Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Proposed Rules 19869

1Pub. L. No. 102–546, sec. 217, 106 Stat. 3590

(1992).

2For the purposes of this release, the term

‘‘committee’’ will generally be used to include

governing boards, disciplinary committees and

oversight committees unless otherwise specified.

3The 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

Continued

the requirements of this AD can be

accomplished.

(c) An alternative method of compliance or

adjustment of the initial compliance time

that provides an equivalent level of safety

may be approved by the Manager, FAA,

Atlanta Aircraft Certification Office, Campus

Building, 1701 Columbia Avenue, suite 2–

160, College Park, Georgia 30337–2748. The

request shall be forwarded through an

appropriate FAA Maintenance Inspector,

who may add comments and then send it to

the Manager, Atlanta Aircraft Certification

Office.

Note 3: Information concerning the

existence of approved alternative methods of

compliance with this AD, if any, may be

obtained from the Atlanta Aircraft

Certification Office.

(d) Alternative methods of compliance

approved in accordance with AD 87–17–07

(superseded by this action) are considered

approved as alternative methods of

compliance with this AD.

(e) All persons affected by this directive

may obtain a copy of the document referred

to herein upon request to The New Piper

Aircraft, Inc., Attn: Customer Service, 2926

Piper Dr., Vero Beach, Florida, 32960; or may

examine this document at the FAA, Central

Region, Office of the Assistant Chief Counsel,

Room 1558, 601 E. 12th Street, Kansas City,

Missouri 64106.

(f) This amendment supersedes AD 86–17–

07, Amendment 39–5400.

Issued in Kansas City, Missouri, on April

26, 1996.

Michael Gallagher,

Manager, Small Airplane Directorate, Aircraft

Certification Service.

[FR Doc. 96–11027 Filed 5–2–96; 8:45 am]

BILLING CODE 4910–13–U

FEDERAL TRADE COMMISSION

16 CFR Part 254

Extension of Comment Period; Guides

for Private Vocational Schools

AGENCY: Federal Trade Commission.

ACTION: Extension of time for filing

public comments.

SUMMARY: The Federal Trade

Commission (the ‘‘Commission’’), as

part of a systematic review of all of its

current regulations and guides,

requested public comments on April 3,

1996 about its Guides for Private

Vocational Schools. 61 FR 14685. The

Commission solicited comments until

May 3, 1996. In response to requests

from interested parties, the Commission

grants an extension of the time period

to file written comments.

DATES: Written comments will be

accepted until July 1, 1996.

FOR FURTHER INFORMATION CONTACT:

Joseph J. Koman, Jr., Federal Trade

Commission, Bureau of Consumer

Protection, Division of Enforcement,

Room S–4302, 601 Pennsylvania

Avenue NW., Washington, D.C. 20580,

(202) 326–3014, or Walter Gross III,

Federal Trade Commission, Bureau of

Consumer Protection, Division of

Service Industry Practices, Room H–

200, Sixth Street and Pennsylvania

Avenue NW., Washington, D.C. 20580,

(202) 326–3319.

List of Subjects in 16 CFR Part 254

Advertising, Trade practices.

Authority: 15 U.S.C. 41–58.

By direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 96–11037 Filed 5–2–96; 8:45 am]

BILLING CODE 6750–01–M

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Parts 1 and 156

Proposed Rulemaking Concerning

Voting by Interested Members of SelfRegulatory Organization Governing

Boards and Committees and

Concerning the Publicizing of Broker

Association Memberships

AGENCY: Commodity Futures Trading

Commission.

ACTION: Proposed rulemaking.

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’’).1

The proposed rulemaking would

establish a new Commission Regulation

1.69 which would require selfregulatory 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.’’ 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.

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 selfregulatory process.3
19870 Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Proposed Rules

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.

4Under 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.

5See, 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).

6The 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.

7This section will discuss only those term

definitions which could raise noteworthy issues.

8As noted in footnote 10 below, however, the

rulemaking would have a more limited impact on

RFAs as opposed to contract markets and clearing

organizations.

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.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.5

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 selfinterests of a few committee members.6

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 7

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 selfinterest.8

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
Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Proposed Rules 19871

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.

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.’’

11Notably, 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.’’

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.9

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.’’ 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.

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.11

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 decisionmaker 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
19872 Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Proposed Rules

12For 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.’’

13For 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.

14Proposed 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.’’

15Under 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.

16For 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).

17See proposed Commission Regulation

1.69(a)(7).

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? 12

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.’’ 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 14 and employment 15

relationships.

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 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.

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-thecounter 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.17
Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Proposed Rules 19873

18While 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).

19See 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.

20Proposed Commission Regulation

1.69(b)(3)(i)(A) (1) through (3).

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.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.

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); 19 and,

(3) Any other source of position

information which was readily available

to the staff.20

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
19874 Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Proposed Rules

21Note 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.

22Under 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.

23This 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 § 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.

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? 21

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.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.

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.23

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
Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Proposed Rules 19875

24See Commission Regulations 1.64 (b) and (c)

which respectively require governing boards and

certain disciplinary committees to include non-SRO

member representatives.

25Contract 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).

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.24

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 1.69,25 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.
19876 Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Proposed Rules

26See 58 FR 31167 (June 1, 1993) for a full

description of the Commission’s Part 156

rulemaking regarding broker associations.

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.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.’’

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. § 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:
Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Proposed Rules 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:

§ 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:

§ 1.41 Contract market rules; submission

of rules to the Commission; exemption of

certain rules.

* * * * *

(f) * * *

(10) Governing board members who

abstain from voting on a temporary

emergency rule pursuant to § 1.69, shall

not be counted in determining whether

such a rule was approved by the twothirds vote required by this regulation.

4. Section 1.63(a)(2) would be

proposed to be revised to read as

follows:

§ 1.63 Service on self-regulatory

organization governing boards or

committees by persons with disciplinary

histories.

(a) * * *

(2) ‘‘Disciplinary committee’’ means 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

§ 1.63(a)(4).

7. Section 1.63(a)(6) would be

proposed to be redesignated as

§ 1.63(a)(5).

8. In redesignated § 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 § 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

§ 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:

§ 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 selfregulatory organization’s board of

directors, board of governors, board of

managers, or similar body, or any

subcommittee thereof, duly authorized,

pursuant to a rule of the self-regulatory

organization that has been approved by

the Commission or has become effective

pursuant to either Section 5a(a) (12)(A)

or 17(j) of the Act, to take action 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 § 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 § 1.3(ee) and includes a

‘‘clearing organization’’ as defined in

§ 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

§ 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 selfregulatory 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 § 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 § 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 selfregulatory 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

§ 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

§ 1.17(b)(3), at the member’s affiliated

firm;
19878 Federal Register / Vol. 61, No. 87 / Friday, May 3, 1996 / Proposed Rules

(iv) Gross positions held in the

personal accounts or ‘‘controlled

accounts,’’ as defined in § 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 § 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 selfregulatory 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 selfregulatory 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 nonmembers 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 selfregulatory organization or selfregulatory 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:

§ 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

DEPARTMENT OF ENERGY

Federal Energy Regulatory

Commission

18 CFR Part 346

[Docket No. RM96–10–000]

Oil Pipeline Cost-of-Service Filing

Requirements; Notice of Proposed

Rulemaking

April 29, 1996.

AGENCY: Federal Energy Regulatory

Commission (Commission).

ACTION: Notice of Proposed Rulemaking.

SUMMARY: The Federal Energy

Regulatory Commission (Commission)

proposes to revise Part 346 of its

regulations to make the cost-of-service

filing requirements of that Part

applicable to the Trans-Alaska Pipeline

System (TAPS) carriers and carriers

delivering oil directly or indirectly to

TAPS. These carriers were inadvertently

excluded from the streamlined

procedural rules in Part 346 required by

the Energy Policy Act of 1992.

DATES: Comments are due on or before

June 3, 1996.