[Federal Register Volume 61, Number 87 (Friday, May 3, 1996)]
[Proposed Rules]
[Pages 19869-19878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10936]



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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 156


Proposed Rulemaking Concerning Voting by Interested Members of 
Self-Regulatory Organization Governing Boards and Committees and 
Concerning the Publicizing of Broker Association Memberships

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
proposing a rulemaking which would implement the statutory directives 
of Section 5a(a)(17) of the Commodity Exchange Act (``CEA'') as it was 
amended by Section 217 of the Futures Trading Practices Act of 1992 
(``FTPA'').<SUP>1
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    \1\ Pub. L. No. 102-546, sec. 217, 106 Stat. 3590 (1992).
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    The proposed rulemaking would establish a new Commission Regulation 
1.69 which would require self-regulatory organizations (``SROs'') to 
adopt rules prohibiting governing board, disciplinary committee and 
oversight panel members from deliberating and voting on certain matters 
where the member has either a relationship with the matter's named 
party in interest or a financial interest in the matter's outcome. The 
proposed rulemaking also would amend existing Commission Regulations 
1.3, 1.41 and 1.63 to make modifications made necessary by new 
Commission Regulation 1.69. The Commission also is proposing to add a 
new Regulation 156.4 to require that contract markets make more readily 
available to the public the identity of members of broker associations 
at their respective exchanges.

DATES: Comments on the proposed rules and proposed rule amendments must 
be received by July 2, 1996.

ADDRESSES: Interested persons should submit their views and comments to 
Jean A. Webb, Secretary, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581. 
Telephone: (202) 418-5100.

FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Special Counsel, 
Division of Trading and Markets, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581. 
Telephone: (202) 418-5481.

SUPPLEMENTARY INFORMATION:

I. Introduction

    Section 217 of the FTPA amended Section 5a(a)(17) of the CEA to 
provide that each contract market must ``provide for the avoidance of 
conflict of interest in deliberations by [its] governing board and any 
disciplinary and oversight committees.'' <SUP>2 FTPA Section 217 
further describes certain conflict situations where committee members 
must abstain from deliberations and voting, while also requiring that 
the Commission promulgate regulations in this regard.
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    \2\ For the purposes of this release, the term ``committee'' 
will generally be used to include governing boards, disciplinary 
committees and oversight committees unless otherwise specified.
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    Consistent with Section 217 of the FTPA, proposed Commission 
Regulation 1.69 would generally bar an SRO committee member from 
deliberations and voting on a committee decision where the member could 
potentially be unduly influenced, due to either financial or personal 
concerns, by the outcome of the decision. The Commission's proposed 
rulemaking is intended to ensure that SRO committee actions are not 
infected by any conflict of interest and are in the best interest of 
the entire SRO. By furthering the impartiality of the SRO 
decisionmaking process, the Commission believes that Regulation 1.69 
should promote public confidence in the integrity of the self-
regulatory process.<SUP>3
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    \3\ The Commission notes that proposed Regulation 1.69 would be 
the latest in an ongoing series of recent Commission rulemakings 
aimed at enhancing the fairness and impartiality of the SRO 
committee decisionmaking process. In 1990, the Commission adopted 
Regulation 1.63 prohibiting persons with histories of disciplinary 
violations from serving on various SRO committees. Prompted by the 
FTPA, in 1993, the Commission adopted three separate rulemakings 
dealing with SRO committee procedures and service. First, the 
Commission amended Regulation 1.41 to establish conditions under 
which contract markets may take emergency actions without prior 
Commission approval, while also establishing specific procedures for 
Commission review of such emergency actions. Second, the Commission 
amended Regulation 1.59 to enhance its prohibition of SRO governing 
board members and employees disclosing or trading on inside 
information. Third, the Commission promulgated Regulation 1.64 which 
establishes committee composition requirements to ensure that a 
diversity of each SRO's membership is represented on its committees.

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[[Page 19870]]

    The Commission notes that the governing boards of futures exchanges 
are legally bound to not act in ``bad faith'' when taking actions on 
behalf of an exchange. This ``bad faith'' standard was first 
articulated in Daniel v. Board of Trade of the City of Chicago, 164 
F.2d 815 (7th Cir., 1947), a case arising from Chicago Board of Trade 
(``CBOT'') emergency actions raising the price limits on various grain 
futures contracts due to price volatility. The plaintiffs in the case 
lost money on their grain positions as a result of the CBOT's actions 
and claimed that the CBOT's Board members acted ``wilfully, 
maliciously, and for their own personal gain'' in imposing the 
emergency price limits. 164 F.2d at 818. In the Daniel case, the Court 
recognized that while exchange boards have a ``duty'' to address market 
emergencies, they also have a ``relation to the public'' which requires 
that they ``act with the utmost, objectivity, impartiality, honesty, 
and good faith.'' 164 F.2d at 819-20. In order to prevail in a suit 
challenging an emergency action, the Court determined that the 
plaintiff must show ``bad faith amounting to fraud,'' since fraud would 
imply a board's breach of its public trust. Id.
    The ``bad faith'' standard governing exchange boards has been 
consistently followed and further refined by the Commission and the 
courts. Most recently, the Commission included a bad faith standard as 
part of its amendment to Commission Regulation 1.41(f) setting forth 
standards to be used by the Commission in assessing temporary exchange 
actions addressing Regulation 1.41(a)(4) emergencies.<SUP>4 The courts 
have applied the ``bad faith'' standard a number of times to cases 
where a board member may have had a personal financial interest in a 
board decision due to his market position.<SUP>5
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    \4\ Under Regulation 1.41(f)(4)(i), within ten days after 
Commission receipt of a notice of an exchange temporary emergency 
action, the Commission will make a determination to permit such an 
action to remain in effect unless it is: (1) arbitrary, capricious 
or an abuse of discretion; (2) lacking a reasonable basis in fact; 
or, (3) taken in bad faith by the contract market or its officials.
    See 58 FR 26229 (May 3, 1993) for a full description of the 
Commission's rulemaking regarding the review of contract market 
emergency actions.
    \5\ See, e.g., Sam Wong & Sons, Inc. v. New York Mercantile 
Exchange, 735 F.2d 355 (7th Cir. 1975) and Bishop v. Commodity 
Exchange, Inc., 564 F.Supp. 1557 (S.D.N.Y. 1983).
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    The Commission believes that by including more specificity in the 
factors to be considered with respect to barring persons with potential 
financial or personal interests from deliberating and voting on 
committee decisions, the proposed rulemaking should reduce the 
potential for collateral attack of such committee decisions on the 
grounds that they were made in ``bad faith.'' The Commission has 
attempted to structure proposed Regulation 1.69 to provide guidance to 
SROs, consistent with the new provisions of the FTPA, on what type of 
committee member circumstances could be the basis for ``bad faith'' 
challenges.
    In proposing Commission Regulation 1.69, the Commission does not 
intend to exclude the views of any particular group or groups 
represented on SRO committees. By requiring that committee members with 
potential biases abstain from participating in committee proceedings, 
the Commission is attempting only to ensure that SRO committee 
decisions serve the best interests of the entire SRO membership and the 
public, rather than the self-interests of a few committee 
members.<SUP>6
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    \6\ The Commission notes that current Regulation 1.64 
establishes composition requirements for SRO committees in order to 
ensure that a diversity of membership interests are represented on 
such committees. See 58 FR 37644 (July 13, 1993) for a full 
description of Commission Regulation 1.64 and its underlying 
rationale. In this connection, the Commission specifically invites 
comment on how to balance the goals of Regulation 1.64 and the goals 
of FTPA Section 217 and proposed Commission Regulation 1.69 with 
respect to conflicts.
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II. Description of Proposed Rulemaking

    The following description consists of a section-by-section analysis 
of the Commission's proposed rulemaking. In addition to explaining the 
rationale and operation of the proposal, this description is intended 
to provide interested persons with a framework for addressing issues 
which may be raised by particular provisions of the rulemaking.

A. Proposed Regulation 1.69(a)--Definitions <SUP>7
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    \7\ This section will discuss only those term definitions which 
could raise noteworthy issues.
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1. Self-Regulatory Organizations
    Proposed Regulation 1.69's conflicts restrictions would apply to 
each SRO governing board, disciplinary committee and oversight panel. 
Proposed Regulation 1.69(a)(6)'s definition of SRO would include 
contract markets, clearing organizations and registered futures 
associations (``RFAs''). While Section 217 of the FTPA specifies that 
``contract markets'' must adopt conflict of interest provisions, the 
Commission believes that it is appropriate for proposed Regulation 
1.69's conflicts restrictions to extend to clearing organizations and 
RFAs as well.
    In making clearing organizations subject to proposed Regulation 
1.69, the Commission notes that FTPA Section 217 requires that its 
conflicts restrictions apply to committees handling certain types of 
margin changes. Margin levels in the futures industry, however, are 
established by both contract markets and clearing organizations. The 
Commission does not find any reason to distinguish between contract 
markets and clearing organizations with respect to the potential for 
conflicts of interests when making margin decisions. In addition, there 
are already a number of instances where the Commission has taken CEA 
requirements addressed to contract markets and applied them to clearing 
organizations. For example, Section 5a(a)(12)(A) of the CEA mandates 
Commission review of ``contract market'' rules, while Commission 
Regulation 1.41, which establishes procedures for Commission review of 
such rules, specifically includes clearing organizations within the 
definition of contract markets for these purposes. For these reasons, 
the Commission believes that it would be appropriate to make clearing 
organizations subject to proposed Regulation 1.69.
    The Commission also believes that it would be beneficial to apply 
its proposed rulemaking to RFAs in order to ensure that their 
committees would be able to make decisions which were free from the 
potential taint of committee member bias and self-interest.<SUP>8
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    \8\ As noted in footnote 10 below, however, the rulemaking would 
have a more limited impact on RFAs as opposed to contract markets 
and clearing organizations.
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    The Commission particularly seeks comment on its proposed 
definition of SRO and whether it would be consistent with the 
principles endorsed by FTPA Section 217 to extend this proposed 
rulemaking to clearing organizations and RFAs in addition to contract 
markets.
2. Governing Boards and Oversight Panels
    Proposed Regulation 1.69(a)(2)'s definition of governing board 
would

[[Page 19871]]

include any SRO ``board of directors, board of governors, board of 
managers, or any similar body'' and any subcommittee thereof, such as 
an executive committee, which is authorized to take action on behalf of 
the SRO. Proposed Regulation 1.69 also would apply to SRO oversight 
panels which have the responsibility of formulating and carrying out an 
SRO's self-regulatory responsibilities.<SUP>9
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    \9\ In order to consolidate the Commission's Regulations, 
``oversight panel'' would be defined by a new Commission Regulation 
1.3(tt). That provision would define oversight panel for application 
in both current Regulation 1.63 and proposed Regulation 1.69. The 
definition would be identical to Commission Regulation 1.63(a)(4)'s 
current oversight panel definition.
    The Commission notes that its ``oversight panel'' definition is 
intended to cover floor committees when they make decisions such as 
changing a price quote on a price change register, setting modified 
closing call ranges and establishing settlement prices. Please 
comment on whether the oversight panel definition needs to be 
clarified in any way to incorporate floor committees when they 
engage in such activities.
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3. Disciplinary Committees
    Proposed Regulation 1.69(a)(1) would define an SRO ``disciplinary 
committee'' to mean a body which was authorized by an SRO ``to conduct 
disciplinary proceedings, to settle disciplinary charges, to impose 
sanctions, or to hear appeals thereof.'' <SUP>10 This definition, in 
combination with the proposed formulation of Regulations 1.69(b)(1) and 
(2), would ensure that Regulation 1.69's conflicts restrictions would 
apply to disciplinary committee members when they deliberated and voted 
on matters as a body, but would not apply to members of disciplinary 
committees when they individually exercised disciplinary powers. Thus, 
it would not include a floor committee member who disposes of minor 
disciplinary violations by individually issuing summary fines or other 
limited penalties, but it would apply to instances where more than one 
floor committee member is required to endorse a decision.
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    \10\ In this connection, the Commission also is proposing to 
amend Regulation 1.63's definition of ``disciplinary committee'' so 
that it will be identical to proposed Regulation 1.69(a)(1). To make 
these two definitions identical, Regulation 1.63(a)(2) would be 
revised by deleting ``disciplinary hearings'' and substituting 
``disciplinary proceedings.''
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    While the Commission recognizes that restrictions on conflicted 
members participating in disciplinary matters promotes the impartiality 
of the disciplinary process, it also believes that applying such 
restrictions to floor committee members acting individually may present 
countervailing problems. One apparent disadvantage of such an 
application would be that it might actually diminish the coverage of an 
SRO's compliance program. For example, if an individual floor committee 
member were subject to Regulation 1.69's conflicts restrictions, he 
would be prohibited from summarily fining any floor trader with whom he 
had one of the specified relationships, even if he directly observed 
violative conduct by such a trader. In those instances where such a 
floor committee member was the only committee member responsible for 
monitoring trading activity in a particular pit, such behavior might go 
unpunished.
    Applying conflicts restrictions to disciplinary committee members 
when they act individually might also present more practical 
difficulties. As currently proposed, Regulation 1.69 would require that 
before each disciplinary proceeding SRO staff must determine whether 
any committee member has a conflict in the matter. Floor committee 
members, however, typically issue summary fines to SRO members who 
commit minor rule violations on the trading floor (e.g., violations of 
dress and decorum rules). Requiring floor committee members to submit 
to some prior staff review in these circumstances could undermine, or 
possibly eliminate, their ability to discipline violative behavior 
expeditiously.
    The Commission seeks comment on its proposed application of 
Commission Regulation 1.69's conflicts restrictions to disciplinary 
committees and floor committees in particular. Does the current 
proposed approach strike an equitable balance between the need for an 
impartial disciplinary mechanism versus the need for the deterrent 
effect of having floor committee members on exchange trading floors? 
Are there other ways in which to further both of these goals?
4. Significant Actions
    As explained below, proposed Regulation 1.69's conflicts 
restrictions would apply to SRO committees when they consider any 
``significant action which would not be submitted to the Commission for 
its prior approval.'' Proposed Regulation 1.69(a)(7)'s definition of 
that term would include, at a minimum, two types of SRO actions. First, 
the term would include SRO actions or rule changes which address 
emergencies at an SRO, as they are defined by Commission Regulation 
1.41(a)(4), including actual or attempted market corners, squeezes or 
manipulations. Second, proposed Regulation 1.69(a)(7)'s definition also 
would include SRO margin changes which ``respond to extraordinary 
market conditions when such conditions are likely to have a substantial 
effect on prices in any contract traded or cleared'' at the SRO.<SUP>11
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    \11\ Notably, under this definition, RFA committees would not 
consider either of the two types of SRO actions which would 
constitute a ``significant action which would not be submitted to 
the Commission for its prior approval.'' Accordingly, this aspect of 
Regulation 1.69's conflicts restrictions would be inapplicable to 
RFA committee members. See proposed Commission Regulation 1.69(b)(2) 
and Section II.C. below. RFA committee members would, however, be 
subject to proposed Regulation 1.69(b)(1)'s restrictions on SRO 
committee members considering matters in which they had a 
relationship with the named party in interest (e.g., disciplinary 
cases). See proposed Commission Regulation 1.69(b)(1) and Section 
II.B. below. The Commission invites comment on whether it should 
revise proposed Commission Regulation 1.69 to specifically exclude 
RFA committees from being subject to Regulation 1.69(b)(2)'s 
restrictions on SRO committees which consider a ``significant action 
which would not be submitted to the Commission for its prior 
approval.''
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    The proposed definition of a ``significant action which would not 
be submitted to the Commission for its prior approval'' generally 
follows Congress' definition of that same term in FTPA Section 217. The 
Commission believes that its proposed definition should capture those 
circumstances in which a committee member's conflict would have the 
greatest potential to influence SRO actions. The proposed definition 
has been limited to committee actions which could have an immediate 
impact on the marketplace and, consequently, the positions of SRO 
committee members, because those are the situations in which a 
decision- maker most likely would be influenced by self-interest. The 
proposal does not intend to suggest that any particular significant 
action would have a predictable impact on market prices; in fact, the 
experience of the Commission in assessing the consequences of prior 
emergency actions has been to the contrary. That being said, it is 
critical for public confidence in self-regulation that such actions be 
perceived as being applied even-handedly and not to the advantage or 
disadvantage of any given group. The Commission has attempted to 
formulate a definition which addresses the objectives explicitly set 
forth in the legislation the rulemaking is intended to implement, but 
which, at the same time, does not do unnecessary injury to the 
mechanics of the SRO committee decisionmaking process and the ability 
of the SRO to engage in effective self-governance activities.
    The Commission seeks comment on whether there are any other types 
of SRO actions or rule changes which should be subject to Regulation 
1.69's conflicts restrictions. For instance, the Commission currently 
proposes to limit

[[Page 19872]]

the conflicts restrictions to SRO actions which would not be submitted 
for prior Commission review, because the Commission approval process is 
intended to consider the public interest and to insulate SRO actions 
from impropriety. The rule approval process requires a discussion of 
all opposing views and a statement of the purpose of each rule change. 
Ordinarily, such rule changes do not even have the potential to affect 
prices. Nonetheless, the Commission requests comment on whether the 
public interest would be better served if a broader range of SRO 
actions, whether or not there was prior Commission review, were subject 
to conflicts restrictions. If so, what other types of SRO actions 
should be covered? <SUP>12
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    \12\ For example, should changes to a price quote on a price 
change register, setting modified closing call ranges, or 
establishing settlement prices be particularly included in 
Regulation 1.69's definition of a ``significant action which would 
not be submitted to the Commission for its prior approval.''
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B. Proposed Regulation 1.69(b)(1)--Relationship With Named Party in 
Interest

    Proposed Regulation 1.69(b)(1) would mandate that SROs implement 
rules requiring that committee members abstain from deliberating and 
voting on any matter in which they had a significant relationship with 
the matter's ``named party in interest.'' <SUP>13 Proposed Regulations 
1.69(b)(1) (i) through (v) would list the types of relationships 
between a committee member and named party in interest which would 
require abstention, including family <SUP>14 and employment <SUP>15 
relationships.
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    \13\ For these purposes, proposed Commission Regulation 
1.69(a)(5) would define a ``named party in interest'' as a ``party 
who is identified as the subject of any matter being considered'' by 
an SRO committee.
    \14\ Proposed Regulation 1.69(b)(1)(v) would prohibit a 
committee member from deliberating and voting on a matter if he was 
in the immediate family of the named party in interest. Proposed 
Regulation 1.69(a)(3) would define ``immediate family'' to mean a 
person's ``spouse, parent, stepparent, child, stepchild, sibling, 
stepbrother, stepsister, or in-law.''
    \15\ Under proposed Regulation 1.69(b)(1)(ii), a committee 
member could not deliberate or vote on any matter in which the named 
party interest was an employer, employee or fellow employee of the 
committee member.
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    Another type of relationship which would be the basis for 
abstention, under proposed Regulation 1.69(b)(1)(iv), would be if the 
committee member and the named party in interest had a ``significant, 
ongoing business relationship.'' Under this provision, for example, a 
committee member would be prohibited from participating in a matter in 
which he and the named party were co-owners of a business venture. In 
order to clarify this provision, the Commission proposes to include any 
clearing relationship within the scope of a ``significant, ongoing 
business relationship,'' but proposes to exclude relationships which 
are limited to executing futures or option contract transactions 
<SUP>16 with each other. In drawing this distinction, the Commission 
notes that two parties in a clearing relationship typically rely upon 
each other, to some degree, to carry on their respective businesses. 
Accordingly, the Commission believes that parties to a clearing 
relationship may not be totally impartial if one party was involved in 
considering an SRO committee action which directly bore upon the other 
party. The Commission notes that under proposed Commission Regulation 
1.69(b)(1)(iii), members of a broker association would be required to 
abstain from deliberations and voting on any SRO committee matter in 
which one of its members was a named party in interest.
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    \16\ For these purposes, the Commission would consider exchange 
of futures for physical transactions and CEA Section 4(c) contract 
market transactions to be futures and option contract transactions 
under proposed Regulation 1.69(b)(1)(iv).
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    The Commission invites comment as to whether any other specific 
type of relationship should be included or excluded as a ``significant, 
ongoing business relationship'' for the purposes of proposed Regulation 
1.69(b)(1)(iv). For example, two SRO members might do a significant 
amount of transactional business with each other outside of the SRO as 
counterparties in the over-the-counter market. Could such a 
relationship give rise to a potential conflict because of the frequency 
of contacts? Or, should whether or not a transaction is arms length 
govern the possibility for conflicts?
    While the Commission anticipates that proposed Regulation 
1.69(b)(1)'s restrictions would most oftentimes be applied to 
disciplinary cases because they involve named respondents, the 
provision also would pertain to any matter handled by an SRO governing 
board, disciplinary committee or oversight panel in which there was a 
particular named party in interest. Accordingly, the proposed conflict 
restrictions would apply to such committees if they were to review a 
membership application or consider some action with respect to a 
particular individual (e.g., directing a person to reduce his position 
in a contract).
    The Commission believes that this proposed provision should reduce 
the potential for committee members to be unduly influenced by family 
and personal business considerations. Accordingly, the provision should 
help to assure that committee decisions will be the result of fair 
deliberations and will not be tainted by the real or perceived self-
interest of committee members.
    The Commission notes that Section 217 of the FTPA states that 
contract markets must adopt rules requiring that committee members 
abstain from ``confidential'' deliberations and voting on matters where 
they have a relationship with the named party in interest. Commission 
Regulation 1.69(b)(1), which is being proposed in furtherance of that 
provision, takes the more prophylactic approach of applying its 
conflicts restrictions to all deliberations and voting on such matters, 
whether they are confidential or non-confidential. The Commission 
believes that this approach should help to reduce the potential for 
biased decisionmaking in both settings. Theoretically, in non-
confidential committee meetings outsiders would be able to monitor the 
fairness of a committee's decision-making process. The Commission 
questions, however, whether there could ever be an effective outside 
presence at SRO committee proceedings given their history of usually 
being closed to the public. In addition, the Commission believes that 
even in a public setting it would be difficult to detect any one 
committee member's bias or prejudice on a matter unless the member also 
publicly disclosed any possible relationships with the named party in 
interest.

C. Proposed Regulation 1.69(b)(2)--Financial Interest in an Action

    Proposed Commission Regulation 1.69(b)(2) would require that SRO 
committee members abstain from committee deliberations and voting on 
certain matters in which they would have a ``direct and substantial 
financial interest.'' The proposed restriction would only apply when a 
committee is considering ``a significant action which would not be 
submitted to the Commission for its prior approval.'' As discussed in 
Section II.A. above, those committee actions would include, at a 
minimum, Regulation 1.41(a)(4) emergency actions and margin changes 
which respond to market conditions which are likely to have a 
substantial effect on the prices of any contract traded or cleared at 
the SRO.<SUP>17
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    \17\ See proposed Commission Regulation 1.69(a)(7).

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[[Page 19873]]

    In determining a committee member's financial interest in a 
possible committee action, Regulation 1.69(b)(2) would require SROs to 
review for positions of the member, the member's family, the member's 
firm and the customers of the member's firm held in any contract which 
could be affected by the committee action.<SUP>18 With respect to a 
committee member's personal positions, proposed Regulations 1.69(b)(2) 
(i) and (ii) specifically would require that SROs consider gross 
positions in the subject contract held in the member's personal 
accounts, the member's Regulation 1.3(j) controlled accounts and any 
accounts in which the member had a significant financial interest.
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    \18\ While proposed Regulation 1.69(b)(2) would specify what 
positions SROs must review in determining whether an SRO committee 
member would have a ``direct and substantial financial interest'' in 
an SRO committee action, proposed Regulation 1.69(b)(3) would 
specify what sources of position information an SRO would be 
required to consider, at a minimum, in making such a determination. 
See Section II.D. of this release below for a further description of 
Regulation 1.69(b)(3).
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    Regarding positions of the member's family, proposed Regulation 
1.69(b)(2)(iv) would require that SROs review gross positions held in 
the personal accounts or Regulation 1.3(j) controlled accounts of the 
member's immediate family. For these purposes a committee member's 
immediate family would be defined by proposed Regulation 1.69(a)(3), 
excluding those immediate family members who were not dependents of the 
member and who did not reside with the member. The Commission has 
proposed this exclusion in order to limit the provision to position 
information which a committee member likely would know in the ordinary 
course.
    SROs reviewing for a committee member's financial interest in a 
committee matter also would be required to consider gross positions 
held in the member's firm's proprietary accounts, net positions held in 
customer accounts at the member's firm and gross positions held by any 
customers who constituted a significant proportion of business for the 
member's firm.
    Proposed Commission Regulation 1.69(b)(2) would specifically fix 
the types of positions which SROs would have to review in determining 
whether a committee member had a ``direct and substantial financial 
interest'' in the outcome of the committee's consideration of ``a 
significant action which would not be submitted to the Commission for 
its prior approval.'' The proposal would not, however, set any specific 
standards as to what position size warranted a member's abstention from 
deliberations and voting on a matter. Rather, the Commission has 
endeavored to give SROs flexibility in complying with this aspect of 
its proposed rulemaking.
    The criteria for each SRO in evaluating whether a committee member 
would have a ``direct and substantial financial interest'' in a 
committee action must be the extent to which an individual would be 
exposed to market risk, the size of the individual's positions, whether 
or not market neutral, relative to the market and, with respect to a 
committee member's affiliated firm, the potential effect on the firm's 
capital. The Commission would expect each SRO to weigh a variety of 
factors in making these determinations. Each SRO should assess the 
magnitude and probable market impact of the underlying ``significant 
action.'' A possible margin change or emergency action for a contract 
might be so profound that even the smallest position in the contract 
could be affected by the measure. Likewise, a committee member might 
not have a particularly large position in any one of the categories 
listed in Regulation 1.69(b)(2) (i) through (vi). However, if a 
member's positions in each one of these categories were similarly 
aligned such that they all would be favorably or unfavorably impacted 
by even a moderate margin change, the member should be required to 
abstain from participating in deliberations and voting on such a 
possible margin action.
    The Commission invites comment on its proposed approach to 
determining whether a committee member has a ``direct and substantial 
financial interest'' in a matter being considered by an SRO committee. 
What numerical thresholds for margin changes or position sizes could 
the Commission establish for SROs in this regard? What other 
requirements could the Commission impose in this area to require SROs 
to make more objective abstention decisions? For example, a 
straightforward approach to this issue could be to require abstention 
by committee members with any position in a contract which could be 
impacted by a committee's significant action. Please comment on the 
effect of such an approach.

D. Proposed Regulation 1.69(b)(3)--Abstention Decision

    Proposed Commission Regulation 1.69(b)(3) would mandate procedures 
which SROs would have to follow in determining whether any SRO 
committee members must abstain from deliberations and voting on a 
matter due to a conflict. These procedural requirements would apply 
whenever an SRO governing board, disciplinary committee or oversight 
panel took up a matter involving: (1) a named party in interest (See 
proposed Regulation 1.69(b)(1)); (2) an action or rule change 
addressing a Regulation 1.41(a)(4) emergency (See proposed Regulations 
1.69(a)(7)(i) and 1.69(b)(2)); or, (3) a margin change designed to 
respond to extraordinary market conditions when such conditions would 
be likely to have a substantial effect on prices in any contract traded 
at the SRO (See proposed Regulations 1.69(a)(7)(ii) and 1.69(b)(2)).
    Prior to a committee's consideration of any such matter, proposed 
Regulation 1.69(b)(3) would require the SRO's staff to make a 
determination whether any member of the committee was subject to any of 
the conflicts situations listed in Regulations 1.69(b) (1) and (2). In 
determining whether a conflict existed under Regulation 1.69(b)(1), the 
Commission would expect SRO staff to ascertain whether any committee 
member had a relationship with the named party in interest based upon 
its available records and questioning of the committee's members. In 
the case of conflicts based upon a committee member's financial 
interest in a committee's action under Regulation 1.69(b)(2), SRO staff 
would be required to review the positions listed in Regulation 
1.69(b)(2) for each committee member. In ascertaining this position 
information, an SRO's staff would be permitted to rely upon:
    (1) The most recent large trader reports and clearing records 
available to the staff;
    (2) Position information provided to the staff by committee members 
pursuant to Regulation 1.69(c); <SUP>19 and,
---------------------------------------------------------------------------

    \19\ See proposed Commission Regulation 1.69(c) and related 
Section II.F. of this release below for a description of each 
committee member's position reporting responsibility.
---------------------------------------------------------------------------

    (3) Any other source of position information which was readily 
available to the staff.<SUP>20
---------------------------------------------------------------------------

    \20\ Proposed Commission Regulation 1.69(b)(3)(i)(A) (1) through 
(3).
---------------------------------------------------------------------------

    The Commission believes that by consulting this range of easily 
accessible sources of position data, SRO staffs should be able to make 
a well-informed decision as to whether any committee member has a 
financial interest in a committee action.
    Under proposed Regulations 1.69(b)(3)(i) (B) and (C), SRO staff 
would be required to determine whether any committee member had a 
conflict, under either Regulation 1.69(b)(1) or (2), and

[[Page 19874]]

to direct any committee member with such a conflict to abstain from 
deliberations and voting on the matter.
    Whenever SRO staff made an abstention determination pursuant to 
proposed Regulation 1.69(b)(3)(i), proposed Commission Regulation 
1.69(b)(3)(ii) would require the SRO committee considering the 
underlying substantive matter to include certain information regarding 
the abstention determination in the minutes of its meeting. Such a 
record would be required to indicate, among other things, the committee 
members who attended the meeting, the staff member(s) who reviewed the 
committee members' positions, a listing of the position information 
reviewed for each committee member, the names of any committee member 
directed to abstain and the reasons thereof. The Commission believes 
that these recordation requirements would enable SROs to demonstrate 
the propriety of their abstention decisions should they be called into 
question by either SRO members, the Commission or the public. In 
addition, such records would be useful to the Commission in any future 
evaluation of Regulation 1.69 and the SROs' implementing rules and 
procedures.
    In instances when a committee member was permitted to deliberate 
but not vote on a matter pursuant to proposed Commission Regulation 
1.69(b)(4), the committee's records would be required to include a full 
description of the views expressed by such member during the 
committee's deliberations on the underlying substantive matter. This 
description should not be limited to a recital of the committee 
member's presence at the meeting, but should detail the views and 
supporting arguments offered by the member at such meeting. To ensure a 
full description of the member's views, SRO committees should consider 
making transcripts of the pertinent portions of such a meeting. The 
Commission believes that this requirement should deter such a committee 
member from offering strictly self-interested advice to an SRO 
committee.
    Under proposed Regulation 1.69(b)(3), the Commission would confer 
the responsibility for making abstention determinations on SRO staff. 
The Commission believes that this approach would best assure that the 
process of making such determinations would not adversely impact the 
SRO committee decisionmaking process.
    The Commission understands that this provision's proposed approach 
would closely follow the procedures which most SROs currently use when 
handling committee member conflicts. Notably, a number of SRO staff 
members indicated to Commission staff that SRO committee members rarely 
resist their staffs' abstention recommendations based upon potential 
conflicts.
    The Commission invites comment on the efficiency of these proposed 
procedures for handling abstention decisions, and particularly its 
approach to having SRO staff gather position information. Would the 
proposed procedures be administratively burdensome for SRO staffs or 
should the Commission grant SRO staffs more discretion in this regard? 
Would the specified range of position information to be gathered 
provide a sufficient basis for making a fair assessment of a committee 
member's potential conflict of interest with respect to any particular 
committee matter?
    Should the Commission's rulemaking include any provisions for 
appealing abstention determinations by SRO staff? For instance, should 
the rulemaking allow SRO committees to include ``conflicted'' members 
in deliberations and voting on matters when the member's vote was 
needed to obtain a quorum? <SUP>21
---------------------------------------------------------------------------

    \21\ Note that, as described in Section II.E. below, the 
Commission's proposed rulemaking already would permit, in specified 
circumstances, ``conflicted'' committee members to participate in 
committee deliberations, but not voting, on certain matters.
---------------------------------------------------------------------------

E. Proposed Regulation 1.69(b)(4)--Participation in Deliberations

    In a limited number of circumstances, proposed Commission 
Regulation 1.69(b)(4) would permit SRO committees to allow a committee 
member, who otherwise would be required to abstain from deliberations 
and voting on a matter because of a conflict, to deliberate but not 
vote on the matter.<SUP>22 Regulation 1.69(b)(4) only would permit such 
a ``deliberation exception'' for matters in which a committee member 
``knowingly [had] a direct and substantial interest in the result of 
the vote'' under proposed Regulation 1.69(b)(2). Consistent with 
Section 217 of the FTPA, this exception would not apply to matters in 
which a committee member had a conflict, under proposed Regulation 
1.69(b)(1), due to his or her relation with the matter's named party in 
interest.
---------------------------------------------------------------------------

    \22\ Under Regulation 1.69's proposed abstention determination 
procedures, SRO staff would make the initial determination of 
whether a committee member should be required to abstain from 
deliberations and voting on any particular committee matter. For 
reasons discussed in this section below, however, the Commission 
proposes that only SRO committees, and not SRO staff, be able to 
permit a committee member to participate in deliberations, but not 
voting, on a committee matter.
---------------------------------------------------------------------------

    While the conflicts restrictions established by Section 217 of the 
FTPA further the fairness and integrity of the decisionmaking processes 
of SRO committees, Section 217 also recognizes that in some instances a 
committee member with a conflict with respect to a particular matter 
might also have special knowledge or experience regarding that matter. 
Accordingly, proposed Regulation 1.69(b)(4) would allow such members to 
participate in deliberations only, but subject to qualifying criteria 
limiting such participation to instances where the committee believed 
that it had insufficient expertise to consider a matter and needed such 
a member to participate.
    In determining whether to permit a committee member to deliberate 
on a matter, proposed Regulation 1.69(b)(4)(i) would require the 
presiding committee to consider a number of factors including: (1) 
Whether the member had special expertise in the matter involved which 
few or no other members of the committee had; (2) whether the 
committee's ability to meaningfully deliberate would be adversely 
affected by the member's non-participation; and (3) whether the 
member's participation in deliberations would be necessary for the 
committee to obtain a quorum.<SUP>23
---------------------------------------------------------------------------

    \23\ This factor presumes that an SRO's quorum requirement is 
based upon the number of committee members who can deliberate on a 
matter and not upon the number of committee members who can vote on 
a matter. See Robert's Rules of Order Sec. 3 (Henry M. Roberts III 
and William J. Evans, eds., 9th Ed. 1990). The Commission invites 
comment from SROs on whether the proposed approach would be 
consistent with their committees' quorum requirements.
---------------------------------------------------------------------------

    Given the factors which must be considered, the Commission believes 
that deliberation exception decisions should be made by the committee 
involved, rather than SRO staff. For any particular matter to be 
considered by an SRO committee, the committee members themselves would 
be in a better position than SRO staff to assess their individual 
levels of expertise in the matter and their need for input during 
deliberations from the committee member who otherwise would be required 
to abstain.
    In order to help ensure that committees handle deliberation 
exception decisions in an impartial manner, proposed Commission 
Regulation 1.69(b)(4)(ii) would require that any such exception must be 
approved by all ``public'' members of the presiding committee (i.e., 
committee members who are not members of the SRO) who were present when 
the

[[Page 19875]]

committee made such a determination. This requirement would not apply 
to those SRO governing boards, disciplinary committees or oversight 
committees which do not normally have public members.<SUP>24
---------------------------------------------------------------------------

    \24\ See Commission Regulations 1.64 (b) and (c) which 
respectively require governing boards and certain disciplinary 
committees to include non-SRO member representatives.
---------------------------------------------------------------------------

    The Commission invites comment on its proposal to permit, in 
certain circumstances, an SRO committee member, who otherwise would be 
required to abstain from deliberations and voting on a matter because 
of a conflict, to deliberate but not vote on the matter. 
Notwithstanding the statute, should the possibility of allowing an 
interested committee member to participate in deliberations be further 
limited or even prohibited entirely? Would the proposed exception for 
deliberations provide a person who could not vote on a matter with an 
opportunity to unduly influence a committee's decision? Would the 
proposed requirements strike a proper balance between ensuring that SRO 
committees make well-informed decisions while minimizing the influence 
of a committee member's potential bias or self-interest in the matter?

F. Proposed Regulation 1.69(c)--Disclosure Requirement

    Under proposed Commission Regulation 1.69(c), whenever an SRO 
committee considered a ``significant action which would not be 
submitted to the Commission for its prior approval,'' as that term is 
defined by proposed Regulation 1.69(a)(7), each member of the committee 
would be required to disclose to the SRO's staff any position 
information which was known or should have been known by the member 
with respect to the positions listed in Regulation 1.69(b)(2) (i.e., 
positions held by the member, the member's family, the member's firm 
and certain customers of the member's firm). Proposed Regulation 
1.69(c) would make it a direct violation of the Regulation, 
prosecutable by the Commission, for any committee member to fail to 
report such information to the SRO's staff.
    For the purposes of this provision, committee members would be 
presumed to have knowledge of gross positions held in: (1) the member's 
personal or controlled accounts (See proposed Regulation 
1.69(b)(2)(i)); (2) accounts in which the member had a significant 
financial interest (See proposed Regulation 1.69(b)(2)(ii)); (3) 
proprietary accounts at the member's firm (See proposed Regulation 
1.69(b)(2)(iii)); and, (4) the personal or controlled accounts of 
persons in the member's immediate family (excepting family members who 
were not dependents of the committee member and did not reside at the 
member's residence) (See proposed Regulation 1.69(b)(2)(iv)). While it 
would always be a question of fact as to what position information a 
committee member knew at a particular point in time, the Commission 
believes that a committee member usually should be aware of this type 
of position information because it would be based on either his own 
trading activity or the trading activity of parties with whom he would 
have a close relationship. This presumption of knowledge would be 
rebuttable, but the committee member involved would bear the burden of 
providing evidence of his or her lack of knowledge.
    The Commission believes that its proposed Regulation 1.69(c) 
reporting requirement should help SRO staff and committees to better 
determine whether committee members have conflicts which warrant 
abstention from committee deliberations and voting. In addition, the 
Commission believes that its enforcement powers under Regulation 
1.69(c) should help ensure compliance with the conflicts restrictions. 
Of course, each SRO would continue to have an independent 
responsibility under Section 5a(8) of the CEA and Commission Regulation 
1.51 to enforce any of its own rules implementing Regulation 1.69.

G. Proposed Regulation 1.69(d)--Violations of SRO Rules

    Proposed Commission Regulation 1.69(d) would make it a violation 
for an SRO to permit a committee member to participate in deliberations 
or voting on a matter if such participation would violate any SRO rule 
implementing the conflicts restrictions of Commission Regulations 
1.69(b) (1) or (2). As with proposed Regulation 1.69(c), Regulation 
1.69(d) would enable the Commission to enforce the conflicts 
restriction requirements as implemented by SRO rules if necessary. The 
Commission believes that this reservation of enforcement power would be 
appropriate given Regulation 1.69's purpose of upholding the fairness 
and integrity of the SRO decisionmaking process.
    The Commission invites comment on the appropriate enforcement 
mechanisms for implementing the FTPA's conflicts restrictions.

H. Proposed Regulation 1.69(e)--Liability to Other Parties

    Under proposed Commission Regulation 1.69(e), SROs, SRO officials 
and SRO staffs involved in reviewing committee member positions and 
making abstention decisions, pursuant to Regulation 1.69(b)(3), would 
be protected from liability to any party other than the Commission. 
This limitation of liability is mandated by Section 217 of the FTPA.

I. Amendments to Current Commission Regulations Made Necessary by 
Proposed New Commission Regulation 1.69

1. Proposed Regulation 1.3(tt)--Definition of Oversight Panel
    As indicated in Section II. A. above, the Commission proposes to 
establish a definition for oversight panels in the definitional section 
of the Commission's regulations. The definition would be identical to 
the definition of oversight panel in current Commission Regulation 
1.63(a)(4). As part of its proposal, the Commission would delete 
Regulation 1.63(a)(4) and make the new Regulation 1.3(tt)'s definition 
of oversight panel applicable to both Regulation 1.63 and proposed 
Regulation 1.69.
2. Proposed Regulation 1.41(f)--Voting on Temporary Emergency Rules
    Section 213 of the FTPA amended Section 5a(a)(12)(B) of the CEA to 
require that the Commission issue regulations establishing ``terms and 
conditions'' under which contract markets may take temporary emergency 
actions without prior Commission approval. Section 5a(a)(12)(B) and 
Regulation 1.41(f), the Commission's implementing regulation, require 
that any such temporary emergency action be adopted by a two-thirds 
vote of a contract market's governing board. In recognition of the fact 
that governing board members may be required to abstain from 
deliberations and voting on such an action under contract market rules 
implementing proposed Regulation 1.69,<SUP>25 as part of its rulemaking 
the Commission is proposing to amend Regulation 1.41(f) to provide that 
such abstaining board members should not be included in determining 
whether a temporary emergency action has been approved by two-thirds of 
a governing board.
---------------------------------------------------------------------------

    \25\ Contract market governing board members would be subject to 
Regulation 1.69's conflict restrictions whenever they considered 
such temporary emergency actions. See proposed Commission 
Regulations 1.69(a)(7)(i) and 1.69(b)(2).

---------------------------------------------------------------------------

[[Page 19876]]

J. Proposed Regulation 156.4--Disclosure of Broker Association 
Membership

    Section 102 of the FTPA amended Section 4j(d) of the CEA to 
prohibit the knowing execution of a customer order by a floor broker 
opposite any broker or trader with whom the floor broker has a 
specified business relationship, unless the Commission has adopted 
rules requiring exchange procedures and standards designed to prevent 
violations of the CEA attributable to broker association trading. In 
response to this provision, the Commission adopted Part 156 to its 
regulations in order for contract markets to identify and enhance 
surveillance of broker associations.<SUP>26 Among other things, the 
Commission's Part 156 Regulations require that contract markets 
register broker associations at their respective exchanges and maintain 
records listing ``the name of each person who is a member or otherwise 
has a direct beneficial interest in [a] broker association.''
---------------------------------------------------------------------------

    \26\ See 58 FR 31167 (June 1, 1993) for a full description of 
the Commission's Part 156 rulemaking regarding broker associations.
---------------------------------------------------------------------------

    As part of the current rulemaking, the Commission is proposing to 
amend its Part 156 Regulations by adding a new Regulation 156.4 which 
would require contract markets to post a listing of the broker 
association membership information which they are currently required to 
compile pursuant to Regulation 156.2(b). This posting should be made in 
a place designed to ensure its availability to the general public such 
as an exchange's lobby or other common access area. The Commission 
believes that this requirement would serve the public interest by 
enabling the public to take broker association relationships into 
account when making trading decisions and assessing exchange actions 
generally.

III. Conclusion

    The Commission believes that the proposed new Regulation 1.69 and 
the proposed amendments to Regulations 1.3, 1.41 and 1.63 meet the 
statutory directive of Section 5a(a)(17) of the CEA as it was amended 
by Section 217 of the FTPA. The proposal would establish guidelines and 
factors to be considered in determining whether an SRO committee member 
was subject to a conflict which could potentially impinge on his 
ability to make fair and impartial decisions in a matter and, thus, 
warrant abstention from participating in committee deliberations and 
voting.
    The Commission invites public comments on any aspect of this 
proposed rulemaking, including whether it would fulfill the 
implementation requirements of FTPA Section 217. The Commission also 
invites comment on whether any other revisions should be made to ensure 
greater fairness and impartiality in the decisionmaking processes of 
SRO committees. For instance, would it be beneficial for the Commission 
to amend current Commission Regulation 1.64 to provide a higher level 
of representation for public, non-SRO members on SRO boards and 
committees?

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq. 
(1988), requires that agencies, in proposing rules, consider the impact 
of those rules on small businesses. The Commission has previously 
determined that contract markets are not ``small entities'' for 
purposes of the RFA, and that the Commission, therefore, need not 
consider the effect of proposed rules on contract markets. 47 FR 18618, 
18619 (April 30, 1982). Furthermore, the Chairman of the Commission 
previously has certified on behalf of the Commission that comparable 
rule proposals affecting clearing organizations and registered futures 
associations, if adopted, would not have had a significant economic 
impact on a substantial number of small entities. 51 FR 44866, 44868 
(December 12, 1986).
    The proposed rulemaking would affect individuals who serve on SRO 
governing boards, disciplinary committees and oversight panels. The 
Commission does not believe that its proposed rulemaking would have a 
significant economic impact on these SRO committee members. The 
proposed rulemaking would require these committee members to disclose 
to their SROs certain position information which is known or should be 
known to them at the time that their committees consider certain 
significant actions which would not be submitted to the Commission for 
approval. The Commission believes that this requirement would not have 
any significant economic impact on such members because the information 
which they would be required to provide should be readily available to 
them and because the significant actions which would give rise to this 
requirement should occur on an infrequent basis.
    Accordingly, the Acting Chairman, on behalf of the Commission, 
hereby certifies, pursuant to Section 3(a) of the RFA, 5 U.S.C. 
Sec. 605(b), that the proposed rulemaking, if adopted, would not have a 
significant economic impact on a substantial number of small entities.

B. Agency Information Activities: Proposed Collection; Comment Request

    The Paperwork Reduction Act of 1980 (``PRA''), 44 U.S.C. 3501 et 
seq. (1988), imposes certain requirements on federal agencies 
(including the Commission) in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. In 
compliance with the PRA, the Commission has submitted the proposed 
rulemaking and its associated information collection requirements to 
the Office of Management and Budget (``OMB''). The burden associated 
with the entire collection, including this proposed regulation and 
amendments, is as follows:

Average burden hours per response--3,546.26
Number of respondents--15,286.00
Frequency of response--On Occasion

    The burden associated with the proposed regulation and amendments 
is as follows:

Average burden hours per response--2.00
Number of respondents--20
Frequency of response--On Occasion

    Persons wishing to comment on the information that would be 
required by the proposed rulemaking should contact Jeff Hsu, OMB, Room 
3228, NEOB, Washington, D.C. 20503, (202) 395-7340. Copies of the 
information collection submission to OMB are available from Joe F. 
Mink, Clearance Officer, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581. 
Telephone: (202) 418-5170.

List of Subjects

 17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements.

17 CFR Part 156

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

    In consideration of the foregoing, and based on the authority 
contained in the Commodity Exchange Act, the Commission is proposing to 
amend Title 17, Chapter I of the Code of Federal Regulations as 
follows:

[[Page 19877]]

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for Part 1 continues to read as follows:

    Authority: 7 USC 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 
6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 8, 9, 12, 12a, 12c, 13a, 13a-
1, 16, 19, 21, 23, and 24, unless otherwise stated.

    2. Section 1.3 would be proposed to be amended by adding paragraph 
(tt) to read as follows:


Sec. 1.3  Definitions.

* * * * *
    (tt) ``Oversight panel'' means any panel authorized by a self-
regulatory organization to review, recommend or establish policies or 
procedures with respect to the self-regulatory organization's 
surveillance, compliance, rule enforcement or disciplinary 
responsibilities.
    3. Section 1.41 would be proposed to be amended by adding paragraph 
(f)(10) to read as follows:


Sec. 1.41  Contract market rules; submission of rules to the 
Commission; exemption of certain rules.

* * * * *
    (f) * * *
    (10) Governing board members who abstain from voting on a temporary 
emergency rule pursuant to Sec. 1.69, shall not be counted in 
determining whether such a rule was approved by the two-thirds vote 
required by this regulation.
    4. Section 1.63(a)(2) would be proposed to be revised to read as 
follows:


Sec. 1.63  Service on self-regulatory organization governing boards or 
committees by persons with disciplinary histories.

    (a) * * *
    (2) ``Disciplinary committee'' means a committee of persons which 
is authorized by a self-regulatory organization to conduct disciplinary 
proceedings, to settle disciplinary charges, to impose sanctions, or to 
hear appeals thereof.
 * * * * *
    5. Section 1.63(a)(4) would be proposed to be removed.
    6. Section 1.63(a)(5) would be proposed to be redesignated as 
Sec. 1.63(a)(4).
    7. Section 1.63(a)(6) would be proposed to be redesignated as 
Sec. 1.63(a)(5).
    8. In redesignated Sec. 1.63(a)(5)(ii), the reference to 
``subparagraphs (a)(6)(i) (A) through (C)'' would be proposed to be 
amended to read ``paragraphs (a)(5)(i) (A) through (C)''.
    9. In redesignated Sec. 1.63(a)(5)(iv), the reference to 
``paragraphs (a)(6)(i) through (iii)'' would be proposed to be amended 
to read ``paragraphs (a)(5)(i) through (iii)''.
    10. Section 1.63(a)(7) would be proposed to be redesignated as 
Sec. 1.63(a)(6).
    11. In Section 1.63(d), the reference to ``paragraph (a)(6)(i)'' 
would be proposed to be amended to read ``paragraph (a)(5)(i)''.
    12. Section 1.69 would be proposed to be added to read as follows:


Sec. 1.69  Voting by interested members of self-regulatory organization 
governing boards and various committees.

    (a) Definitions. For purposes of this section:
    (1) ``Disciplinary committee'' means a committee of persons which 
is authorized by a self-regulatory organization to conduct disciplinary 
proceedings, to settle disciplinary charges, to impose sanctions, or to 
hear appeals thereof.
    (2) ``Governing board'' means a self-regulatory organization's 
board of directors, board of governors, board of managers, or similar 
body, or any subcommittee thereof, duly authorized, pursuant to a rule 
of the self-regulatory organization that has been approved by the 
Commission or has become effective pursuant to either Section 5a(a) 
(12)(A) or 17(j) of the Act, to take action for and on behalf of the 
self-regulatory organization with respect to a matter covered by this 
section.
    (3) A person's ``immediate family'' means the person's spouse, 
parent, stepparent, child, stepchild, sibling, stepbrother, stepsister, 
or in-law.
    (4) ``Member's affiliated firm'' is a firm in which the member is a 
``principal,'' as defined in Sec. 3.1(a), or an employee.
    (5) ``Named party in interest'' means a party who is identified as 
the subject of any matter being considered by a governing board, 
disciplinary committee or oversight panel.
    (6) ``Self-regulatory organization'' means a ``self-regulatory 
organization'' as defined in Sec. 1.3(ee) and includes a ``clearing 
organization'' as defined in Sec. 1.3(d).
    (7) ``Significant action which would not be submitted to the 
Commission for its prior approval'' includes, at a minimum, any of the 
following types of self-regulatory organization actions or rule changes 
which can be implemented without the Commission's prior approval:
    (i) Any actions or rule changes which address an ``emergency'' as 
defined in Sec. 1.41(a)(4); and,
    (ii) Any changes in margin levels that are designed to respond to 
extraordinary market conditions when such conditions are likely to have 
a substantial effect on prices in any contract traded or cleared at 
such self-regulatory organization.
    (b) Self-Regulatory Organization Rules. Each self-regulatory 
organization shall maintain in effect rules which have been submitted 
to the Commission pursuant to Section 5a(a)(12)(A) of the Act and 
Sec. 1.41 or, in the case of a registered futures association, pursuant 
to Section 17(j) of the Act, which require, at a minimum, that:
    (1) Relationship With Named Party in Interest. A member of a self-
regulatory organization's governing board, disciplinary committee or 
oversight panel shall abstain from such body's deliberations and voting 
on any matter where such member:
    (i) Is the named party in interest;
    (ii) Is an employer, employee or fellow employee of the named party 
in interest;
    (iii) Is associated with the named party in interest through a 
``broker association'' as defined in Sec. 156.1;
    (iv) Has any other significant, ongoing business relationship with 
the named party in interest, including clearing relationships, but not 
including relationships limited to executing futures or option contract 
transactions with each other; or,
    (v) Is in the immediate family of the named party in interest.
    (2) Financial Interest in an Action. A member of a self-regulatory 
organization's governing board, disciplinary committee or oversight 
panel shall abstain from such body's deliberations and voting on any 
significant action which would not be submitted to the Commission for 
its prior approval if the member knowingly has a direct and substantial 
financial interest in the result of the vote. In determining whether a 
member has a direct and substantial financial interest in the result of 
such a vote, among other things, a self-regulatory organization's rules 
must consider with respect to any contract or product which the self-
regulatory organization reasonably expects could be affected by the 
action:
    (i) Gross positions held in the member's personal accounts or 
``controlled accounts,'' as defined in Sec. 1.3(j);
    (ii) Gross positions held in accounts in which the member has a 
significant financial interest;
    (iii) Gross positions held in proprietary accounts, as defined in 
Sec. 1.17(b)(3), at the member's affiliated firm;

[[Page 19878]]

    (iv) Gross positions held in the personal accounts or ``controlled 
accounts,'' as defined in Sec. 1.3(j), of any person in the member's 
immediate family, unless such person is not a dependent of the member 
and does not reside at the member's residence;
    (v) Net positions held in ``customer'' accounts, as defined in 
Sec. 1.17(b)(2), at the member's affiliated firm; and,
    (vi) Gross position of any customer who constitutes a significant 
portion of business for the member or the member's affiliated firm.
    (3) Abstention Decision.
    (i) Prior to the start of any self-regulatory organization's 
governing board, disciplinary committee or oversight panel 
deliberations or voting on a matter, appropriate self-regulatory 
organization staff shall:
    (A) review the positions described in paragraph (b)(2) of this 
section for each member of such body based upon:
    (1) The most recent large trader reports and clearing records 
available to the staff;
    (2) Position information provided by the member to the staff 
pursuant to Paragraph (c) of this section; and,
    (3) Any other source of position information which is readily 
available to the staff;
    (B) Determine whether any such member is subject to any of the 
conditions listed in paragraphs (b)(1) or (2) of this section; and,
    (C) Direct any such member to abstain from deliberations and voting 
on the matter.
    (ii) Whenever the staff of a self-regulatory organization makes an 
abstention determination pursuant to paragraph (b)(3)(i) of this 
section, the appropriate governing board, disciplinary committee or 
oversight panel shall include in the minutes or records of its 
subsequent meeting the following information regarding any such 
determination:
    (A) The names of all members who attended the meeting in person or 
who otherwise were present by electronic means;
    (B) The name of any member who voluntarily recused himself from 
deliberations and/or voting on a matter and the reason for the recusal, 
if stated;
    (C) The names of the individuals reviewing the positions described 
in paragraph (b)(2) of this section;
    (D) A list referencing the position information which was reviewed 
for each member;
    (E) The name of any member who was directed to abstain from any 
deliberations and voting on a matter and the reason for the abstention;
    (F) A description of the procedures followed in making any 
determination on abstentions from deliberations and voting; and,
    (G) In those instances when a committee member is permitted to 
deliberate but not vote on a matter pursuant to this paragraph (b)(4) 
of this section, a full description of the views expressed by such 
member during deliberations.
    (4) Participation in Deliberations.
    (i) A self-regulatory organization governing board, disciplinary 
committee or oversight panel may permit a member to participate in 
deliberations prior to a vote on a matter for which he otherwise would 
be required to abstain under the self-regulatory organization's rules 
implementing the requirements of paragraph (b)(2) of this section. In 
making such a determination, the presiding body should consider the 
following factors:
    (A) Whether the member has expertise, knowledge or experience in 
the matter under consideration which few or no other members of the 
presiding body have;
    (B) Whether the ability of the presiding body to deliberate 
meaningfully would be adversely affected by the non-participation of 
the member; and,
    (C) Whether the member's participation in deliberations is 
necessary for the presiding body to achieve a quorum in the matter.
    (ii) Any determination to so allow a member to participate in 
deliberations on a matter shall be approved by each of those members of 
the presiding body who are present and who are non-members of the self-
regulatory organization.
    (c) Disclosure Requirement. Each member of a self-regulatory 
organization governing board, disciplinary committee or oversight panel 
which is to consider a matter referred to in paragraph (b)(2) of this 
section shall disclose to the appropriate self-regulatory organization 
staff prior to such consideration the position information referred to 
in paragraph (b)(2) of this section which is known or should be known 
to the member at that time. For these purposes, members shall be 
presumed to have knowledge of those positions referred to in paragraphs 
(b)(2) (i) through (iv) of this section.
    (d) Violations of Self-Regulation Organization Rules. No self-
regulatory organization may permit a person to engage in deliberations 
or voting on a matter if it would violate any rule adopted by the self-
regulatory organization in compliance with paragraphs (b) (1) or (2) of 
this section.
    (e)Liability to Other Parties. No self-regulatory organization or 
self-regulatory organization official, employee or member, other than 
the member whose position or positions are being reviewed, or delegee 
or agent thereof, shall be subject to liability under this section, 
except for liability in an action initiated by the Commission, in 
connection with the review required by paragraph (b)(3) and any action 
taken or required to be taken thereunder.

PART 156--BROKER ASSOCIATIONS

    1. The authority citation for Part 156 continues to read as 
follows:

    Authority: 7 U.S.C. 6b, 6c, 6j(d), 7a(b) and 12a.

    2. Section 156.4 would be proposed to be added to read as follows:


Sec. 156.4  Disclosure of Broker Association Membership

    Each contract market shall post in a location accessible to the 
public a list of all registered broker associations which identifies 
for each such association the name of each person who is a member or 
otherwise has a direct beneficial interest in the association. This 
list shall be updated at least semi-annually.

    Issued in Washington, D.C. on April 29, 1996, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 96-10936 Filed 5-2-96; 8:45 am]
BILLING CODE 6351-01-P