 

with Core Principle 15, or a plan for 

compliance, upon application. 

II. Procedural History 

The four acceptable practices for Core 

Principle 15 adopted today are the 

culmination of a comprehensive review 

of self-regulation in the U.S. futures 

industry (‘‘SRO Review’’ or ‘‘Review’’) 

launched by the Commission in May of 

2003. Phase I of the Review explored the 

roles, responsibilities, and capabilities 

of SROs in the context of industry 

changes. Staff examined the designated 

self-regulatory organization system of 

financial surveillance, the treatment of 

confidential information, the 

composition of DCM disciplinary 

committees and panels, and other 

aspects of the self-regulatory process. 

Phase I of the Review also included staff 

interviews with over 100 persons 

including representatives of DCMs, 

clearing houses, futures commission 

merchants (‘‘FCMs’’), industry 

associations, and securities-industry 

entities, as well as current and retired 

industry executives, academics, and 

consultants. 

In June of 2004, the Commission 

initiated Phase II of the SRO Review and 

broadened its inquiry to explicitly 

address SRO governance and the 

interplay between DCMs’ self-regulatory 

responsibilities and their commercial 

interests. In June of 2004, the 

Commission issued a Federal Register 

Request for Comments (‘‘Request’’) on 

the governance of futures industry 

SROs.13 The Request sought input on 

the proper composition of DCM boards, 

optimal regulatory structures, the 

impact of different business and 

ownership models on self-regulation, 

the proper composition of DCM 

disciplinary committees and panels, and 

other issues. 

In November of 2005, the Commission 

updated its previous findings through a 

second Federal Register Request for 

Comments (‘‘Second Request’’) that 

focused on the most recent industry 

developments.14 The Second Request 

examined the board-level ROCs recently 

established at some SROs in the futures 

and securities industries. It also asked 

commenters to consider the impact of 

New York Stock Exchange (‘‘NYSE’’) 

listing standards on publicly traded 

futures exchanges; whether the 

standards were relevant to selfregulation; and how the standards might 

inform the Commission’s own 

regulations.15

Phase II of the SRO Review concluded 

with a public Commission hearing on 

‘‘Self-Regulation and Self-Regulatory 

Organizations in the U.S. Futures 

Industry’’ (‘‘Hearing’’). The day-long 

Hearing, held on February 15, 2006, 

included senior executives and 

compliance officials from a wide range 

of U.S. futures exchanges, 

representatives of small and large FCMs, 

academics and other outside experts, 

and an industry trade group. The 

Hearing afforded the Commission an 

opportunity to question panelists on 

four broad subject areas: (1) Board 

composition; (2) alternative regulatory 

structures, including ROCs and thirdparty regulatory service providers; (3) 

transparency and disclosure; and (4) 

disciplinary committees.16

Finally, in July of 2006, the 

Commission published the Proposed 

Rule and sought public comment on 

new acceptable practices for Core 

Principle 15.17 The Commission 

proposed that at least 50% of the 

directors on DCM boards and executive 

committees (or similarly empowered 

bodies) be public directors. It also 

proposed that day-to-day regulatory 

operations be overseen and insulated 

through a CRO reporting directly to a 

board-level ROC consisting exclusively 

of public directors. The proposed 

acceptable practices also defined 

‘‘public director’’ for persons serving on 

boards and ROCs, and defined ‘‘public 

person’’ for disciplinary panel members. 

To qualify as a public director under the 

proposal, the director in question would 

require an affirmative determination 

that he or she had no material 

relationship with the DCM. In addition, 

public directors and public persons 

would both have been required to meet 

a series of ‘‘bright-line’’ tests. The 

inability to satisfy both the material 

relationship and bright-line test 

requirements would automatically 

preclude them from serving as public 

directors or public disciplinary panel 

members. Finally, the proposed 

acceptable practices called for DCM 

disciplinary panels that were not 

dominated by any group or class of SRO 

participants, and that included at least 

one public person. 

The proposal’s original 30-day 

comment period, scheduled to close on 

August 7, 2006, was extended by an 

additional 30 days, to September 7, 

2006. The Commission received a total 

of 34 comment letters in response to the 

proposed acceptable practices for Core 

Principle 15, significant aspects of 

which are discussed below.18


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6940 Federal Register / Vol. 72, No. 30 / Wednesday, February 14, 2007 / Rules and Regulations 

19The commenters were: Bear Stearns; Citigroup; 

Morgan Stanley; the Chicago Mercantile Exchange 

(‘‘CME’’); the New York Mercantile Exchange 

(‘‘NYMEX’’); U.S. Sen. Pat Roberts and 

Congressman Jerry Moran; the National Grain Trade 

Council; Daniel L. Gibson; the National Grain and 

Feed Association; the New York Board of Trade 

(‘‘NYBOT’’); Public Members of the NYBOT; the 

Chicago Board of Trade (‘‘CBOT’’); Philip McBride 

Johnson; the CBOE Futures Exchange (‘‘CFE’’); 

Dennis M. Erwin; HedgeStreet; Colby Moss; 

Horizon Milling, LLC; John Legg; the National 

Futures Association; Robert J. Rixey; Michael 

Braude; Lehman Brothers; the Kansas City Board of 

Trade (‘‘KCBT’’); the Futures Industry Association 

(‘‘FIA’’); the Florida Citrus Producers Association; 

the National Cotton Council of America; Cargill 

Juice North America; Nickolas Neubauer; the 

American Cotton Shippers Association; Barry Bell; 

Fimat; J.P. Morgan Futures Inc.; and the 

Minneapolis Grain Exchange (‘‘MGEX’’). 

20 71 FR 38740, 38743. 

21See, e.g., NYSE Listed Company Manual, 

§ 303A (commentary). 

22CEA Section 3(a), 7 U.S.C. 5(a). 

III. Public Comments Received and the 

Commission’s Response 

The 34 comment letters received in 

response to the proposed acceptable 

practices included responses from 10 

industry associations and trade groups, 

nine individuals (including directors of 

exchanges writing separately), eight 

DCMs, six futures commission 

merchants (‘‘FCMs’’), one group of DCM 

public directors, one U.S. Senator, and 

one U.S. Congressman.19

The Commission thoroughly reviewed 

and considered all comments received. 

In response to persuasive arguments by 

various commenters, the final 

acceptable practices include two 

significant modifications from those 

originally proposed. Specifically, the 

final acceptable practices include: (1) a 

reduction in the required number of 

public directors on boards and 

executive committees, from at least 50% 

public to at least 35% public; and (2) a 

phase-in period to implement the 

acceptable practices, or otherwise come 

into full compliance with Core Principle 

15, of two years or two regularly 

scheduled board elections, whichever 

occurs sooner. 

In addition, in response to comments 

received, the Commission has made 

several clarifications and nonsubstantive revisions to the final 

acceptable practices. The Commission 

has also provided further discussion or 

elaboration in this preamble in order to 

provide further clarification on specific 

aspects of the acceptable practices, 

consistent with the Commission’s 

original intent. 

Specifically, in the text of the final 

acceptable practices, the Commission 

has clarified: that a public director may 

serve on the boards of both a DCM and 

of its parent company; that public 

directors are allowed deferred 

compensation in excess of $100,000 

under certain circumstances; and that 

public persons serving on disciplinary 

panels are subject only to the bright-line 

tests used to define public directors. 

The Commission has also clarified that 

the acceptable practices do not address 

the manner in which DCMs select their 

public directors, whether by election, 

appointment, or other means. 

Some commenters called for greater 

requirements than in the proposed 

acceptable practices, and others called 

for less requirements. The Commission 

carefully considered those comments, 

but decided not to make any changes 

other than those outlined above. As 

stated previously, the Commission 

believes that adopting the new 

acceptable practices strikes a careful 

balance between an appropriate 

approach to minimizing conflicts of 

interest in self-regulation, as required by 

Core Principle 15, and the overall 

flexibility offered by the core principle 

regime. Moreover, the Commission 

believes that the acceptable practices 

adopted herein are necessary and 

appropriate to fulfill the purposes of the 

Act and advance the public interest. 

The substantive comments received, 

and the Commission’s responses 

thereto, are presented below. They are 

organized as follows: 

Legal Comments: comments questioning 

the Commission’s authority to issue the 

proposed acceptable practices, including 

comments with respect to the meaning of 

Core Principle 15 and its interaction with 

other core principles; 

Policy Comments: comments requesting 

more or stricter guidance than that proposed 

by the Commission; comments requesting 

that the Commission issue no acceptable 

practices, or fewer or less detailed acceptable 

practices; and comments questioning the 

rationale behind the proposed acceptable 

practices, including: 

• General comments; 

• Comments with respect to board 

composition; 

• Comments with respect to the definition 

of public director; 

• Comments with respect to Regulatory 

Oversight Committees; 

• Comments with respect to disciplinary 

committees; 

Comments Requesting Modifications and 

Clarifications, including: 

• Phase-in period for the new acceptable 

practices; 

• Selection of public directors; 

• Compensation of public directors; 

• Overlapping public directors; 

• Jurisdiction of disciplinary panels and 

definition of ‘‘public’’ for persons serving on 

disciplinary panels; 

• ‘‘No material relationship’’ test for public 

directors; 

• elimination of ROCs’ periodic reporting 

requirements. 

A. Legal Comments: Public Comments 

Received and the Commission’s 

Response. 

1. Overview of the Commission’s 

Authority To Issue the Acceptable 

Practices 

The Commission’s issuance of the 

acceptable practices for Core Principle 

15 respects the letter and spirit of the 

Act. The Commission’s authority to do 

so is firmly rooted in Core Principle 15’s 

mandate to DCMs to minimize conflicts 

of interest in decision making. Core 

Principle 15 requires DCMs to maintain 

systems to minimize structural conflicts 

of interest inherent in self-regulation, as 

well as individual conflicts of interest 

faced by particular persons.20 The 

acceptable practices are rationally 

related to the purposes of Core Principle 

15. 

The Board Composition Acceptable 

Practice recognizes that the governing 

board of a DCM is its ultimate decision 

maker and therefore the logical place to 

begin to address conflicts. Participation 

by public directors in board decision 

making is a widely accepted and 

effective means to reduce conflicts of 

interest.21 By providing for significant 

public participation on the board, the 

seat of DCM governance and 

policymaking, the acceptable practice 

ensures that conflicts of interest are 

minimized at the highest level of 

decision making. 

The ROC Acceptable Practice 

recognizes the importance of insulating 

core regulatory functions from improper 

influences and pressures stemming from 

a DCM’s commercial affairs. It operates 

to minimize conflicts of interest in 

decisions made in the ordinary course 

of business. Finally, the Disciplinary 

Panel Acceptable Practice, by 

mandating participation on most 

disciplinary panels of at least one 

person who meets the bright-line tests 

for public director, minimizes conflicts 

of interest that may undermine the 

fundamental fairness required of DCM 

disciplinary proceedings. In sum, these 

acceptable practices represent an 

effective means to implement Core 

Principle 15 and are fully consistent 

with its mandate that DCMs minimize 

conflicts of interest in all decision 

making. They therefore lie well within 

the Commission’s authority. 

Congress has determined that there is 

a national public interest in risk 

management and price discovery.22 The 

individual provisions of the Act operate 


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23CEA Section 3(b), 7 U.S.C. 5(a). 

24The CFMA is published at Appendix E of Pub. 

L. 106–554, 114 Stat. 2763 (2000). 

25 7 U.S.C. 7a–2(a)(1). 

26 7 U.S.C. 7a–2(a)(2). 

27FIA Comment Letter (‘‘CL’’) 7 at 3–4. 

28CME CL 29 at 4–5. Core Principle 16 states: 

‘‘COMPOSITION OF BOARDS OF MUTUALLY 

OWNED CONTRACT MARKETS.—In the case of a 

mutually owned contract market, the board of trade 

shall ensure that the composition of the governing 

board reflects market participants.’’ CEA § 5(d)(16), 

7 U.S.C. 7(d)(16). 

29NYBOT CL 21 at 4; KCBT CL 8 at 3. 

30There is no legislative history concerning Core 

Principle 16 other than the statutory language itself. 

in furtherance of those interests by 

instituting and enforcing a system of 

‘‘effective self-regulation of trading 

facilities, clearing systems, market 

participants and market professionals 

under the oversight of the 

Commission.’’ 23 Core Principle 15 must 

be read in light of those public interests 

and purposes. 

The safe harbor created by the new 

acceptable practices removes the 

guesswork from compliance with Core 

Principle 15. Congress intentionally 

wrote the core principles to be broad 

and flexible, and to help DCMs and the 

Commission to adjust to changing 

circumstances. Flexibility, however, 

may give rise to uncertainty. In order to 

provide DCMs with greater certainty in 

the context of flexible core principles, 

Congress, in adopting the Commodity 

Futures Modernization Act (‘‘CFMA’’),24

added Section 5c(a)(1) to the CEA, 

which specifically authorizes the 

Commission, consistent with the 

purposes of the CEA, to ‘‘issue 

interpretations, or approve 

interpretations submitted to the 

Commission * * * to describe what 

would constitute an acceptable business 

practice for Core Principles.’’ 25 As a 

general rule, the Commission believes 

that issuing acceptable practices and 

other guidance under the core 

principles is beneficial, given the 

CFMA’s lack of legislative history that 

might otherwise have been a source of 

guidance. Safe harbors, such as those 

created by the acceptable practices 

being issued today, remove uncertainty 

while setting high standards consistent 

with the purposes of the CEA and the 

authority granted by Congress to the 

Commission to issue such acceptable 

practices. Nothing in these acceptable 

practices, as safe harbors, infringes upon 

the Congressional directive in Section 

5c(a)(2) of the CEA that acceptable 

practices not be the ‘‘exclusive means 

for complying’’ with core principles, as 

DCMs remain free to demonstrate core 

principle compliance by other means.26

Pursuant to its duty under the CEA to 

consider the costs and benefits of its 

action in issuing the acceptable 

practices, as discussed separately below, 

the Commission believes that the 

acceptable practices will minimize 

conflicts of interest in DCM decision 

making and promote public confidence 

in the futures markets. These are 

significant benefits to the futures 

industry, market participants, and the 

public. While commenters alleged that 

compliance would be costly, none of 

them provided an estimate of those 

costs in response to the Commission’s 

specific request for quantitative data. 

The Commission has no basis to 

conclude that compliance would not be 

a reasonable cost of doing business in an 

industry subject to federal oversight—a 

cost that may be phased in gradually 

over two years or two election cycles. 

Finally, the Board Composition 

Acceptable Practice operates without 

impeding the duties owed to 

shareholders by the directors of a public 

corporation. Demutualized DCMs 

typically have reorganized themselves 

as subsidiaries of parent holding 

companies. The acceptable practice 

applies to the board of a DCM itself—

not to the parent. Accordingly, the 

Board Composition Acceptable Practice 

is unquestionably within the 

Commission’s authority to issue 

acceptable practices under the core 

principles applicable to DCMs. The 

composition of a DCM governing board 

may be identical to that of its parent—

that decision is a matter for the business 

judgment of the persons involved. 

Nevertheless, the boards are separate 

bodies, even if their memberships 

overlap. DCM directors have a fiduciary 

duty to stockholders, to be sure, but 

stockholders of a DCM own an entity 

that, as a matter of federal law, is 

required to minimize conflicts of 

interest under Core Principle 15 and 

that serves a public interest through its 

business activity. Stockholders are well 

served when the DCMs that they own 

comply with applicable laws and 

regulations. 

We now turn to the legal issues raised 

by the commenters with respect to the 

Commission’s authority to issue the 

acceptable practices. 

2. Specific Legal Issues Raised by 

Commenters 

FIA, five major FCMs, and one 

exchange, CFE, filed comments 

generally in favor of the proposed 

acceptable practices and endorsed the 

Commission’s analysis of its authority to 

issue them. CME, CBOT, NYMEX, and 

other commenters, in opposition, 

challenged the Commission’s 

interpretation of Core Principle 15 and 

the statutory authority under which the 

proposals were issued. 

As stated above, Core Principle 15 

requires DCMs to establish and maintain 

systems that address conflicts of interest 

inherent in the structure of selfregulation, as well as personal conflicts 

faced by individuals. FIA endorsed this 

analysis, stating that the proposed 

acceptable practices are ‘‘wellgrounded’’ in the Commission’s 

statutory authority and ‘‘rationally 

related’’ to the purposes of Core 

Principle 15.27

Commenters challenging the 

Commission’s authority to promulgate 

the acceptable practices for Core 

Principle 15 contend that they: (1) 

Conflict with Core Principle 16; (2) are 

contrary to the text of the statute; (3) are 

contrary to Congressional intent in 

enacting the CFMA; (4) lack factual 

support; (5) conflict with guidance for 

Core Principle 14; and (6) impermissibly 

shift the burden to DCMs to demonstrate 

compliance with Core Principle 15. As 

discussed below, none of these 

contentions is persuasive. 

a. The Acceptable Practices For Core 

Principle 15 Do Not Conflict With Core 

Principle 16. 

CME challenged Core Principle 15’s 

applicability to the acceptable practices, 

contending that because Core Principle 

16 is the only core principle that 

mentions board composition, it is the 

only source of authority the 

Commission may use for this purpose, 

and that it is limited to mutually-owned 

DCMs.28 Similarly, NYBOT and KCBT 

contended that as member-owned 

DCMs, they are subject to Core Principle 

16’s requirement to maintain governing 

boards that ‘‘reflect[ ] market 

participants,’’ and should not face any 

other board composition provision.29

Core Principle 16 requires a mutually 

owned board of trade to ensure that the 

composition of its governing board 

reflects market participants. Based on its 

plain language, Core Principle 16 is 

limited to that goal,30 and has no 

bearing on the entirely separate goal of 

Core Principle 15 to ‘‘minimize conflicts 

of interest in the decision-making 

process of the contract market,’’ whether 

or not it is mutually owned. Core 

Principle 16 applies only to mutually 

owned contract markets and directs that 

their governing boards must fairly 

represent market participants. Core 

Principle 15 applies to all contract 

markets, no matter how organized, and 

directs them to minimize conflicts of 

interest. Conflicts may be structural as 

well as personal. Core Principle 15 

embraces both and supports the public 

director membership requirement for 


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31See, e.g., KCBT CL 8 at 2 and Roberts & Moran 

CL 27 at 1–2. 

32NYMEX CL 28 at 6. 

33See Commission Reg. 40.1(h), 17 CFR 40.1(h). 

34NYMEX CL 28 at 6. 

35CBOT CL at 5–6. 

36See, e.g., U.S. v. Vonn, 535 U.S. 55, 65 (2002); 

Pauley v. Bethenergy Mines, Inc., 501 U.S. 680, 703 

(1991) (internal citation omitted). 

37See, e.g., NYSE Corporate Governance Rule 

303A (commentary). 

38See Section 10(a) of the Investment Company 

Act of 1940, 7 U.S.C. 80a–10(a); Burks v. Lasker, 

441 U.S. 471, 484 (1979). 

39NYMEX CL 28 at 5–6. 

40Roberts & Moran CL 27 at 1–2. 

41See, e.g., NYMEX CL 28 at 9–10. 

42See, e.g., CME CL 29 at 12. 

43 17 CFR 1.64. 

44Commission Rule 38.2 contains an exemption 

for DCMs from all Commission regulations except 

those specifically enumerated. 17 CFR 38.2. 

45NYMEX CL 28 at 15. 

46See 71 FR 1953 (Jan. 12, 2006). 

boards of DCMs. Accordingly, Core 

Principle 16 does not limit the 

Commission’s authority to issue 

acceptable practices to increase public 

director representation on DCM boards 

in order to minimize conflicts of interest 

under Core Principle 15. 

b. The Acceptable Practices for Core 

Principle 15 Are Not Contrary to the 

CEA’s Text. 

Other opposing comments based on 

the text of Core Principle 15 substitute 

the Commission’s straightforward 

reading of the statute with targeted 

interpretations of individual words and 

phrases. The Commission believes that 

these comments do not rise to the 

stature of significant questions of 

statutory interpretation. For instance, 

various commenters contended that 

Core Principle 15 says ‘‘minimize’’

conflicts of interest, not ‘‘eliminate’’

them, as they argue the Commission 

seeks to do with the Board Composition 

Acceptable Practice.31 However, if the 

Commission had sought to ‘‘eliminate’’

conflicts of interest, the Commission 

could have imposed a 100% public 

director requirement. Certainly any lessthan-100% public director requirement 

may not eliminate all conflicts of 

interest. 

Another such comment stated that 

Core Principle 15 applies to ‘‘rules’’ and 

‘‘process,’’ but board composition is 

contained in DCM ‘‘bylaws’’ (not rules), 

and a change to board composition is 

not a ‘‘process.’’ 32 Contrary to this 

commenter’s restrictive interpretation of 

the term, ‘‘rule’’ is defined broadly in 

Commission regulations to include bylaws.33 Thus, the mere mention of 

‘‘rules’’ in Core Principle 15 has no 

bearing on the Commission’s authority. 

In addition, Core Principle 15 provides 

that a DCM shall establish and enforce 

rules to minimize conflicts of interest in 

the decision-making process of the 

contract market and establish a process 

for resolving such conflicts of interest. 

The two requirements are not mutually 

exclusive. 

Another commenter stated that Core 

Principle 15 provides that a DCM shall 

‘‘enforce’’ rules, and thereby 

contemplates action against individuals 

rather than the DCM itself.34 In fact, 

Core Principle 15 states ‘‘establish and 

enforce’’ rules. Use of the conjunctive 

belies any contention that Core 

Principle 15 was intended to be directed 

solely to individuals. 

Numerous comments of this type 

were received, none of which 

constitutes a serious challenge to the 

Commission’s legal authority and 

reasonable interpretation of Core 

Principle 15. 

c. The Acceptable Practices for Core 

Principle 15 Are Not Contrary to 

Congressional Intent in Enacting the 

CFMA. 

Several commenters, including 

NYMEX and CBOT, contended that the 

Board Composition Acceptable Practice 

is contrary to Congress’ intent in 

enacting Core Principle 15 and the 

CFMA. 

Specifically, CBOT stated that prior to 

the CFMA’s enactment, the CEA treated 

board composition and conflicts of 

interest in two distinct provisions of the 

statute. In passing the CFMA, Congress 

omitted the board composition 

provision and kept the conflicts of 

interest provision. CBOT interpreted 

this as evidence that Congress did not 

view board composition as a mechanism 

to minimize conflict of interests.35 We 

believe that the legal import of silence 

as a statutory canon of construction in 

these circumstances is a weak indicator 

of Congressional intent.36 Moreover, 

inclusion of public directors on 

company boards is a widely accepted 

means to reduce conflicts of interest.37

Congress has in other contexts 

recognized the utility of public directors 

in controlling conflicts of interest.38

Interpreting the CFMA as the CBOT 

advocates would require the 

Commission to infer that Congress was 

unaware of its own enactments, as well 

as the aforementioned wide acceptance 

of public directors for reducing 

conflicts, which the Commission is not 

prepared to do. 

Similarly, NYMEX commented that 

when the CFMA was enacted there was 

a general understanding among DCMs, 

Commission staff, and legislators that 

Congress did not intend the 

Commission to establish board 

composition requirements for 

demutualized DCMs, which would 

instead be subject to corporate 

governance and NYSE listing 

standards.39 A congressional comment 

letter stated that it does not ‘‘appear’’

that Congress intended the Commission 

to address board composition in the 

instance of small mutually-owned 

DCMs like KCBT.40

No commenter, however, cited any 

legislative history supporting these 

views, and no rule of statutory or legal 

interpretation compels the Commission 

to adopt them. The Commission may 

interpret the CEA according to its 

reasoned discretion and agency 

expertise given the absence of any 

contrary indication of Congressional 

intent at the time the CFMA was 

enacted. 

Various commenters also asserted that 

the proposed acceptable practices in 

general are counter to the spirit of the 

CFMA, which transformed the 

Commission into an oversight agency.41

They contended also that the 50% 

public board member requirement in the 

proposed Board Composition 

Acceptable Practice is stricter than the 

former statutory requirement that DCM 

boards have 20% independent 

directors.42 This comment would apply 

equally to the minimum 35% 

requirement contained in the final 

acceptable practice. These commenters, 

however, overlook the essential fact that 

the acceptable practices—unlike the 

pre-CFMA 20% rule—are safe harbors, 

not statutory mandates. Persons taking 

this view appear to want the 

Commission to do nothing at all—

neither issue rules nor announce 

nonbinding acceptable practices that 

embody high standards. 

One commenter argued that the 

Commission did not subject DCMs to 

Commission Rule 1.64 (containing the 

board composition requirement for nonmember representation) 43 when it 

adopted Commission Rule 38.2 44

shortly after the enactment of the 

CFMA, thus suggesting that the 

Commission’s interpretation was that 

Core Principle 15 did not impose a 

board composition requirement.45

The Commission did not adopt 

acceptable practices for all of the core 

principles when it promulgated 

Commission Rule 38.2. Nor did the 

Commission permanently reserve from 

exemption all regulations that are 

reflected in core principles. Indeed, in 

January 2006, the Commission added 

Commission Rule 1.60 to the 

enumerated list of regulations to which 

DCMs are subject pursuant to 

Commission Rule 38.2.46 Accordingly, 


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47See CME CL 29 at 9; NYMEX CL 28 at 11–12; 

NYBOT CL 22 at 4; CBOT CL 21 at 3. 

48See, e.g., NYMEX CL 28 at 11–13; CME CL 29 

at 9; NYBOT CL 22 at 2; Comment of Donald L. 

Gibson, CL 25 at 1. 

49Chamber of Commerce v. SEC, 412 F.3d 133, 

141 (D.C. Cir. 2005). 

50Core Principle 14 provides that a ‘‘Board of 

Trade shall establish and enforce appropriate 

fitness standards for directors [and others].’’ CEA 

§ 5(d)(14), 7 U.S.C. 7(d)(14). 

51CME CL 29 at 9. 

52 7 U.S.C. 12a(2). 

53 17 CFR 1.63. See 17 CFR Part 38, Appendix B, 

Core Principle 14 (‘‘Application Guidance’’). 

54See CEA § 5c(d), 7 U.S.C. 7a–2(d). 

the fact that Commission Rule 1.64 was 

not specifically exempted when 

Commission Rule 38.2 was promulgated 

is not a reliable indicator of the 

Commission’s interpretation of Core 

Principle 15. Moreover, not long after 

Commission Rule 38.2 was issued, the 

Commission began the SRO Review to 

examine governance issues in order to 

determine whether action was 

warranted. Thus, even if the omission of 

Commission Rule 1.64 from the 

enumerated regulations in Commission 

Rule 38.2 were somehow indicative of a 

contemporaneous interpretation by the 

Commission of Core Principle 15, a 

matter that the Commission does not 

concede, the Commission’s evolving 

views—based on the extensive record 

developed during the course of the SRO 

Review—support its current 

interpretation that Core Principle 15 

authorizes it to adopt the Board 

Composition Acceptable Practice. 

d. Acceptable Practices Are Justified 

As A Prophylactic Measure. 

Several commenters contended that 

the acceptable practices lack factual 

support demonstrating a need for their 

issuance. They argued that the 

Commission did not point to any 

specific event or documented selfregulatory failure or allegation of such 

failure in support of the acceptable 

practices.47 Several commenters 

contended that the studies cited by the 

Commission in the proposing release 

applied only to the securities industry, 

and thus were inapposite to conditions 

in the futures industry.48

These comments are misplaced. 

Although the Commission did not 

specifically identify futures industry 

self-regulatory lapses in support of the 

acceptable practices, it identified 

significant trends in the futures 

industry, including increased 

competition and changing ownership 

structures, that justify the acceptable 

practices as a prophylactic measure to 

minimize conflicts in decision making 

and to promote public confidence in the 

futures markets in the altered, 

demutualized, and more competitive 

landscape. Commenters pointed to 

nothing in the CEA, nor has the 

Commission found anything, to suggest 

that Congress intended to restrict the 

authority of the Commission to make 

‘‘precautionary or prophylactic 

responses to perceived risks,’’ that 

would render the Commission’s action a 

violation of the CEA.49

e. Acceptable Practices for Core 

Principle 15 Do Not Conflict with 

Guidance to Core Principle 14. 

Another issue raised is whether the 

new acceptable practices for Core 

Principle 15 conflict with guidance 

issued for Core Principle 14.50 One 

commenter asserted that guidance to 

Core Principle 14 suggests that directors 

of DCMs should, at a minimum, be 

market participants, contrary to the 

proposed ‘‘public director’’ definition.51

This contention misreads the guidance 

for Core Principle 14. Minimum 

standards for directors provided in the 

guidance are derived from the bases for 

refusal to register persons under CEA 

Section 8a(2),52 and from the types of 

serious disciplinary offenses that would 

disqualify persons from board and 

committee service under Commission 

Rule 1.63.53 Nothing in the Application 

Guidance for Core Principle 14 requires 

directors to be market participants. 

Moreover, a significant number of DCMs 

currently have directors on their boards 

who are not market participants. 

f. Acceptable Practices for Core 

Principle 15 Do Not Impermissibly Shift 

the Burden to DCMs for Demonstrating 

Compliance. 

Finally, CME, CBOT, and NYMEX 

contended that the Board Composition 

Acceptable Practice impermissibly 

shifts the burden of demonstrating a 

DCM’s compliance with Core Principle 

15 from the Commission to the DCM if 

a DCM elects not to comply with the 

acceptable practices. 

There is no burden shifting here. All 

DCMs are required to demonstrate to the 

Commission how they are complying 

with the core principles. Without such 

a factual demonstration, the 

Commission could not determine 

whether a contract market is in 

compliance with the core principles, 

and thus the Commission could not 

meet its obligations under the CEA.54

Compliance with these acceptable 

practices merely eliminates the need for 

a DCM to demonstrate to the 

Commission that it is complying with 

certain aspects of Core Principle 15. It 

follows that a contract market that does 

not comply with the acceptable 

practices must demonstrate to the 

Commission that it is complying with 

Core Principle 15 by other means, as 

stated in the release. 

B. Policy Comments: Public Comments 

Received and the Commission’s 

Response 

1. General Comments 

The Commission received a series of 

general comments, as discussed more 

fully below, both in support of and in 

opposition to the overall direction and 

findings of the proposed acceptable 

practices. 

a. The proposed acceptable practices 

are inflexible; DCMs should be free to 

determine their own methods of core 

principle compliance. 

Several commenters stated that, 

consistent with the CFMA, DCMs, and 

not the Commission, should determine 

the composition of their boards and 

committees, and should have the 

discretion to establish their own 

definition of ‘‘public director.’’ One 

commenter noted that the concept of 

membership has evolved as markets 

have become increasingly electronic and 

global, and now encompasses a growing 

number of new types of market 

participants (which consequently 

reduces the population of potential 

public directors). Commenters argued 

that DCMs should be permitted to tap 

these new types of members for service 

as directors, bringing market knowledge 

and differing perspectives to their 

boards, rather than adding public 

directors, who, as defined by the 

Commission, will lack experience and 

expertise. It was further argued that 

DCMs should be permitted to decide for 

themselves how to constitute their 

boards in order to obtain the necessary 

knowledge, experience, and expertise 

that will permit them to serve their 

economic functions and the public 

interest. 

With respect to the other committees 

and panels addressed in the proposal, 

commenters stated that each DCM 

should be permitted to determine the 

appropriate size and composition of its 

executive committee, and likewise 

should be permitted: To determine 

whether to establish an ROC; to 

determine the extent of an ROC’s 

responsibilities; and to determine the 

most appropriate composition for such 

committee. Commenters also stated that 

each DCM should be permitted to 

determine the composition and the 

structure of its disciplinary committees 

in order to ensure that decisions are 

informed by knowledge and experience. 

Numerous commenters opined that 

the proposals are inflexible, arbitrary, or 


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55The Commission’s Division of Market 

Oversight conducts periodic RERs at all DCMs to 

assess their compliance with particular core 

principles over a one-year target period. Staff’s 

analyses, conclusions, and recommendations 

regarding any identified deficiency are included in 

a publicly available written report. 56Core Principle 1 states: ‘‘IN GENERAL—To 

maintain the designation of a board of trade as a 

contract market, the board of trade shall comply 

with the core principles specified in this 

subsection. The board of trade shall have reasonable 

discretion in establishing the manner in which it 

complies with the core principles.’’ CEA § 5(d)(1), 

7 U.S.C. 7(d)(1). 57CEA § 3(b), 7 U.S.C. 5(b) . 

overly prescriptive. Among other things, 

commenters stated that the regulatory 

proposals: could stifle vital day-to-day 

market functions; Could swing the 

balance too far towards rigid, arbitrary 

requirements when there is no 

demonstrable need for such action; are 

contrary to the spirit and intent of the 

CFMA and the market-oriented, 

principle-based structure authorized by 

that legislation; unnecessarily 

micromanage the operations of DCMs; 

fail to recognize the changing definition 

and increasing breadth of the concept of 

DCM membership; inflexibly impose 

uniform requirements upon all DCMs 

without regard to the nature of a 

particular DCM or the products traded 

on that DCM; and should be presented 

not as a model for DCMs to adopt, but 

rather as examples of ways for DCMs to 

meet core principle requirements. 

Commenters also expressed concern 

that a bright-line test regarding the 

proper number of public directors will 

become the de facto requirement for all 

DCMs and will severely limit the ability 

of DCMs to undertake other approaches 

to achieving the general performance 

standard set by the core principles. 

Some commenters also contended that 

requiring a DCM that does not meet the 

proposed acceptable practices to 

demonstrate compliance with Core 

Principle 15 through other means 

impermissibly shifts the burden of proof 

to DCMs to justify departures from the 

acceptable practices, when the Act gives 

DCMs reasonable discretion in how they 

comply with the core principles. 

Another commenter noted that since the 

Commission has proposed absolute 

numerical standards as a means of 

avoiding conflicts of interest, there is no 

legitimate way to prove compliance by 

other means. 

b. Safeguards are already in place to 

protect against conflicts of interest at 

publicly traded, mutually-owned, and 

other DCMs. 

Numerous commenters opined that 

the proposals are not necessary because 

there are sufficient safeguards already in 

place to ensure that potential conflicts 

of interest are adequately identified and 

controlled and that self-regulation 

remains effective. Several commenters 

argued that small DCMs already have in 

place adequate controls to address 

potential conflicts of interest, and that 

the Commission conducts an 

independent review of each DCM’s 

compliance department through its rule 

enforcement review (‘‘RER’’) program.55

Several commenters noted that their 

board composition standards already 

require public directors (albeit at a level 

lower than the proposed 50% 

requirement). Those commenters opined 

that their existing procedures for 

avoiding conflicts and including public 

participation are sufficient and more 

effective than the proposed 50% public 

member requirement. 

Commenters also argued that fear of a 

possible conflict of interest between a 

demutualized DCM’s regulatory 

responsibilities and the demands of a 

for-profit company is without 

foundation. These comments asserted 

that demutualization actually 

encourages rather than discourages 

effective self-regulation because market 

integrity is key to attracting and 

retaining business. Commenters stated 

that large, publicly traded DCMs already 

have numerous safeguards in place to 

ensure that they act in the best interest 

of their shareholders and do not act to 

the detriment of a particular group of 

shareholders. In addition, some 

commenters opined that corporate 

governance requirements currently 

applicable to publicly traded DCMs, 

combined with the reasonable exercise 

of discretion by DCMs pursuant to Core 

Principle 1,56 provide sufficient 

assurance that conflicts of interest will 

be kept to a minimum in the decisionmaking process. One DCM commented 

that the proposed acceptable practices 

are unnecessary given, inter alia, the 

NYSE and NASDAQ listing standards to 

which some DCM parent companies are 

subject. In addition, it was observed that 

when a potential conflict does arise, 

DCMs have developed specific board 

governance procedures to ensure proper 

disclosure and to remove the potential 

conflict from the decision-making 

process. One commenter stated that the 

proposals are unnecessary because, if 

the Commission’s general concern is 

that a DCM will adopt rules that will 

disadvantage members who are their 

competitors, it may address that concern 

through its review of self-certified rules 

to ensure that such rules comply with 

the Act and regulations. 

Several commenters argued that the 

proposals should not be applied to 

mutually-owned DCMs, as none of the 

factors cited by the Commission as 

justification for the proposed acceptable 

practices apply to them. These 

commenters further argued that 

applying the acceptable practices to 

mutually-owned DCMs to the same 

degree as large publicly traded DCMs 

would be burdensome in terms of cost, 

administration, and efficiency. 

1a. The Commission’s Response to the 

General Comments 

i. Proactive measures are justified to 

protect the integrity of self-regulation in 

the U.S. futures industry. 

The Commission’s response to the 

comments summarized above is threefold. First, the Commission believes that 

the argument that there are no specific 

regulatory failures justifying new 

acceptable practices for Core Principle 

15 is misplaced. As discussed more 

fully in the cost-benefit analyses in 

Section V–A, the Commission did 

identify industry changes that it 

believes create new structural conflicts 

of interest within self-regulation, 

increase the risk of customer harm, 

could lead to an abuse of self-regulatory 

authority, and threaten the integrity of, 

and public confidence in, self-regulation 

in the U.S. futures industry. Increased 

competition, demutualization and other 

new ownership structures, for-profit 

business models, and other factors are 

highly relevant to the impartiality, 

vigor, and effectiveness with which 

DCMs exercise their self-regulatory 

responsibilities. The Commission 

strongly believes that credible threats to 

effective self-regulation must be dealt 

with promptly and proactively, and is 

confident that precautionary and 

prophylactic methods are fully justified 

and well within its authority. 

Second, the Commission firmly 

rejects commenters’ implicit argument 

that its oversight authority may be 

exercised only in response to crises or 

failures in self-regulation. To the 

contrary, the Commission’s mandate, 

given by the Congress, is affirmative and 

forward-looking, including promoting 

‘‘responsible innovation’’ and ‘‘fair 

competition’’ in the U.S. futures 

industry.57 As catalogued throughout 

the SRO Review, rapid innovation and 

increasing competition are powerful 

new realities for all DCMs. The 

Commission’s statutory obligation is to 

ensure that these realities evolve as 

fairly and responsibly as possible, and 

always in a manner that serves the 

public interest. The Commission 

believes that the new acceptable 

practices for Core Principle 15 serve 

exactly those purposes by ensuring a 

strong public voice at key levels of SRO 


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58See, e.g., CME’s Categorical Independence 

Standards: ‘‘* * * the Board of Directors has 

determined that a director who acts as a floor 

broker, floor trader, employee or officer of a futures 

commission merchant, CME clearing member firm, 

or other similarly situation person that 

intermediates transactions in or otherwise uses 

CME products and services shall be presumed to be 

‘‘independent,’’ if he or she otherwise satisfies all 

of the above categorical standards and the 

independence standards of the [NYSE] and The 

Nasdaq Stock Market, Inc. * * *’’ CME Holdings 

Inc., Definitive Proxy Statement (Form DEF 14A), 

App. A, (March 10 2006). Accord CBOT Holdings 

Inc., Definite Proxy Statement (Form DEF 14A), 

App. A, (March 29, 2006). Both holding companies 

are listed on the NYSE and subject to its listing 

standards. 

59NYSE Group’s board of directors consists 

exclusively of directors who are independent both 

of member organizations and listed companies. In 

addition, NYSE Group and NASD recently 

announced plans to consolidate their member firm 

regulation into a single new SRO for all securities 

broker/dealers. Market regulation and listed 

company compliance will remain with NYSE 

Regulation, a not-for-profit subsidiary of NYSE 

Group. A majority of NYSE Regulation’s directors 

must be independent of member organizations and 

listed companies, and unaffiliated with any other 

NYSE Group board. See http://www.nyse.com/ 

regulation/1089235621148.html. 

60CME, CBOT, and NYMEX are wholly-owned 

subsidiaries of CME Holdings Inc., CBOT Holdings 

Inc., and NYMEX Holdings Inc., respectively. 

NYBOT is a wholly owned subsidiary of 

IntercontinentalExchange Inc. In each case, the 

DCMs are now subsidiaries of for-profit, publicly 

traded stock corporations listed on the NYSE. 

61The two mutually-owned exchanges are the 

Kansas City Board of Trade and the Minneapolis 

Grain Exchange. However, as noted above, KCBT is 

structured as a for-profit, dividend-paying, stock 

corporation. See http://www.kcbt.com/ 

news_2.asp?id=457 (KCBT press release 

announcing ninth consecutive annual dividend, 

including $11,000 per share in 2006) and http:// 

www.kcbt.com/news_2.asp?id=347 (KCBT press 

release announcing eighth consecutive annual 

dividend, including $7,000 per share in 2005). 

62The argument that RERs make acceptable 

practices unnecessary is further misplaced as it 

ignores the beneficial interaction between the two 

oversight tools. For example, acceptable practices 

facilitate core principle compliance and advance 

the RER process by providing both DCMs and 

Commission staff with information as to the areas 

of concern which must be addressed under a 

particular core principle. The final acceptable 

practices for Core Principle 15 are no exception, as 

they highlight the type of structural conflicts of 

interest which all DCMs must address. 

decision making, particularly as it 

effects self-regulation. 

Finally, prior to adopting these 

acceptable practices, the Commission 

initiated an exhaustive, three-and-onehalf year research program that resulted 

in a uniquely informed regulatory 

process. The Commission determined, 

as have many other regulatory and selfregulatory bodies, that ‘‘independent’’

directors can be of great benefit to the 

deliberations and decisions of corporate 

boards and their committees. The 

Commission further determined, as have 

others, that DCMs charged with selfregulatory responsibilities are distinct 

from typical corporations, and thereby 

require careful attention to how their 

independent directors are defined. 

Finally, the Commission determined, as 

have others, that DCMs’ independent 

directors should be of a special type—

‘‘public’’ directors—and should meet 

higher standards, including nonmembership in the DCM. All three 

decisions have ample precedent in 

exchange governance and selfregulation, both in the futures and the 

securities industries, are based on the 

extensive record amassed during the 

SRO Review and on the Commission’s 

expertise and unique knowledge of the 

futures industry, and are well-grounded 

in the Commission’s statutory authority 

to issue acceptable practices for core 

principle compliance. 

ii. Some comments do not stand up to 

factual scrutiny. 

Some general comments in opposition 

to the proposed acceptable practices do 

not stand up to factual scrutiny. For 

example, DCMs whose parent 

companies are publicly traded and 

subject to NYSE listing standards (50% 

‘‘independent’’ board of directors and 

key committees that are 100% 

independent) argued that those 

standards are sufficient to ensure 

effective self-regulation. The argument 

fails on two grounds. 

First, by their very terms, the NYSE’s 

listing standards are designed for 

shareholder protection, not the effective 

self-regulation of futures exchanges in 

the public interest. Second, DCM 

holding companies have determined 

that DCM members are independent 

under the NYSE’s listing standards.58 By 

doing so, they have demonstrated the 

inappropriateness of relying on the 

listing standards as a means of 

identifying public directors for effective 

self-regulation. Notably, the NYSE itself 

recognized this same point when 

reforming its own governance and selfregulatory structure, which is 

substantially more demanding than 

what it requires of its listed companies, 

or than what the Commission’s new 

acceptable practices will require of 

DCMs.59

The related argument that the 

proposed acceptable practices should 

not be applied to mutually-owned 

DCMs is also without merit. It ignores 

the futures industry’s rapid and 

continuing evolution. When the SRO 

Review began in 2003, three of the four 

largest DCMs were member-owned. 

Now, all four are subsidiaries of public 

companies.60 Only two member-owned 

futures exchanges remain in the United 

States, and one is actually structured as 

a Delaware for-profit stock corporation 

that has paid dividends for nine 

consecutive years, including $11,000 

per share in 2006 and $7,000 per share 

in 2005.61 More importantly, all DCMs, 

regardless of ownership structure, 

operate in an increasingly competitive 

environment where improper influence 

may be brought to bear upon regulatory 

functions, personnel, and decisions. 

Another misplaced series of 

comments argued that existing 

Commission processes, such as RERs, 

provide sufficient safeguards to ensure 

the future integrity of self-regulation. 

RERs are in fact central to the 

Commission’s oversight regime for 

DCMs, and constitute the primary 

method by which the Commission 

verifies core principle compliance. 

However, RERs are retrospective in 

nature (focusing on a target period in 

the past) and cannot guarantee future 

performance. When self-regulatory 

failures are discovered, they are 

typically corrected via 

recommendations made by the 

Commission’s Division of Market 

Oversight and implemented by the 

relevant DCM on a forward-looking 

basis. In contrast, the objective of 

effective self-regulation and 

Commission oversight is to prevent such 

failures from ever occurring. The 

Commission does not believe that RERs 

should be a substitute for issuing 

acceptable practices for compliance 

with a particular core principle. The 

Commission has found that acceptable 

practices improve core principle 

compliance by providing all DCMs with 

greater clarity regarding the 

Commission’s expectations, and a safeharbor upon which they may fully rely. 

Neither RERs nor any other existing 

Commission process, such as the review 

of self-certified rules, is an adequate 

substitute for carefully tailored 

acceptable practices.62 This is 

particularly true when the new 

acceptable practices concern a core 

principle that has no previous 

acceptable practices or respond to a 

rapidly changing area of the futures 

industry. 

iii. The Commission may implement 

detailed acceptable practices as safeharbors for core principle compliance. 

Notwithstanding those comments 

generally opposed to the proposed 

acceptable practices for Core Principle 

15, the Commission continues to 

strongly believe that the recent 

structural changes in the U.S. futures 

industry require an appropriate 

response within DCMs to ensure that 

self-regulation remains compatible with 

competitive, for-profit DCMs. 

Accordingly, the new acceptable 

practices for Core Principle 15 establish 


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63See 17 CFR Part 38, App. B, ¶ 1 (‘‘This 

appendix provides guidance on complying with the 

core principles, both initially and on an ongoing 

basis to maintain designation under Section 5(d) of 

the Act and this part’’ (emphasis added)). 64Core Principle 10 states: ‘‘TRADE 

INFORMATION—The board of trade shall maintain 

rules and procedures to provide for the recording 

and safe storage of all identifying trade information 

in a manner that enables the contract market to use 

the information for purposes of assisting in the 

prevention of customer and market abuses and 

providing evidence of any violations of the rules of 

the contract market.’’ CEA § 5(d)(10), 7 U.S.C. 

7(d)(10). 

65On September 11, 2001, the physical location 

of three DCMs was destroyed, and both the 

Commission and the industry recognized the 

importance of redundancy capabilities, including 

safe storage of trade information, that are 

sufficiently distant from primary locations. 

66The Commission has explained that ‘‘boards of 

trade that follow the specific practices outlined 

under [the acceptable practices] * * * will meet the 

applicable core principle.’’ 17 CFR 38, App. B, ¶ 2. 

67One commenter stated that filling governance 

positions with those totally devoid of any 

connection to the marketplace would necessarily 

lead to major decisions regarding the operation of 

futures markets being made by those with no 

expertise in such decision making and no vested 

interest in the long-term best interests of those 

markets. It was suggested that this will result in 

either grossly mismanaged DCMs or the appearance 

of conflicts of interest as public directors defer to 

the less diverse non-public directors and officers. 

appropriate governance and selfregulatory structures, while preserving 

DCMs’ flexibility to adopt alternate 

measures if necessary. 

Those commenters that opposed the 

new acceptable practices for their 

‘‘inflexibility’’ misunderstand the nature 

of the core principle regime and the 

interaction between core principles and 

acceptable practices. The 18 core 

principles for DCMs establish standards 

of performance and grant DCMs 

discretion in how to meet those 

standards. However, compliance with 

the core principles is not static and does 

not exist in a vacuum; instead, core 

principles are broad precepts whose 

specific application is subject to change 

as DCMs and the futures industry 

evolve. Furthermore, as discussed in 

Section III, core principle compliance is 

an affirmative and continuing obligation 

for all DCMs, and it is incumbent upon 

them to demonstrate compliance to the 

Commission’s satisfaction.63

The flexibility inherent in the core 

principles permits each DCM to comply 

in the manner most appropriate to it. At 

the same time, such flexibility provides 

both the Commission and the futures 

industry with the latitude to grow in 

their understanding of self-regulation 

and its requirements. One common 

example is the Commission’s approach 

to the safe storage of trade data under 

Core Principle 10,64 which evolved 

following the events of September 11, 

2001.65 Similarly, the Commission’s 

expectations for the management of 

conflicts of interest under Core 

Principle 15 now include an 

understanding that in a highly 

competitive futures industry, where 

almost all DCMs are for-profit and many 

are subsidiaries of publicly traded 

companies, the conflicts that may arise 

are not purely personal or individual. 

Simply stated, whether or not DCMs 

choose to implement the new acceptable 

practices, the conflicts of interest which 

they must address to comply with Core 

Principle 15 now include structural 

conflicts between their self-regulatory 

responsibilities and their commercial 

interests. 

All acceptable practices, including 

those for Core Principle 15, are designed 

to assist DCMs by offering ‘‘preapproved’’ roadmaps or safe-harbors for 

core principle compliance. Although it 

may be a preferred method of 

compliance, no acceptable practice is 

mandatory. Instead, as safe-harbors, 

acceptable practices provide all DCMs 

with valuable regulatory certainty upon 

which they may rely, should they 

choose to do so, when seeking initial 

designation, when subject to periodic 

RERs by the Division of Market 

Oversight, or at any other time in which 

the Commission requires a DCM to 

demonstrate core principle 

compliance.66

Because they offer such broad and 

beneficial safe-harbors, acceptable 

practices are sometimes detailed and 

exact in their requirements. If the 

Commission effectively ‘‘pre-approves’’

a specific self-regulatory structure for 

minimizing conflicts of interests under 

Core Principle 15, as it is doing here, 

then it must be sufficiently specific in 

describing that structure and all of its 

components. In the alternative, the 

Commission would be offering not a 

safe-harbor upon which DCMs may fully 

rely, but only additional guidance, 

subject to varying interpretations, 

raising many questions, and providing 

few answers and even less certainty. 

That is not the intent of these acceptable 

practices. 

In addition, the Commission notes 

that the presence of ‘‘must,’’ ‘‘shall,’’

and similar words in the new acceptable 

practices indicates only that these 

things must be done to receive the 

benefits of the safe-harbor, not that the 

acceptable practices themselves are 

required. What is now required of all 

DCMs under Core Principle 15 is to 

demonstrate that they have effectively 

insulated their self-regulatory functions, 

personnel, and decisions from improper 

influence and commercial 

considerations, including those 

stemming from their numerous member, 

customer, owner, and other 

constituencies. If a DCM chooses not to 

implement the new acceptable practices 

for Core Principle 15, then the 

Commission will evaluate the DCM’s 

alternative plan, either through RERs, 

the rule submission process, or other 

means. During any such review, the 

DCM will be required to present and 

demonstrate what procedures, 

arrangements, and methods it has 

adopted or will adopt to minimize 

structural conflicts of interest in selfregulation. The DCM will further be 

required to demonstrate that its 

approach is capable of responding 

effectively to conflicts that may arise in 

the future. 

2. Comments With Respect to the Board 

Composition Acceptable Practice 

The proposed Board Composition 

Acceptable Practice calling for at least 

50% public director representation on 

DCM boards and executive committees 

drew substantial comment, both for and 

against. In their comment letters, the 

FIA and five large FCMs strongly 

supported the 50% public director 

benchmark for DCM boards. The FIA 

particularly noted that the proposal 

provides DCMs with flexibility as to 

how they want to address the diversity 

of interest groups in that the proposal 

does not specify any fixed number of 

board members. The FIA also 

recommended that a subgroup of public 

directors should serve as a nominating 

committee to select new or re-nominate 

existing public directors. One exchange 

also generally supported the proposals, 

commenting that the proposed 

governance standards and ROCs will 

enhance DCM governance and serve to 

protect market participants and the 

public interest. 

Many commenters, however, opposed 

the proposed 50% public director 

composition requirement. Several 

commenters were concerned that the 

proposal would dilute the voices of 

trade, commodity, and farmer interests 

in DCM governance, as well as the 

voices of market users, members, 

shareholders, and other stakeholders in 

the DCM. Commenters were also 

concerned about the need for experience 

and expertise on DCM boards.67

Several commenters stated that, in 

order to meet the proposed 50% board 

composition requirement, either the 

board would have to be made 

unreasonably large, or a DCM would 

have to reduce the number of directors 

drawn from its commercial interest and 

other memberships. Commenters also 

contended that it would be difficult to 


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68One mutually-owned DCM commented that 

payment of a stipend to directors will create 

additional financial burdens on smaller, non-profit 

DCMs and create the possibility of less qualified 

directors serving on the board. Another commenter 

noted that public directors with no industry 

experience might be less inclined to invest in the 

self-regulatory functions of the DCM. 

69As noted previously, some commenters made 

similar arguments with respect to executive 

committee composition and board composition. 

Those arguments are addressed jointly in this 

Section. Some commenters also argued that 

executive committees require a special degree of 

expertise due to their unique role in day-to-day 

operational and managerial issues. The Commission 

notes that this argument runs counter to 

commenters’ opposition to the ROC Acceptable 

Practice on the grounds that directors and board 

committees should not take part in day-to-day 

operational and managerial issues. The Commission 

believes that executive committees’ unique role 

stems from their authority to act in place of the full 

board of directors. Regardless of the decision being 

made, if a DCM decides that such decision is best 

made by a small group of directors to whom full 

board authority has been delegated, then the ratio 

of public directors in that group should be no less 

than the ratio on the full board. Anything less 

would deprive a key level of DCM decision making 

from the benefits attendant to sufficient public 

representation and independence, and diminish the 

effectiveness of the Board Composition Acceptable 

Practice. 

70Certain DCMs, such as large exchange 

subsidiaries of publicly traded companies, may be 

better served by a higher ratio of public directors, 

and may be better able to attract them. Although the 

Commissions believes that the 35% standard 

adopted herein is an appropriate minimum 

standard for all DCMs, the core principle regime 

grants DCMs the flexibility to adopt higher ratios of 

public directors should they wish. 

attract a sufficient number of qualified 

public directors.68

Many of the comments regarding 

executive committee composition raised 

the same points as comments regarding 

the board composition requirement. 

Such comments included the need for a 

diversity of representation on executive 

committees, the need for experience and 

expertise, and the difficulty of attracting 

qualified public directors. In addition, 

several commenters argued that 

members of an executive committee 

have a special need for expertise due to 

its unique involvement in day-to-day 

operational and managerial issues. 

2a. The Commission’s Response to 

Comments on the Board Composition 

Acceptable Practice 

After carefully reviewing the 

comments above, the Commission has 

decided to modify the proposed Board 

Composition Acceptable Practice, and 

reduce the required ratio of public 

directors on boards and executive 

committees from at least 50% to at least 

35%. The Commission is confident that 

the new Board Composition Acceptable 

Practice, together with the other 

acceptable practices adopted herein, 

effectively accomplishes what Core 

Principle 15 requires—‘‘minimiz[ing] 

conflicts of interest in the decisionmaking process of the contract 

market’’—while simultaneously 

respecting the legitimate needs of 

efficiency and expertise in that process. 

Both the proposed and final Board 

Composition Acceptable Practices 

recognize the importance of DCM 

boards of directors in effective selfregulation. Boards of directors bear 

ultimate responsibility for all regulatory 

decisions, and must ensure that DCMs’

unique statutory obligations are duly 

considered in their decision making. 

While exchange boards do have 

fiduciary obligations to their owners, 

they are also required by the Act to 

ensure effective self-regulation, to 

protect market participants from fraud 

and abuse, and to compete and innovate 

in a fair and responsible manner. To 

meet these obligations, boards of 

directors, and any committees to which 

they delegate authority, including 

executive committees, must make 

certain that DCMs’ regulatory 

responsibilities are not displaced by 

their commercial interests or those of 

their numerous constituencies. 

The Commission strongly believes 

that DCMs are best able to meet their 

statutory obligations if their boards and 

executive committees include a 

sufficient number of public directors.69

While determining a ‘‘sufficient’’ level 

of public representation is not an exact 

process, the Commission has concluded 

that the public interest will be furthered 

if the boards and executive committees 

of all DCMs are at least 35% public. 

Such boards and committees will gain 

an independent perspective that is best 

provided by directors with no current 

industry ties or other relationships 

which may pose a conflict of interest. 

These public directors, representing 

over one-third of their boards, will 

approach their responsibilities without 

the conflicting demands faced by 

industry insiders. They will be free to 

consider both the needs of the DCM and 

of its regulatory mission, and may best 

appreciate the manner in which 

vigorous, impartial, and effective selfregulation will serve the interests of the 

DCM and the public at large. 

Furthermore, boards of directors that are 

at least 35% public will help to promote 

widespread confidence in the integrity 

of U.S. futures markets and selfregulation. Public participation on such 

boards will enhance the independence 

and accountability of all self-regulatory 

actions. As regulatory authority flows 

from the board of directors to all 

decision-makers within a DCM, such 

independence should permeate every 

level of self-regulation and successfully 

minimize conflicts of interest as 

required by Core Principle 15. 

As stated above, the Commission is 

confident that boards of directors and 

executive committees that are at least 

35% public will effectively protect the 

public interest; at the same time, the 

Commission believes that they are 

appropriately responsive to the 

comments. Under the new 35% 

standard, DCMs will have more latitude 

to include a broader diversity of nonpublic directors, such as commercial 

representatives and other highly 

experienced industry professionals, and 

to appoint more member directors and 

other emerging classes of trading 

privilege holders. There will also be 

sufficient room for stockholders and 

other outside investors, DCM officers, 

and persons representing affiliated 

entities or business partners. 

The Commission believes that a 

public director level of at least 35% will 

not require DCMs to increase the size of 

their boards or executive committees, 

nor will they lose the ability to convene 

boards and committees on short notice. 

Furthermore, at the 35% level, DCMs 

should find it easier to attract a 

sufficient number of qualified public 

directors to serve on their boards and 

executive committees, thereby 

substantially reducing any 

disproportionate burden on smaller or 

start-up DCMs. Finally, while this 

modification makes ROCs with 100% 

public representation all the more 

necessary, it also provides ROC 

directors with access to a larger pool of 

industry expertise from among their 

fellow board members, with whom they 

may freely consult whenever needed. 

At the same time, the Commission has 

determined that the 35% standard 

adopted in the final Board Composition 

Acceptable Practice is sufficient to 

ensure strong representation of the 

public interest in DCM decision making. 

While a DCM may determine that a 50% 

public director standard is more 

appropriate for its circumstances,70 the 

Commission believes that the 35% 

standard for safe harbor purposes under 

Core Principle 15 will be effective while 

also responsive to reasonable concerns 

voiced in the public comments. 

The Commission has concluded that 

the most effective way to address DCM 

conflicts of interest, while still 

maintaining the self-regulatory model, is 

to place a sufficient number of public 

persons on DCM boards of directors, 

executive committees, and other 

decision-making bodies. Ultimately, 

however, the Commission’s objective is 


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71The use of a DCM’s contracts to hedge risks in 

commercial activities otherwise unrelated to futures 

trading does not automatically constitute a material 

relationship. However, a board of directors should 

consider all relevant factors carefully when making 

its materiality determination. For example, if the 

farm operator cited above conducted its hedging 

activities as an exchange member, as broadly 

defined herein, such membership would disqualify 

it and persons affiliated with it from serving as 

public directors. Likewise, if futures trading is a 

central economic activity for an individual or firm, 

rather than incidental to other commercial activity, 

then the board should consider whether such 

futures trading rises to the level of a material 

relationship that could affect a director’s decision 

making. For example, a director voting on a 

proposed exchange rule that would facilitate or 

deter a particular trading strategy will have a 

material conflict if their personal or firm trading is 

likely to benefit or be harmed by such new rule. 

72This commenter stated that each DCM board 

should consider compensation from the DCM or its 

members as one factor in determining whether the 

person has a material relationship with the DCM. 

not to engineer specific board-level 

decisions, but rather to encourage a 

process that ensures that every decision 

will be both well-informed by inside 

expertise and well-balanced by the 

public interest. Following 

implementation of the Board 

Composition and companion acceptable 

practices, the Commission will carefully 

monitor DCM decision making, and 

reserves the right to modify the required 

ratio of public directors as necessary. 

3. Comments With Respect to the Public 

Director Acceptable Practice 

Many commenters addressed the 

proposed acceptable practices’

definition of ‘‘public’’ for DCM directors 

and members of disciplinary panels. 

With respect to the definition generally, 

the FIA supported the Commission’s 

definition but noted that it had 

proposed a more stringent public 

director standard of no involvement 

with the futures or derivatives business. 

Several commenters expressed the 

general concern that the Commission’s 

definition of public would lead to a lack 

of experience and expertise among DCM 

directors and members of disciplinary 

panels. One commenter contended that 

the definition was not needed for NYSElisted DCMs as the definition of 

independence contained in the NYSE 

listing requirements was sufficient to 

ensure the appropriate level of 

independence in a DCM’s decisionmaking processes. 

With respect to the proposed 

definition’s exclusion of persons having 

a material relationship with the contract 

market, one commenter asked that the 

Commission clarify that DCM boards 

may make material relationship 

determinations without any 

independent nominating committee 

involvement. That commenter also 

asked that the Commission clarify 

whether it would represent a material 

relationship with the futures exchange 

for an individual, who otherwise 

satisfied the proposed qualification 

criteria, to be a lessor member of a DCM 

affiliate with a de minimus equity 

percentage interest in the DCM affiliate. 

Another commenter questioned whether 

the material relationship test would 

prevent an otherwise qualified 

individual from becoming a public 

director if its family farming operation 

used the DCM’s contracts as risk 

management tools.71

The proposed definition stated that a 

director will not be considered ‘‘public’’

if the director is a member of the 

contract market or a person employed 

by or affiliated with a member. In 

response, one commenter stated that 

such a restriction would be a mistake 

because it would exclude from the 

board people with both industry 

knowledge and substantial 

shareholdings, including persons who 

hold membership but who are retired or 

lease their membership to others, 

members that are marginally involved in 

trading, persons who are members at 

other DCMs, and holders of corporate 

memberships whose firms likely 

conduct business at multiple DCMs. 

One commenter stated that the 

proposal’s definition of member does 

not take into account the various types 

of membership, some of which may 

raise greater potential for conflicts of 

interest, while others may raise very 

little potential. 

The proposed definition also stated 

that a director will not be considered 

‘‘public’’ if the director is an officer or 

employee of the DCM or a director, 

officer, or employee of its affiliate. In 

response, one commenter argued against 

the disqualification of an otherwise 

public DCM because he or she is also 

serving as a director at an affiliate of the 

DCM. Another commenter requested 

that the Commission clarify that a 

director of a DCM would not be 

considered non-public because he or 

she was also a director of the DCM’s 

holding company. 

Several comments addressed the 

proposed definition’s determination that 

a director will not be considered 

‘‘public’’ if the director receives more 

than $100,000 in payments, not 

including compensation for services as 

a director, from the DCM, any affiliate 

of the DCM or from a member or anyone 

affiliated with a member. The FIA 

argued that the Commission should 

adopt a ‘‘no-payment-from-contractmarket’’ standard, noting that payment 

of up to $100,000 would result in at 

least some allegiance to DCM 

management. Additionally, the FIA 

commented that if the $100,000 

compensation limit is retained, the 

Commission should clarify that it is an 

overall cap of permissible compensation 

from contract markets and their 

members. The FIA also opined that 

receipt of more than $100,000 by a 

potential director’s firm (rather than by 

the director) from a DCM member 

constitutes indirect payment or 

compensation and should not prevent 

an otherwise qualified director from 

being considered public. 

By contrast, one DCM stated that the 

public director definition should be 

modified to eliminate the $100,000 

compensation provision because it is an 

arbitrary level and may amount to de 

minimis compensation in the context of 

the person’s total compensation.72

Another exchange requested that the 

Commission clarify that pensions and 

other forms of deferred compensation 

for prior services that are not contingent 

on continued service would not 

automatically disqualify a person from 

serving as a public director. 

One commenter addressed the 

proposed definition’s determination that 

a person will be precluded from serving 

as a public director if any of the 

relationships identified in the definition 

apply to a member of the director’s 

immediate family. That commenter 

stated that an individual should not be 

prohibited from serving as a public 

director based on the affiliation of an 

immediate family member with a 

member firm unless the family member 

is an executive officer of the member 

firm. The same commenter further noted 

that the exclusion should not apply to 

family members who do not live in the 

same household as the director. 

The proposed definition also included 

a one-year look back provision with 

respect to the identified disqualifying 

circumstances. With respect to this 

provision, the FIA commented that a 

two-year look back would be more 

realistic and effective. In contrast, an 

exchange commented that the proposed 

one-year look back is more than 

sufficient and noted that that the longer 

the look back period, the less likely that 

individuals will plan to return to the 

industry. 

3a. The Commission’s Response to 

Comments on the Public Director 

Acceptable Practice 

The Commission carefully considered 

all of the comments with respect to the 

Public Director Acceptable Practice, and 

generally found that many of the 


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Federal Register / Vol. 72, No. 30 / Wednesday, February 14, 2007 / Rules and Regulations 6949 

73The board of directors of the Chicago Board 

Options Exchange, which owns CFE, is 50% public 

(independent non-member). 74The NYSE’s commentary to its listing standards 

emphasizes that ‘‘as the concern is independence 

from management, the Exchange does not view 

ownership of even a significant amount of stock, by 

itself, as a bar to an independence finding.’’ NYSE 

Listed Company Manual, § 303A.02 (commentary) 

(emphasis added). 75CEA § 3(b), 7 U.S.C. 5(b). 

discrete requests for clarification 

regarding the definition of ‘‘public’’

were reasonable. Accordingly, the 

Commission made appropriate 

responsive modifications to the final 

Public Director Acceptable Practice, as 

discussed in Section IV below. 

The Commission has determined, 

however, that a less stringent definition 

of public director, as requested by some, 

is contrary to the acceptable practices’

stated objectives: minimizing conflicts 

of interest through independent 

decision making, encouraging a strong 

regard for the public interest, and 

insulating regulatory functions via 

public directors and persons who are 

not conflicted by industry ties. 

Furthermore, the Commission believes 

that a strict definition of public director 

is especially necessary now that it will 

apply to 35% of a DCM’s directors, 

rather than the 50% originally 

proposed. More importantly, the 

Commission strongly believes that, 

rather than being a drawback, the most 

significant contribution made by public 

directors to the DCM decision-making 

process is precisely their outside, nonindustry perspective. The Commission 

is confident that a board consisting of at 

least 35% public directors, as defined in 

the Public Director Acceptable Practice, 

is more than capable of reaching 

intelligent collective decisions, even on 

technical matters requiring detailed 

knowledge of futures trading, while at 

the same time exercising its regulatory 

authority in a manner consistent with 

the public interest. 

The Commission rejects the 

contention that it will be impossible to 

find a sufficient number of qualified 

public directors to serve on DCM 

boards. Similarly, it rejects the argument 

that the materiality and bright-line tests 

may result in inexperienced directors 

with limited knowledge of the futures 

industry. To the contrary, the 

Commission believes that DCMs are 

fully capable of finding a sufficient 

number of qualified directors to 

constitute at least 35% public boards. 

DCMs may draw from a large pool of 

talented candidates with relevant or 

related 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. 

The Commission notes that a wide 

variety of DCMs—large and small, 

mutually-owned and publicly traded, 

for-profit and not-for-profit—already 

have boards of directors that are at least 

20% non-member, as once required by 

Commission Regulation 1.64. One 

securities exchange that is the parent 

company of a DCM has a board that is 

at least 50% non-member,73 and the 

NYSE’s board of directors is 100% nonmember. Accordingly, many exchanges 

have already demonstrated an ability to 

successfully recruit, retain, and thrive 

with significant numbers of public 

directors. 

It is noteworthy that the three largestvolume DCMs, all of which are 

subsidiaries of publicly traded 

companies, are already required to have 

boards that are at least 50% 

‘‘independent,’’ as defined by the NYSE. 

In certain respects, the Commission’s 

definition of ‘‘public director’’ overlaps 

with the NYSE’s ‘‘independent 

directors’’ definition. Thus, these DCMs 

could potentially select at least some of 

their public directors from among their 

independent directors who do not have 

current ties to the futures industry. At 

the same time, the argument that the 

NYSE listing standards render the 

proposed Public Director Acceptable 

Practices unnecessary is misplaced. 

Despite the similarities between the 

acceptable practices and the NYSE’s 

definition of independent, one 

overarching difference remains— the 

listing standards are designed to protect 

shareholders, through boards of 

directors that are sufficiently 

independent from management.74 In 

contrast, the new acceptable practices 

for Core Principle 15, while recognizing 

that DCMs are commercial enterprises, 

serve the national public interest in 

vigorous, impartial, and effective selfregulation. 

The Commission agrees with many of 

the commenters that effective selfregulation is in the long-term interest of 

DCM owners, including shareholders. 

However, it is crucial for all DCMs and 

their owners to understand that DCMs 

have two responsibilities: a 

responsibility to their ownership and a 

responsibility to the public interest as 

defined in the Act.75 Whereas the NYSE 

listing standards serve those with a 

direct fiduciary claim upon a company 

(shareholders (owners)), the new 

acceptable practices serve the public, 

whose claim upon DCMs is entirely 

independent of ownership, 

membership, or any other DCM 

affiliation. In short, through the new 

acceptable practices for Core Principle 

15, the Commission seeks to ensure 

adequate representation of a public 

voice that otherwise is not guaranteed 

any formal standing within a DCM, and 

which receives no effective 

representation under any regulatory 

regime other than the Commission’s. 

Some commenters argued that the 

proposed Public Director Acceptable 

Practice, and the bright-line tests in 

particular, do not take into account 

different types of DCM memberships 

and the different degrees of conflict 

which they may or may not engender. 

Although different commenters focused 

on different groups of industry 

participants, their underlying argument 

was the same: that industry participants 

should be permitted to serve as public 

directors to a lesser or greater extent. 

The Commission’s response to this and 

similar comments summarized above is 

two-fold. 

First, if DCMs value the presence of 

industry insiders on their boards, they 

may place them among the 65% of 

directors who are not required to be 

public under the final acceptable 

practices. The Commission has 

facilitated this option by reducing the 

required ratio of public directors. 

Second, and as stated previously, the 

purpose of the Public Director 

Acceptable Practice is to ensure 

independent decision making and 

strong consideration of the public 

interest by DCM boards of directors. 

While all directors are required to 

consider DCMs’ statutory obligations 

and public responsibilities, public 

directors are particularly meaningful 

because they have no fiduciary duty to 

lessees or lessors of trading seats, 

corporate members, persons who trade 

small amounts, or any other persons 

affiliated with the futures industry and 

inquired about in the comments. 

Allowing persons with current industry 

affiliation to serve as public directors 

would necessarily reintroduce into 

board deliberations and ROC oversight 

the very conflicts of interest that Core 

Principle 15 and the new acceptable 

practices seek to minimize. 

The Commission also notes that the 

most significant determination to be 

made under the Public Director 

Acceptable Practice is the board’s 

finding that a potential public director 

has no material relationship with the 

DCM. The Commission has left this 

determination to the board’s discretion, 

and offers the bright-line tests only as a 

beginning to the board’s inquiry. The 

material relationship test requires a 


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6950 Federal Register / Vol. 72, No. 30 / Wednesday, February 14, 2007 / Rules and Regulations 

76 In Section IV, the Commission makes 

clarifications with respect to, inter alia, the manner 

in which DCMs select their public directors, the 

compensation of public directors, and public 

directors serving on both a parent company and a 

subsidiary DCM (‘‘overlapping public directors’’). 

77As stated in the proposing release, the 

Commission emphasizes that ROCs are expected to 

identify aspects of their DCMs’ regulatory system 

that work well and those that need improvement, 

and to make any necessary recommendations to 

their boards for changes that will help to ensure 

vigorous, impartial, and effective self-regulation. 

ROCs should be given the opportunity to review, 

and, if they wish, present formal opinions to 

management and the board on any proposed rule 

or programmatic changes originating outside of the 

ROCs, but which they or their CROs believe may 

have a significant regulatory impact. DCMs should 

provide their ROCs and CROs with sufficient time 

to consider such proposals before acting on them. 

ROCs should prepare for their boards and the 

Commission an annual report assessing the 

effectiveness, sufficiency, and independence of the 

DCM’s regulatory program, including any proposals 

to remedy unresolved regulatory deficiencies. ROCs 

should also keep thorough minutes and records of 

their meetings, deliberations, and analyses, and 

make these available to the Commission upon 

request. In the future, when reviewing DCMs’

compliance with the core principles, the 

Commission will examine any recommendations 

made by ROCs to their boards and the boards’

reactions thereto. 

DCM’s board to make an affirmative, onthe-record finding that a director has no 

material relationship with the DCM, and 

to disclose the basis for that 

determination. The bright-line tests 

simply facilitate the board’s inquiry by 

noting obviously material relationships, 

and freeing the board to focus on other 

relationships that may be less apparent 

but that are equally detrimental to 

impartial representation of the public 

interest. As such, the bright-line tests, 

like any other acceptable practices, must 

be sufficiently detailed to merit the 

benefits accorded to a safe-harbor. 

Consistent with this approach, the 

Commission reaffirms the familial 

relationships excluded under the brightline tests, the one-year look-back 

provision, and all other elements of the 

proposed Public Director Acceptable 

Practice, except for those specifically 

treated in Section IV.76

4. Comments With Respect to the 

Regulatory Oversight Committee 

Acceptable Practice 

The proposed Regulatory Oversight 

Committee Acceptable Practice called 

upon DCMs to establish a board-level 

ROC, composed solely of public 

directors, to oversee regulatory 

functions. Many commenters focused on 

the composition of the proposed ROC, 

voicing many of the same concerns they 

had with respect to the proposed 50% 

public director board requirement. Two 

DCMs commented that each DCM 

should be permitted to determine 

whether to establish a ROC, the extent 

of the ROC’s responsibilities, and the 

most appropriate composition thereof. 

One DCM argued that the level of public 

representation should be the same for 

ROCs and boards. 

A number of commenters expressed 

concern with the difficulty in recruiting 

qualified public directors (similar to the 

concerns expressed with respect to 

recruiting qualified directors for the 

board generally) to serve on ROCs, and 

noted the need for experience, expertise, 

and diversity on any such body. One 

DCM commented that an ROC should be 

able to include public representatives 

who are not public directors of the 

exchange, but who are otherwise 

qualified to be. 

The FIA and a large FCM supported 

the proposed Regulatory Oversight 

Committee Acceptable Practice. The 

FCM commented that adoption of the 

proposal will enhance the credibility 

and effectiveness of DCMs in their 

capacity as self-regulators. 

One DCM commented that while an 

ROC is an appropriate way to reinforce 

impartiality in DCM self-regulation, it 

may not be the best approach for all 

DCMs (particularly smaller ones) to 

charge the committee with managerial 

duties and overseeing daily market 

regulation functions. Another DCM 

commented that ROCs should not 

remove DCMs’ chief regulatory officers 

from the appropriate direction and 

input of DCM management. 

Commenters also argued that ROCs’

proposed duties could conflict with the 

responsibilities of the chief executive 

officer, the board, and DCM personnel, 

and could well undercut their authority. 

Many commenters addressed ROCs’

stated responsibilities. Several of these 

commenters argued that the level of 

authority assigned to an ROC’s public 

directors is contrary to commonly 

accepted corporate management best 

practices because management 

functions are removed from 

management and become directors’

responsibilities. A number of 

commenters offered recommendations 

as to what should be the responsibilities 

of an ROC. One DCM requested that the 

Commission clarify that if an ROC were 

to have any authority with respect to 

overseeing budgets and the hiring and 

compensation of regulatory officers and 

staff, that such authority would 

supplement rather than replace these 

normal management and board 

responsibilities. It was further argued 

that the Commission should make clear 

that it is not the function of an ROC to 

plan or conduct trade practice 

investigations or market surveillance or 

to review the results of particular 

investigations or audits, but rather to 

serve an oversight role. It also was 

suggested that the Commission should 

remove language that states that an ROC 

shall supervise the DCM’s CRO because 

it is inconsistent with the Commission’s 

stated position that an ROC should not 

serve as a manager. Another DCM 

commented that ROCs should be 

granted unhindered access to regulatory 

staff along with the authority to ensure 

that regulatory staff has sufficient 

resources and that nothing interferes 

with staff’s fulfillment of the regulatory 

program. 

In other comments addressing the 

proposed responsibilities of ROCs, a 

large FCM and the FIA contended that 

ROCs (or their chairmen) should 

approve the composition of DCM 

disciplinary panels. The FIA also 

recommended that ROCs be granted the 

power to hire, supervise, and determine 

the compensation of DCMs’ CROs and 

set (or recommend to the board) DCMs’

self-regulatory budgets. Further, in the 

interest of more transparency for DCM 

rulemakings, the FIA recommended that 

ROCs should consider and approve any 

new DCM rule or rule change or, if the 

Commission elects not to call for 

committee approval of all such rules 

and rule changes, than any new DCM 

rule or rule change that a DCM decides 

to self-certify to the Commission. 

4a. The Commission’s Response to 

Comments on the Regulatory Oversight 

Committee Acceptable Practice 

Criticisms of the proposed ROC 

Acceptable Practice often mirrored 

those leveled against the proposed 

Board Composition Acceptable Practice 

and the proposed acceptable practices 

in general. After careful consideration, 

the Commission has determined to 

implement the ROC Acceptable Practice 

for Core Principle 15 as proposed.77

The Commission stresses that ROCs 

are oversight bodies, and that the 

enumerated powers granted to them in 

the ROC Acceptable Practice merely 

complement normal board functions. 

ROCs are not intended to supplant their 

boards of directors, nor are they 

expected to assume managerial 

responsibilities or to perform direct 

compliance work. Under the acceptable 

practices for Core Principle 15, DCM 

self-regulation remains exactly that—

self-regulation, but with a stronger and 

more defined voice for the public 

responsibilities inherent to all DCMs. 

Properly functioning ROCs should be 

robust oversight bodies capable of 

firmly representing the interests of 

vigorous, impartial, and effective selfregulation. ROCs should also represent 

the interests and needs of regulatory 


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78ROCs should not rely on outside professionals 

or firms that also provide services to the full board, 

other board committees, or other units or 

management of their DCMs. 

79For example, whereas the compensation of 

senior DCM executives typically may be 

recommended to the board by a compensation 

committee, the compensation of the CRO will be 

recommended by the ROC. This provides insulation 

to the CRO and the regulatory personnel beneath 

him or her, but does not infringe upon the board’s 

final decision-making authority. Similarly, a ROC, 

rather than a budget committee, should be the body 

that formally recommends the appropriate level of 

regulatory expenditures for the DCM. Again, the 

salutary effect is to insulate a crucial self-regulatory 

decision, but not to remove it from the ultimate 

purview of the full board of directors. In these and 

similar instances, the Commission will be in a 

position to evaluate how boards treat ROC 

recommendations, thus adding Commission review 

as an additional level of self-regulatory insulation. 

80The text of the final acceptable practices makes 

clear that ROCs’ shall ‘‘supervise the contract 

market’s chief regulatory officer, who will report 

directly to the ROC.’’ This two-way relationship—

delegation of certain responsibilities from the ROC 

to the CRO combined with supervision of the CRO 

by the ROC—is a key element of the insulation and 

oversight provided by the ROC structure. It permits 

regulatory functions and personnel, including the 

CRO, to continue operating in an efficient manner 

while simultaneously protecting them from any 

improper influence which could otherwise be 

brought to bear upon them. The ROC Acceptable 

Practice identifies key levers of influence, including 

authority over the conduct of investigations, the 

size and allocation of the regulatory budget, and 

employment and compensation decisions with 

respect to regulatory personnel, among others, and 

then places them within the insulated ROC/CROregulatory personnel relationship. While in no way 

diminishing the ultimate authority of the board of 

directors, this three-part relationship is intended to 

protect regulatory functions and personnel, 

including the CRO, from improper influence in the 

daily conduct of regulatory activities and broader 

programmatic regulatory decisions. 

officers and staff; the resource needs of 

regulatory functions; and the 

independence of regulatory decisions. 

In this manner, ROCs will insulate DCM 

self-regulatory functions, decisions, and 

personnel from improper influence, 

both internal and external. 

Many of the comments in opposition 

to the ROC Acceptable Practice—for 

example, that whether to establish ROCs 

should be left at DCMs’ discretion and 

that it will be difficult to find qualified 

public directors—have already been 

addressed, and the Commission’s 

previous responses need only brief 

summarizing here. The Commission 

strongly believes that new structural 

conflicts of interest within selfregulation require an appropriate 

response within DCMs. The 

Commission further believes that ROCs, 

consisting exclusively of public 

directors, are a vital element of any such 

response. With respect to those public 

directors, the Commission is confident 

that DCMs can recruit a sufficient 

number of qualified persons, as they 

have done for their boards in the past. 

Finally, the Commission notes that 

while DCMs must respond to conflicts 

between their regulatory responsibilities 

and their commercial interests; the exact 

manner in which they do so remains at 

their discretion. 

A second line of comments with 

respect to the ROC Acceptable Practice 

argued that ROCs should include 

industry directors, and that the ratio of 

public directors on ROCs should be the 

same as on boards. The Commission 

believes that these comments ignore the 

very purpose of the ROC Acceptable 

Practice. As stated previously, the new 

acceptable practices ensure that DCMs’

decision-making bodies include an 

appropriate number of persons who are 

not conflicted by industry ties. For 

ROCs—the overseers of DCMs’

regulatory functions—the appropriate 

number is 100% public. The 

Commission believes that anything less 

invites into regulatory oversight 

operations precisely those directors 

whose industry affiliations lend 

themselves to conflicts of interest in 

decision making. 

What constitutes a ‘‘sufficient’’

number of public persons for DCM 

decision making depends upon the 

decision-making body in question and 

its responsibilities. Thus, DCM 

disciplinary panels are required to be 

diverse and have only one public person 

because their responsibility—expert and 

impartial adjudications—often requires 

a detailed knowledge of futures trading 

best provided by industry participants. 

At the same time, that expertise is 

balanced by the impartiality of at least 

one public panelist and a diversity of 

industry representatives. For boards of 

directors, however, with both regulatory 

responsibilities and commercial 

interests, the minimum 35% ratio 

properly recognizes boards’ dual role as 

the ultimate regulatory and commercial 

authorities within DCMs. Industry 

directors on DCMs’ boards are fully 

justified precisely because of the 

numerous commercial decisions that 

they must make. 

Within this construct, ROC’s discrete 

regulatory responsibilities assume 

added significance. The sole purpose of 

ROCs is to insulate self-regulatory 

functions, personnel, and decisions 

from improper influence, and to 

advocate effectively on their behalf. 

ROCs make no direct commercial 

decisions, and therefore, have no need 

for industry directors as members. The 

public directors serving on ROCs are a 

buffer between self-regulation and those 

who could bring improper influence to 

bear upon it. The Commission notes that 

at least three DCMs—CME, NYBOT, and 

U.S. Futures Exchange—have already 

established board-level committees 

similar to the ROCs described in the 

ROC Acceptable Practice, and they 

consist exclusively of public directors. 

The same is true of the securities 

exchange parent company of one DCM 

that submitted comments. 

Commenters who requested greater 

industry participation on ROCs should 

recall that ROCs will be subject to the 

final authority of their boards of 

directors, which may include a 

sufficient number of industry directors. 

DCM boards, including industry 

directors, will have ample opportunity 

to consult with and advise ROC public 

directors, to interact with regulatory 

officers and personnel, and ultimately to 

enact any regulatory policies or 

decisions that they deem appropriate. 

As stated previously, ROCs are designed 

to insulate self-regulation, not isolate it. 

At the same time, under the ROC 

Acceptable Practice, ROCs have the 

absolute right to whatever resources and 

authority they may require to fulfill 

their responsibilities, including 

resources within their DCMs. More 

specifically, ROCs have the authority 

and resources necessary to conduct their 

own inquiries; consult directly with 

their regulatory officers and staffs; 

interview DCM employees, officers, 

members, and others; review relevant 

documents; retain independent legal 

counsel, consultants, and other 

professional service providers and 

industry experts; and otherwise exercise 

their independent analysis and 

judgment as needed to fulfill their 

regulatory responsibilities.78

The related concern that ROCs will 

undercut the authority of DCM boards of 

directors is misplaced. ROCs should 

function as any other committee of the 

board, making recommendations which 

are afforded great weight and deference, 

and reaching final decisions if such 

power is delegated to it, but ultimately 

subject to the board’s authority. The 

very text of the ROC Acceptable Practice 

calls for ROCs to ‘‘monitor,’’ ‘‘oversee,’’

and ‘‘review,’’ none of which implies 

binding authority or a usurpation of the 

full board of directors. At most, it 

implies a change in workflow.79

Similarly, concerns that ROCs will 

become managerial bodies or interfere 

with established managerial 

relationships are equally misplaced. To 

be clear, the Commission expects ROCs 

to oversee DCMs’ self-regulatory 

functions and personnel, not to manage 

them. ROCs’ responsibilities, detailed in 

Section 3 of the final acceptable 

practices, include traditional oversight 

functions or functions that can easily be 

delegated to a DCM’s CRO.80 Some 


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examples of traditional committee 

responsibilities that can easily be 

performed by an ROC without undue 

interference in managerial relationships 

include: recommending rule changes or 

going on the record as opposed to a rule 

change originating elsewhere within the 

DCM; determining an appropriate 

regulatory budget in conjunction with 

the CRO and then forwarding that 

determination for consideration by the 

full board; arriving at employment 

decisions with respect to senior 

regulatory personnel and then 

forwarding those determinations for 

consideration by the full board; annual 

review and reporting on regulatory 

performance to the full board, etc. 

ROCs’ most important responsibility 

will simply be to insulate self-regulatory 

functions and personnel from improper 

influence. Such insulation does not 

usurp established authority, but rather 

acts as a filter through which it must 

pass, and be cleansed of any efforts to 

exercise improper influence or drive 

regulatory decisions according to 

commercial interest. One facet of the 

insulation provided by an ROC clearly 

is the relationship between it and its 

CRO, and through him or her, all 

regulatory functions, personnel, and 

decisions. The Commission has 

endeavored to identify the levers of 

influence that may be used to pressure 

an individual, or an entire regulatory 

department, and to place ROCs 

alongside those levers. Matters such as 

the hiring, termination, and 

compensation of regulatory personnel, 

and size of regulatory budgets, are 

clearly areas where insulation from 

improper influences may be beneficial. 

The insulation provided by the ROC 

Acceptable Practice, however, need not 

interfere with the established 

relationships between management, 

staff, and others necessary to effective 

self-regulation. 

5. Comments With Respect to the 

Disciplinary Committee Acceptable 

Practice 

Several commenters addressed the 

proposed Disciplinary Panel Acceptable 

Practice provision that all DCM 

disciplinary panels include at least one 

public participant and that no panel be 

dominated by any group or class of 

DCM members. The FIA and large FCMs 

that commented were generally 

supportive of the proposed Disciplinary 

Panel Acceptable Practice, with the FIA 

commenting that one public member of 

a DCM disciplinary panel should be a 

prerequisite for safe harbor relief, but 

that a 50% public independent member 

standard for such panels would be 

much more in keeping with the spirit of 

the proposed acceptable practices. One 

large FCM noted that the proposal’s 

composition requirement would avoid 

the perception of conflict and lack of 

fairness and impartiality. Another large 

FCM commented that it supports the 

proposed provision that would require 

rules precluding any group or class of 

industry participants from dominating 

or exercising disproportionate influence 

on disciplinary panels. 

Although two large DCMs commented 

that it is not necessary for the 

Commission to prescribe diversity on 

disciplinary panels, most of the smaller 

DCMs that commented in this area were 

supportive of the proposed acceptable 

practice. One smaller DCM that hires 

hearing officers to determine whether to 

bring a disciplinary action, however, 

commented that this proposed 

acceptable practice is not necessary for 

that DCM as it did not have any 

widespread inadequacies. 

Two commenters addressed what 

should be the qualifications of the 

public person serving on disciplinary 

panels; one agreed that having a public 

person on disciplinary panels is a sound 

proposition, but recommended that 

such person need not be subject to the 

same qualifying criteria as public 

directors. Another requested that the 

Commission clarify that the proposed 

board determination and reporting 

requirements with respect to public 

directors generally are unnecessary for 

public persons serving on disciplinary 

panels. The same commenter also 

requested clarification that the 

Disciplinary Panel Acceptable Practice’s 

exclusion of decorum or attire cases 

from the requirement that one public 

person serve on disciplinary panels also 

applies to cases limited to certain 

recordkeeping matters (e.g., the timely 

submission of accurate records required 

for clearing or verifying each day’s 

transactions or other similar activities). 

5a. The Commission’s Response to 

Comments on the Disciplinary Panel 

Acceptable Practice 

After carefully reviewing these 

comments, the Commission is satisfied 

that the Disciplinary Panel Acceptable 

Practice should be implemented as 

proposed. The Commission believes that 

fair disciplinary procedures, with 

minimal conflicts of interest, require 

disciplinary bodies that represent a 

diversity of perspectives and 

experiences. The presence of at least 

one public person on disciplinary 

bodies also provides an outside voice 

and helps to ensure that the public’s 

interests are represented and protected. 

This approach is consistent with the 

Commission’s overall objective of 

ensuring an appropriate level of public 

representation at every level of DCM 

decision making, while simultaneously 

calibrating the required number of 

public persons to the nature and 

responsibility of the decision-making 

body in question. 

The Disciplinary Panel Acceptable 

Practice accomplishes these dual 

objectives of diversity and public 

representation, while also maintaining 

the expertise necessary to evaluate 

sometimes complex disciplinary 

matters. The Commission also is 

comfortable that its RER process is wellpositioned to evaluate the performance 

of DCM disciplinary committees and 

panels, such that a substantially higher 

proportion of public representation or 

other ameliorative steps are not 

required. RERs typically examine all of 

a DCM’s disciplinary cases during a 

target period in detail, including 

reviews of disciplinary committee and 

panel minutes, investigation reports, 

settlement offers, and sanctions 

imposed. The Commission also pays 

careful attention to the 

recommendations of DCM compliance 

staff, to disciplinary bodies’ responses 

to those recommendations, and to the 

analysis and rationale offered by 

disciplinary bodies in support of their 

decisions. If disciplinary committees 

and panels are underperforming, the 

Commission will be able to recognize 

any shortcomings and take appropriate 

measures. 

The work of disciplinary panels 

requires more specialized knowledge of 

futures trading than almost any other 

governing arm of a DCM. Neither the 

strategic business decisions made by 

boards of directors, nor the oversight 

conducted by ROCs, for example, 

require as much technical futures 

trading expertise as disciplinary panel 

service. Accordingly, the Commission 

believes that increasing the proportion 

of public representatives on disciplinary 

panels to 50%, as suggested by one 

commenter, would eliminate too much 

expertise from the disciplinary process 

and is unwarranted. 

The Commission recognizes that a 

small number of DCMs may have 

unique disciplinary structures. 

However, the Commission strongly 

believes that diverse panels, including 

at least one public person, are 

appropriate for all DCMs. Should an 

individual DCM choose to comply with 

this element of Core Principle 15 by 

other means, the Commission will 

examine and monitor it to ensure full 

core principle compliance. 

Other specific requests for 

modifications and/or clarifications with 

respect to the Disciplinary Panel 


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Acceptable Practice are treated 

separately in Section IV(E) below. 

IV. Specific Requests for Modifications 

and/or Clarifications That the 

Commission Has Determined To Grant 

or Deny 

Several commenters made specific 

requests for modifications and/or 

clarifications that the Commission has 

determined to grant in some instances 

and deny in others. The specific 

modifications and/or clarifications do 

not represent changes in the proposed 

acceptable practices, but rather 

implement the Commission’s original 

intent. They are described below. 

A. Phase-in Period for the New 

Acceptable Practices 

Several commenters indicated 

concern that adoption of the proposed 

acceptable practices, particularly the 

requirement to restructure the board, 

would be burdensome, time consuming 

and costly. For instance, one large DCM 

commented that implementation of the 

acceptable practices would necessitate 

major changes and cause significant 

disruption for DCMs, virtually none of 

which currently meet the proposed 50% 

public director standard (or the 

minimum 35% standard adopted in this 

final release). Another large DCM 

commented that publicly held DCMs 

implementing the acceptable practices 

would have to amend their certificates 

of incorporation, by-laws, and various 

public disclosures and respond to any 

shareholder challenge. As a result of the 

perceived time requirement, several 

commenters requested that, if the 

proposals are adopted, the Commission 

should provide for an adequate phasein period. 

The Commission hereby grants an 

appropriate phase-in period. The new 

acceptable practices for Core Principle 

15 are effective 30 days after publication 

in the Federal Register. Under the 

phase-in period described below, DCMs 

may take up to two years or two 

regularly-scheduled board elections, 

whichever occurs first, to fully 

implement the new acceptable practices 

or otherwise demonstrate full 

compliance with Core Principle 15. The 

Commission expects that DCMs will 

begin making preparations and taking 

conforming steps early in the phase-in 

period. Accordingly, six months after 

publishing these acceptable practices in 

the Federal Register, the Commission 

will survey all DCMs to evaluate their 

plans for full compliance with Core 

Principle 15. The Commission also will 

monitor all DCMs throughout the phasein period to evaluate their progress 

toward full compliance. 

Although DCMs are not required to 

implement the new acceptable 

practices, the Commission has 

determined that full compliance with 

Core Principle 15 requires all DCMs to 

address structural conflicts of interest 

between their regulatory responsibilities 

and their commercial interests or those 

of their numerous constituencies. Such 

measures must be present throughout 

DCMs’ decision-making processes. 

DCMs choosing to adopt measures other 

than the final acceptable practices 

adopted herein should consider and 

address key areas of decision making 

that are subject to conflicts of interest. 

These may include decisions with 

respect to regulatory budgets, 

expenditures, and funding; 

employment, compensation, and similar 

decisions involving regulatory 

personnel; the constitution of 

disciplinary panels; the promulgation of 

rules with a potential regulatory impact; 

decision making with respect to the 

investigation, prosecution, and 

sanctioning of disciplinary offenses; and 

the chain of command in compliance 

programs (including trade practice 

surveillance, market surveillance, and 

financial surveillance) beyond 

regulatory officers. The Commission 

will consider all of these factors in 

evaluating compliance with Core 

Principle 15. 

B. Selection of Public Directors 

With respect to the placement of 

public directors on boards, one DCM 

commented that the proposing release 

calls upon DCMs to ‘‘elect’’ boards 

composed of at least 50% public 

members, but that at that particular 

DCM public governors are not elected 

but are identified and appointed by the 

board itself. Further, election of public 

members might discourage potential 

candidates because having to stand for 

election creates the potential for elected 

individuals to be beholden to their 

electing constituency, especially if the 

position is compensated. Another 

commenter noted that the proposing 

release suggests a role for nominating 

committees in the selection of public 

directors, and asked for clarification that 

nominating committees are not required 

to be involved. Conversely, the FIA 

recommended that a subgroup of public 

directors should serve as a nominating 

committee to select new or re-nominate 

existing public directors. 

The Commission hereby clarifies that 

DCMs may select their public directors 

in the manner most appropriate to them. 

Compliance with the new acceptable 

practices for Core Principle 15 does not 

require the use of nominating 

committees, the ‘‘election’’ of public 

directors, or the selection of public 

directors by any pre-specified means. 

DCMs are free to select their public 

directors by any process they choose, as 

long as their public directors meet the 

requirements set forth in the new 

acceptable practices. In addition, the 

Commission expects that the tenures 

and terms of public directors will be no 

less secure than that of other directors 

of the DCM. For example, if other 

directors can be removed only for cause, 

then that same protection should extend 

to public directors. Similarly, if other 

directors are selected for two-year terms, 

then public directors should be as well, 

etc. 

The Commission considered FIA’s 

request for a special nominating 

committee for public directors. 

However, in promulgating these 

acceptable practices, the Commission 

has been careful to focus on outcomes—

the insulation of regulatory functions, a 

pure public voice in board 

deliberations, and fair disciplinary 

proceedings-while providing only as 

much instruction as necessary to 

achieve the safe harbor. 

C. Compensation of Public Directors 

As summarized in Section III above, 

several commenters requested 

clarifications or amendments with 

respect to the compensation of public 

directors under the Public Director 

Acceptable Practice. Section (2)(B)(iii) 

of the proposed acceptable practices 

specified that a public director may not 

receive more than $100,000 in payments 

from the DCM (or any affiliate of the 

DCM, or from a member or anyone 

affiliated with a member) other than for 

services as a director. One commenter 

asked whether deferred compensation 

for prior services would count toward 

the $100,000 payment limit for public 

directors. It does not. The Commission 

hereby affirms that public directors may 

receive deferred compensation for prior 

services in excess of $100,000, and that 

such compensation will not count 

towards the $100,000 payment limit for 

public directors. To comply with the 

acceptable practices, DCMs must ensure 

that any such compensation is truly 

deferred compensation for prior 

services. Thus, the agreement by which 

the public director is being 

compensated should predate his or her 

selection as a public director. 

Furthermore, it should in no way be 

conditioned upon the directors’ future 

performance, services, or behavior, and 

in no way be revocable by the 

compensating party. 

FIA requested clarification that the 

$100,000 payments cap for public 

directors, for services other than as a 


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director, is a cumulative cap on 

compensation from DCMs and their 

membership. The Commission hereby 

confirms that FIA’s understanding is 

correct. The $100,000 payment cap is an 

annual, cumulative cap on payments to 

the public director from all ‘‘relevant’’

sources (i.e., the DCM, any affiliate of 

the DCM, or any member or affiliate of 

a member of the DCM) combined. As 

explained previously, the $100,000 cap 

also includes indirect payments made 

by a DCM, its affiliates, and its members 

or affiliates of its members to the 

director. In addition, the $100,000 

payment cap is an annual cap, as 

summarized above. 

Finally, FIA argued that the 

Commission should preclude public 

directors from receiving any 

compensation from the DCM, but that 

compensation received by a director’s 

firm, rather than the director itself 

should not count towards any 

compensation cap. The Commission 

considered both comments carefully, 

but determined that neither is 

appropriate. The Public Director 

Acceptable Practice’s compensation cap, 

higher than that requested by FIA, 

combined with its narrow limits on 

where such compensation may 

originate, strikes the proper balance 

between an effective but not overly 

restrictive definition of public director. 

The Commission strongly believes 

that significant compensation paid by a 

DCM or its affiliates to a firm could 

adversely impact the independence of a 

director affiliated with that firm. In the 

Commission’s opinion, any such 

relationship between a DCM and a 

director, through the director’s firm, 

clearly rises to the level of a ‘‘material 

relationship’’ that would preclude the 

director from serving as a public 

director. Accordingly, the Commission 

hereby clarifies that a director affiliated 

with a firm receiving over $100,000 in 

compensation from the DCM or an 

affiliate of the DCM may not qualify as 

a public director. 

D. Overlapping Public Directors 

At least one commenter requested 

clarification with respect to overlapping 

public directors at DCMs whose 

ownership structures include a parentsubsidiary relationship. In the proposed 

acceptable practices, Sections (2)(B)(i) 

and (2)(B)(v), when read together, 

suggested that the same person could 

not serve as a public director at both the 

parent company and its subsidiary 

DCM. The question is most likely to 

arise in the context of DCMs that are 

subsidiaries of publicly traded 

companies, and whose boards of 

directors overlap in whole or in part 

with those of their public parents. 

The Commission hereby clarifies that 

overlapping public directors are 

permitted. However, such directors 

must still meet the Commission’s 

definition of public director, as set forth 

in the Public Director Acceptable 

Practice. In effect, overlapping public 

directors must carry the Commission’s 

definition of ‘‘public’’ director from 

their DCMs to the holding companies’

boards of directors. Conforming 

language has been added to the final 

acceptable practices. 

E. Jurisdiction of Disciplinary Panels 

and Definition of ‘‘Public’’ for Persons 

Serving on Disciplinary Panels 

One commenter asked the 

Commission to confirm that DCM 

disciplinary panels considering cases 

involving the timely submission of 

accurate records required for clearing or 

verifying each day’s transactions need 

not include a public person. The 

Commission included such language in 

the preamble to the proposed 

Disciplinary Panel Acceptable Practices, 

but neglected to include it in the text of 

the acceptable practices themselves. The 

Commission is correcting that oversight 

and modifying the final acceptable 

practices for Core Principle 15 to make 

clear that disciplinary panels 

considering cases involving the timely 

submission of accurate records required 

for clearing or verifying each day’s 

transactions need not include a public 

member. 

The same commenter requested 

clarification that public members of 

DCM disciplinary panels need only 

meet the ‘‘bright-line’’ tests for public 

directors contained in Section (2)(B)(i-v) 

and (2)(C) of the proposed acceptable 

practices. That was, in fact, the 

Commission’s intent. Public members of 

disciplinary panels are not subject to the 

broader ‘‘no material relationship’’ test 

of Section (2)(i), nor the disclosure 

requirements of Section (2)(v) in the 

final acceptable practices. The 

Commission is confident that the new 

bright-line tests, combined with DCMs’

existing personal conflicts of interest 

provisions, are sufficient to ensure 

impartial public representatives on 

disciplinary panels. Furthermore, the 

Commission also believes that requiring 

DCMs to conduct and disclose a 

material relationship test for 

disciplinary panel members would 

constitute an unjustifiable burden at this 

time. Conforming changes have been 

made in the final acceptable practices. 

F. ‘‘No Material Relationship Test’’

Section (2)(B)(ii) of the proposed 

acceptable practices precludes a DCM 

director from being considered public if 

he or she is a member of the DCM, or 

employed by or affiliated with a 

member. A director is ‘‘affiliated with a 

member’’ if he or she is an officer or 

director of the member. The 

Commission hereby adds an additional 

element to that definition: a DCM 

director is affiliated with a member if he 

or she has any relationship with the 

member such that his impartiality could 

be called in question in matters 

concerning the member. 

The Commission believes that this 

additional element of ‘‘affiliated’’ is a 

natural outgrowth of its original 

proposal. In particular, the proposed 

acceptable practices already precluded a 

DCM’s public directors from also 

serving as employees, officers, or 

directors of a member. Combined with 

the materiality test in Section (2)(A) of 

the proposed acceptable practices, the 

Commission’s intent to capture a broad 

array of relationships is clear. Properly 

applied, the proposed Public Director 

Acceptable Practice already excluded 

from service as public directors persons 

whose relationship with a member firm 

could call their impartiality into 

question. Whether the relevant 

relationships are employment, or 

similar to employment—independent 

contracting, legal services, consulting, 

or other relationships—they are 

precluded by the Public Director 

Acceptable Practice. Conforming 

language has been added to the final 

acceptable practices. 

G. Elimination of ROCs’ Periodic 

Reporting Requirements 

Finally, the Commission is removing 

certain language from Section 3(B)(v) of 

the proposed acceptable practices. 

Among other things, this section called 

for ROCs to ‘‘prepare periodic reports 

for the board of directors and an annual 

report assessing the contract market’s 

self-regulatory program.***’’ While 

the annual reporting obligation remains 

in full effect, the Commission has 

determined that an explicit requirement 

to prepare periodic reports for the board 

is unnecessary at this time. DCM boards 

of directors are free to request reports, 

updates, and information from 

committees whenever they wish, and 

committees are free to provide them 

even if not requested. Nothing in the 

ROC Acceptable Practice is intended to 

change that dynamic. 


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81 7 U.S.C. 19(a). 

82E.g, Fishermen’s Dock Co-op., Inc. v. Brown. 75 

F.3d 164 (4th Cir. Va. 1996); Center for Auto Safety 

v. Peck, 751 F.2d 1336 (D.C. Cir. 1985) (agency has 

discretion to weigh factors in undertaking costsbenefits analyses). 

83See, e.g., CME CL 29 at 9; NYMEX CL 28 at 10–

11; NYBOT CL 22 at 4; CBOT CL 21 at 3. 

84See, e.g., NYMEX CL 28 at 11–13; CME CL 29 

at 9; NYBOT CL 22 at 2; Comment of Donald L. 

Gibson, CL 25 at 1. 

85 KCBT at CL 8 at 2; NYBOT CL at 4. NYBOT 

has informed the Commission of its intent to be 

acquired by ICE and run as a for-profit subsidiary. 

Accordingly, its comment has little relevance to its 

own contemplated future circumstances. 

86See HedgeStreet CL 17. 

87NYMEX CL at 20 n.32. 

88CME CL 29 at 14; CBOT CL 21 at 6–7; NYMEX 

CL 28 at 5–6, 15. 

V. Related Matters 

A. Cost-Benefit Analysis 

Section 15(a) of the CEA,81 as 

amended by Section 119 of the CFMA, 

requires the Commission to consider the 

costs and benefits of its action before 

issuing a new regulation or order under 

the CEA. By its terms, Section 15(a) 

does not require the Commission to 

quantify the costs and benefits of its 

action or to determine whether the 

benefits of the action outweigh its costs. 

Rather, Section 15(a) simply requires 

the Commission to ‘‘consider the costs 

and benefits’’ of the subject rule or 

order. 

Section 15(a) further specifies that the 

costs and benefits of the proposed rule 

or order shall be evaluated in light of 

five broad areas of market and public 

concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission may, in its discretion, give 

greater weight to any one of the five 

enumerated areas of concern and may, 

in its discretion, determine that, 

notwithstanding its costs, a particular 

rule or order is necessary or appropriate 

to protect the public interest or to 

effectuate any of the provisions or to 

accomplish any of the purposes of the 

CEA.82

In the proposing release, the 

Commission considered the costs and 

benefits of the acceptable practices, 

requested comment on the application 

of the criteria contained in Section 15(a) 

of the CEA, and invited commenters to 

submit any quantifiable data that they 

might have. 

DCM commenters asserted that the 

costs of compliance outweighed any 

benefit, particularly the costs of 

amending governing documents in the 

manner required by Delaware corporate 

law. A number of DCMs and individuals 

contended that the Board Composition 

Acceptable Practice (and the other 

proposed acceptable practices) is 

unnecessary and that the Commission’s 

cost-benefit analysis is flawed. 

Commenters asserted that the acceptable 

practices present no or minimal benefit, 

since the Commission failed to 

demonstrate any problems in the futures 

industry to warrant issuance of any of 

the acceptable practices.83 Several 

commenters distinguished between 

securities industry reforms, which 

followed public scandals, and the recent 

absence of such events in the futures 

industry.84

As noted above, however, the 

Commission identified significant 

futures industry trends, including 

increased competition and changing 

ownership structures, which justify the 

acceptable practices as a prophylactic 

measure to minimize conflicts of 

interest in DCM decision making and to 

promote public confidence in the 

futures markets in the altered landscape. 

Minimizing conflicts and promoting 

public confidence in the futures markets 

are significant benefits for the futures 

industry, market participants, and the 

national public interest served by the 

futures markets. 

KCBT and NYBOT commented that, 

as small, non-public DCMs, they do not 

present the types of conflicts the 

Commission sought to address in 

expanding public participation on DCM 

governing boards.85 HedgeStreet, a 

small electronic DCM, expressed similar 

views.86 The Commission sees no 

rational basis for the proposition that 

size insulates a DCM from conflicts of 

interest. The potential impact arising 

from an improperly managed conflict 

may well be less at a smaller DCM than 

at a large one. The magnitude of 

potential harm is not the appropriate 

standard for taking prophylactic 

measures. What matters is whether the 

means proposed will impact small 

DCMs disproportionately. Neither 

KCBT, NYBOT, nor HedgeStreet have 

identified a disproportionate burden. 

Nor have they shown how their status 

as non-public DCMs immunizes them 

from conflicts. As the Commission made 

clear in proposing the acceptable 

practices, DCMs that become public, 

stockholder-owned corporations face an 

additional, new layer of conflict. 

Conflicts are inherent in other forms of 

ownership as well. Such conflicts may 

be minimized at all sizes and forms of 

DCMs by an increase in the percentage 

of public directors. 

If any DCM faces a particular burden 

peculiar to its individual circumstances 

in complying with the acceptable 

practices, that DCM may, as a matter of 

statute, choose an alternative method of 

complying with Core Principle 15 that 

is responsive to its circumstances. 

However, such DCM must still 

demonstrate, to the Commission’s 

satisfaction, that its alternative method 

effectively addresses conflicts of interest 

in decision making under Core Principle 

15, including structural conflicts of 

interest. 

DCM commenters asserted that 

complying with the Board Composition 

Acceptable Practice will be an 

expensive undertaking requiring 

amendment of corporate charters and 

other documents, and that the 

Commission gave too little 

consideration to these costs. For 

example, NYMEX states: 

The process of preparing * * * bylaw 

changes requires a commitment of time both 

by in-house exchange staff as well as by 

specialized legal advisors. This process can 

be fairly time-intensive with regard to review 

by such professionals of various drafts of 

amendments and other material for 

shareholders in relation to the successive 

SEC filings. There are the obvious costs 

generated by numerous runs by the 

applicable print shop specializing in SEC 

filing productions as well as the not 

inconsiderable costs of overnight shipping of 

the shareholder materials to hundreds if not 

thousands of shareholders of record.87

Arguments such as these are not 

persuasive. NYMEX describes a process, 

and asserts that it entails a cost, but fails 

even to estimate that cost, or to place 

the cost in any kind of context that 

would allow the Commission to judge 

the level of burden. Other comments 

alleging burdensome costs are similarly 

flawed. The Commission has no basis to 

conclude that compliance is other than 

a reasonable cost of doing business in an 

industry subject to federal oversight. 

Moreover, the costs may be phased in 

over a period of time. In this final 

release, although the acceptable 

practices will be effective immediately, 

the Commission is adopting a phase-in 

period of two years or two board 

election cycles, whichever occurs first. 

The DCMs’ contentions that any level 

of compliance is burdensome because 

they already are subject to other 

governance regimes miss the mark. 

CME, CBOT, and NYMEX essentially 

contended that the governance 

provisions of the Delaware General 

Corporation Law under which they are 

organized, and the NYSE Listing 

Standards, contain sufficient provisions 

to assure sound governance.88 The 


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89NYBOT CL 22 at 3–4; KCBT CL 8 at 1–2; for 

their supporters, see, e.g., comment of Michael 

Braude, CL 10 at 1. 

90CME CL 29 at 8. 

91 Del. Code Ann. tit. 8, § 141(a). 

92 D. Pease, ‘‘Outside Directors: Their Importance 

to the Corporation and Protection from Liability,’’

12 Del. J. Corp. L. 25, 31 et seq. (1987) (citing 

extensive authority and noting the legal advantages 

of outside directors). 

93See, e.g., Comment of Dennis M. Erwin, CL 18 

at 1; Comment of John Legg, CL 14 at 1; and 

Comment of Robert J. Rixey, CL 11 at 1. 

94NYMEX CL 32 at 20. 

95 Id. 96 Id. 

member-owned DCMs, NYBOT, KCBT, 

and their supporters, state that the 

diversity standards of Core Principle 16 

provide an adequate bulwark against 

conflicts of interest, and that the 

membership presence on their boards 

will be diluted if a large contingent of 

public directors is admitted.89 These 

arguments overlook the overarching 

purpose of the Board Composition 

Acceptable Practice, which is expressly 

to minimize conflicts of interest by 

addressing the keystone of all corporate 

decision making—the board of directors. 

CME stated that the responsibility 

imposed on public directors to act in the 

public interest actually conflicts with 

the duty owed to shareholders under 

Delaware corporate law and the NYSE 

Listing Standards.90 The Commission’s 

review of corporate law authority 

reveals no such conflict. These 

proposals are entirely consistent with 

bedrock corporate law principles: as 

Delaware corporations, they are run ‘‘by 

or under the Board of Directors.’’ 91

Directors act as fiduciaries of 

stockholders, to be sure, but that does 

not mean the performance of their 

duties is limited to serving the narrow 

interests of stockholders. Those affairs 

include complying with the various 

statutes to which the corporation is 

subject. Shareholders are well-served or 

ill-served by the quality of the directors’

discharge of their statutory duties. 

Corporate law experts generally agree 

that outside directors benefit corporate 

governance generally. ‘‘[M]ost persons 

in academia and business agree that 

outside directors play an important role 

in the effective functioning of the 

board.’’ 92 The suggestion of some 

commenters that public directors have 

an inherent conflict between the public 

interest and their duty to shareholders 

is misplaced. The acceptable practices 

address DCM governing boards, not the 

boards of parent public holding 

companies. DCMs—and their governing 

bodies—are vested with a public 

interest duty under the plain text of the 

CEA. Moreover, the public interest duty 

applies to nonpublic as well as public 

directors. The Commission is aware of 

overlapping board memberships—i.e., 

that the members of a DCM governing 

board may be the same individuals as 

those who serve on the parent board. 

This is entirely permissible. When an 

individuals sits, deliberates and acts in 

respect of the governance of the 

registered entity, he or she must do so 

consistently with the public interest 

mandate of the CEA. 

A number of commenters who wrote 

in support of KCBT and NYBOT 

assumed that public directors will lack 

interest and experience, and add little to 

board deliberations.93 These 

commenters, however, offered no 

empirical evidence to support their 

speculation. The Commission notes that 

many DCM boards already include 

public directors who have been deemed 

qualified and competent by the DCMs. 

As discussed previously, the boards of 

exchanges such as the KCBT, MGEX, 

NYMEX, NYBOT, and CME, are 

typically 20% or more non-member. 

Moreover, the acceptable practices do 

not preclude non-member producers, 

retired and former industry persons, 

academics, and others from being 

considered public directors, which 

should provide a significant pool of 

futures industry experience from which 

to draw. DCMs that fear adding public 

directors will expand their boards to an 

unwieldy size may comply with the 

acceptable practices by phasing in 

public directors into existing seats. 

One commenter contended that in 

prior cost-benefit analyses, the 

Commission has addressed each of the 

five considerations under Section 15(a) 

separately, and that this approach 

would have facilitated public 

comment.94 However, the Commission 

has not always addressed each 

consideration separately in its 

rulemakings, nor is it required by the 

statute to do so. Section 15(a) requires 

that costs and benefits be evaluated in 

terms of the five considerations, but the 

Commission may give greater weight to 

any one of them. The cost-benefit 

analysis in the proposed acceptable 

practices provided sufficient notice to 

the public regarding the considerations 

to which the Commission accorded the 

greatest weight. The same commenter 

asserted that the Commission should 

endeavor to apply the relevant factors 

separately to each major proposal.95

Again, however, the statute does not 

require that the Commission apply the 

factors in this fashion, but allows it to 

consider the costs and benefits in light 

of the impact of its proposal as a whole. 

Finally, the commenter encouraged the 

Commission to consider regulatory 

alternatives in its cost-benefit analysis.96

As noted above, however, the only 

alternative suggested by the commenters 

was that the Commission do nothing. 

They suggested no other alternative that 

would address the concerns cited by the 

Commission in proposing the acceptable 

practices. In the Commission’s 

judgment, these acceptable practices 

serve to protect the public interest in a 

manner that minimizes the costs to the 

industry while demonstrating 

compliance with Core Principle 15. 

As was discussed in the proposing 

release, the acceptable practices 

described herein are safe harbors for 

compliance with Core Principle 15’s 

conflict of interest provisions. They 

offer DCMs the opportunity to meet the 

requirements of Core Principle 15 

through a regulatory governance 

structure that insulates their regulatory 

functions from their commercial 

interests. The Board Composition 

Acceptable Practice provides that DCMs 

implement boards of directors and 

executive committees thereof that are at 

least 35% public. The ROC Acceptable 

Practice further provides that all DCMs 

place oversight of core regulatory 

functions in the hands of board-level 

ROCs composed exclusively of ‘‘public’’

directors. The Public Director 

Acceptable Practice offers guidance on 

what constitutes a ‘‘public’’ director. In 

addition, the Disciplinary Panel 

Acceptable Practice suggests minimum 

composition standards for DCM 

disciplinary committees. As noted 

above, although the acceptable practices 

will be effective immediately, the 

Commission is allowing a phase-in 

period for DCMs to implement them. 

The proposed acceptable practices are 

consistent with legislative and 

regulatory requirements, and voluntarily 

undertaken changes in governance 

practices in other financial sectors, such 

as the securities markets, and are 

intended to enhance protection of the 

public. The Commission has 

endeavored to establish the least 

intrusive safe harbors and regulatory 

requirements that reasonably can be 

expected to meet the requirements of 

Core Principle 15 of the CEA. These 

acceptable practices advance the 

Commission’s mandate of assuring the 

continued existence of competitive and 

efficient markets and to protect the 

public interest in markets free of fraud 

and abuse. They nevertheless may be 

expected to entail some costs, including, 

among the most foreseeable, those 

attendant to recruiting and appointing 

additional directors, amending 

corporate documents, making necessary 


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Federal Register / Vol. 72, No. 30 / Wednesday, February 14, 2007 / Rules and Regulations 6957 

97Policy Statement and Establishment of 

Definitions of ‘‘Small Entities’’ for Purposes of the 

Regulatory Flexibility Act, 47 FR 18618, 18619 

(Apr. 30, 1982). 

rule changes and certifying them to the 

Commission, and appointing a Chief 

Regulatory Officer. In light of the 

reduction of the percentage of public 

board members from 50% in the Board 

Composition Acceptable Practice as 

proposed to at least 35%, and the phasein period, the Commission believes that 

these costs will not impose a significant 

burden and can be borne over time. 

After considering the costs and benefits 

of the acceptable practices, and 

considering the comments received in 

response to its proposal, the 

Commission has determined to issue the 

acceptable practices for Core Principle 

15 with respect to DCMs. 

B. Paperwork Reduction Act of 1995 

The acceptable practices contain 

information collection requirements. As 

required by the Paperwork Reduction 

Act of 1995 (44 U.S.C. 3504(h)), the 

Commission has submitted a copy of 

this section and the acceptable practices 

to the Office of Management and Budget 

(‘‘OMB’’) for its review. 

The revision of collection of 

information has been reviewed and 

approved by the Office of Management 

and Budget pursuant to the Paperwork 

Reduction Act, under control number 

3038–0052. An agency may not conduct 

or sponsor, and a person is not required 

to respond to, a collection of 

information unless it displays a 

currently valid control number. In the 

Notice of Proposed Acceptable 

Practices, the Commission estimated the 

paperwork burden that could be 

imposed by the acceptable practices and 

solicited comment thereon. 71 FR 

38740, 38748 (July 7, 2006). No specific 

or sufficiently material comment was 

received. 

Copies of the information collection 

submission to OMB are available from 

the Commission Clearance Officer, 

Three Lafayette Centre, 1155 21st Street, 

NW., Washington DC 20581, (202) 418–

5160. 

C. Regulatory Flexibility Act 

The Regulatory Flexibility Act, 5 

U.S.C. 601 et seq., requires federal 

agencies, in promulgating rules, to 

consider the impact of those rules on 

small entities. The final acceptable 

practices affect designated contract 

markets. The Commission has 

previously determined that designated 

contract markets are not small entities 

for purposes of the Regulatory 

Flexibility Act.97 Accordingly, the 

Chairman, on behalf of the Commission, 

hereby certifies pursuant to 5 U.S.C. 

605(b) that the final acceptable practices 

will not have a significant economic 

impact on a substantial number of small 

entities. 

VI. Text of Acceptable Practices for 

Core Principle 15 

List of Subjects in 17 CFR Part 38 

Commodity futures, Reporting and 

recordkeeping requirements. 

■ In light of the foregoing, and pursuant 

to the authority in the Act, and in 

particular, Sections 3, 5, 5c(a) and 8a(5) 

of the Act, the Commission hereby 

amends part 38 of title 17 of the Code 

of Federal Regulations as follows: 

PART 38—DESIGNATED CONTRACT 

MARKETS 

■ 1. The authority citation for part 38 is 

revised to read as follows: 

Authority: 7 U.S.C. 2, 5, 6, 6c, 7, 7a–2 and 

12a, as amended by Appendix E of Pub. L. 

106–554, 114 Stat. 2763A–365. 

■ 2. In Appendix B to Part 38 amend 

Core Principle 15 by adding paragraph 

(b) ‘‘Acceptable Practices’’ to read as 

follows: 

Appendix B to Part 38—Guidance on, 

and Acceptable Practices in, 

Compliance With Core Principles. 

* * * * * 

Core Principle 15 of section 5(d) of the Act: 

Conflicts of Interest 

* * * * * 

(b) Acceptable Practices. All designated 

contract markets (‘‘DCMs’’ or ‘‘contract 

markets’’) bear special responsibility to 

regulate effectively, impartially, and with 

due consideration of the public interest, as 

provided for in Section 3 of the Act. Under 

Core Principle 15, they are also required to 

minimize conflicts of interest in their 

decision-making processes. To comply with 

this Core Principle, contract markets should 

be particularly vigilant for such conflicts 

between and among any of their selfregulatory responsibilities, their commercial 

interests, and the several interests of their 

management, members, owners, customers 

and market participants, other industry 

participants, and other constituencies. 

Acceptable Practices for minimizing conflicts 

of interest shall include the following 

elements: 

(1) Board Composition for Contract 

Markets 

(i) At least thirty-five percent of the 

directors on a contract market’s board of 

directors shall be public directors; and 

(ii) The executive committees (or similarly 

empowered bodies) shall be at least thirtyfive percent public. 

(2) Public Director 

(i) To qualify as a public director of a 

contract market, an individual must first be 

found, by the board of directors, on the 

record, to have no material relationship with 

the contract market. A ‘‘material 

relationship’’ is one that reasonably could 

affect the independent judgment or decision 

making of the director. 

(ii) In addition, a director shall not be 

considered ‘‘public’’ if any of the following 

circumstances exist: 

(A) The director is an officer or employee 

of the contract market or a director, officer or 

employee of its affiliate. In this context, 

‘‘affiliate’’ includes parents or subsidiaries of 

the contract market or entities that share a 

common parent with the contract market; 

(B) The director is a member of the contract 

market, or a person employed by or affiliated 

with a member. ‘‘Member’’ is defined 

according to Section 1a(24) of the 

Commodity Exchange Act and Commission 

Regulation 1.3(q). In this context, a person is 

‘‘affiliated’’ with a member if he or she is an 

officer or director of the member, or if he or 

she has any other relationship with the 

member such that his or her impartiality 

could be called into question in matters 

concerning the member; 

(C) The director, or a firm with which the 

director is affiliated, as defined above, 

receives more than $100,000 in combined 

annual payments from the contract market, 

any affiliate of the contract market, or from 

a member or any person or entity affiliated 

with a member of the contract market. 

Compensation for services as a director does 

not count toward the $100,000 payment 

limit, nor does deferred compensation for 

services prior to becoming a director, so long 

as such compensation is in no way 

contingent, conditioned, or revocable; 

(D) Any of the relationships above apply to 

a member of the director’s ‘‘immediate 

family,’’ i.e., spouse, parents, children, and 

siblings. 

(iii) All of the disqualifying circumstances 

described in Subsection (2)(ii) shall be 

subject to a one-year look back. 

(iv) A contract market’s public directors 

may also serve as directors of the contract 

market’s parent company if they otherwise 

meet the definition of public in this Section 

(2). 

(v) A contract market shall disclose to the 

Commission which members of its board are 

public directors, and the basis for those 

determinations. 

(3) Regulatory Oversight Committee 

(i) A board of directors of any contract 

market shall establish a Regulatory Oversight 

Committee (‘‘ROC’’) as a standing committee, 

consisting of only public directors as defined 

in Section (2), to assist it in minimizing 

actual and potential conflicts of interest. The 

ROC shall oversee the contract market’s 

regulatory program on behalf of the board. 

The board shall delegate sufficient authority, 

dedicate sufficient resources, and allow 

sufficient time for the ROC to fulfill its 

mandate. 

(ii) The ROC shall: 

(A) Monitor the contract market’s 

regulatory program for sufficiency, 

effectiveness, and independence; 

(B) Oversee all facets of the program, 

including trade practice and market 

surveillance; audits, examinations, and other 

regulatory responsibilities with respect to 

member firms (including ensuring 


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6958 Federal Register / Vol. 72, No. 30 / Wednesday, February 14, 2007 / Rules and Regulations 

compliance with financial integrity, financial 

reporting, sales practice, recordkeeping, and 

other requirements); and the conduct of 

investigations; 

(C) Review the size and allocation of the 

regulatory budget and resources; and the 

number, hiring and termination, and 

compensation of regulatory personnel; 

(D) Supervise the contract market’s chief 

regulatory officer, who will report directly to 

the ROC; 

(E) Prepare an annual report assessing the 

contract market’s self-regulatory program for 

the board of directors and the Commission, 

which sets forth the regulatory program’s 

expenses, describes its staffing and structure, 

catalogues disciplinary actions taken during 

the year, and reviews the performance of 

disciplinary committees and panels; 

(F) Recommend changes that would ensure 

fair, vigorous, and effective regulation; and 

(G) Review regulatory proposals and advise 

the board as to whether and how such 

changes may impact regulation. 

(4) Disciplinary Panels 

All contract markets shall minimize 

conflicts of interest in their disciplinary 

processes through disciplinary panel 

composition rules that preclude any group or 

class of industry participants from 

dominating or exercising disproportionate 

influence on such panels. Contract markets 

can further minimize conflicts of interest by 

including in all disciplinary panels at least 

one person who would qualify as a public 

director, as defined in Subsections (2)(ii) and 

(2)(iii) above, except in cases limited to 

decorum, attire, or the timely submission of 

accurate records required for clearing or 

verifying each day’s transactions. If contract 

market rules provide for appeal to the board 

of directors, or to a committee of the board, 

then that appellate body shall also include at 

least one person who would qualify as a 

public director as defined in Subsections 

(2)(ii) and (2)(iii) above. 

* * * * * 

Issued in Washington, DC, on January 31, 

2007 by the Commission. 

Eileen A. Donovan, 

Acting Secretary of the Commission. 

[FR Doc. E7–2528 Filed 2–13–07; 8:45 am] 

BILLING CODE 6351–01–P 

DEPARTMENT OF VETERANS 

AFFAIRS 

38 CFR Part 3 

RIN 2900–AM37 

Home Schooling and Educational 

Institution 

AGENCY: Department of Veterans Affairs. 

ACTION: Final rule. 

SUMMARY: The Department of Veterans 

Affairs (VA) is amending its 

adjudication regulation regarding the 

definition of a child for purposes of 

establishing entitlement to additional 

monetary benefits for a child who is 

home-schooled. VA defines educational 

institutions to include home-school 

programs that meet the legal 

requirements of the States (by 

complying with the compulsory 

attendance laws of the States) in which 

they are located. The proposed rule 

published in the Federal Register on 

July 13, 2006, is adopted as final, 

without change. 

DATES: Effective Date: March 16, 2007. 

FOR FURTHER INFORMATION CONTACT: 

Maya Ferrandino, Regulations Staff, 

Compensation and Pension Service, 

Veterans Benefits Administration, 

Department of Veterans Affairs, 810 

Vermont Avenue, NW., Washington, DC 

20420, (202) 273–7210. 

SUPPLEMENTARY INFORMATION: In a 

document published in the Federal 

Register on July 13, 2006, (71 FR 

39616), VA proposed to amend its 

regulations regarding the definition of a 

child for purposes of establishing 

entitlement to additional monetary 

benefits for a child who is homeschooled. VA defined educational 

institutions and included home-school 

programs that meet the legal 

requirements of the States (by 

complying with the compulsory 

attendance laws of the States) in which 

they are located. 

The 60-day public comment period 

ended on September 11, 2006. One 

comment was received from the Home 

School Legal Defense Association and it 

supported the rule change. 

Based on the rationale set forth in the 

proposed rule and the rationale 

contained in this document, we are 

adopting the provisions of the proposed 

rule as a final rule without change. 

Paperwork Reduction Act 

The collection of information under 

the Paperwork Reduction Act (44 U.S.C. 

3501–3521) referenced in this final rule 

has an existing Office of Management 

and Budget (OMB) approval as a form. 

The form is VA Form 21–674, Request 

for Approval of School Attendance, 

OMB approval number 2900–0049. No 

changes are made in this final rule to 

the collection of information. 

Regulatory Flexibility Act 

The Secretary hereby certifies that 

this final rule will not have a significant 

economic impact on a substantial 

number of small entities as they are 

defined in the Regulatory Flexibility 

Act, 5 U.S.C. 601–612. This final rule 

would not affect any small entities. 

Therefore, pursuant to 5 U.S.C. 605(b), 

this final rule is exempt from the initial 

and final regulatory flexibility analysis 

requirements of sections 603 and 604. 

Executive Order 12866 

Executive Order 12866 directs 

agencies to assess all costs and benefits 

of available regulatory alternatives and, 

when regulation is necessary, to select 

regulatory approaches that maximize 

net benefits (including potential 

economic, environmental, public health 

and safety, and other advantages; 

distributive impacts; and equity). The 

Executive Order classifies a ‘‘significant 

regulatory action,’’ requiring review by 

OMB unless OMB waives such review, 

as any regulatory action that is likely to 

result in a rule that may: (1) Have an 

annual effect on the economy of $100 

million or more or adversely affect in a 

material way the economy, a sector of 

the economy, productivity, competition, 

jobs, the environment, public health or 

safety, or State, local, or tribal 

governments or communities; (2) Create 

a serious inconsistency or otherwise 

interfere with an action taken or 

planned by another agency; (3) 

Materially alter the budgetary impact of 

entitlements, grants, user fees, or loan 

programs or the rights and obligations of 

recipients thereof; or (4) Raise novel 

legal or policy issues arising out of legal 

mandates, the President’s priorities, or 

the principles set forth in the Executive 

Order. 

The economic, interagency, 

budgetary, legal, and policy 

implications of this final rule have been 

examined, and it has been determined 

to be a significant regulatory action 

under the Executive Order because it is 

likely to result in a rule that may raise 

novel legal or policy issues arising out 

of legal mandates, the President’s 

priorities, or the principles set forth in 

the Executive Order. 

Unfunded Mandates 

The Unfunded Mandates Reform Act 

of 1995 requires, at 2 U.S.C. 1532, that 

agencies prepare an assessment of 

anticipated costs and benefits before 

issuing any rule that may result in the 

expenditure by State, local, and tribal 

governments, in the aggregate, or by the 

private sector, of $100 million or more 

(adjusted annually for inflation) in any 

one year. This final rule would have no 

such effect on State, local, and tribal 

governments, or on the private sector. 

Catalog of Federal Domestic Assistance 

Numbers and Titles 

The Catalog of Federal Domestic 

Assistance program numbers and titles 

for this final rule are 64.104 Pension for 

Non-Service-Connected Disability for 

Veterans, 64.105 Pension to Veterans 

Surviving Spouses, and Children, 

64.109 Veterans Compensation for 


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