98-34516. Voting by Interested Members of Self-Regulatory Organization Governing Boards and Committees  

  • [Federal Register Volume 64, Number 1 (Monday, January 4, 1999)]
    [Rules and Regulations]
    [Pages 16-24]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 98-34516]
    
    
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    COMMODITY FUTURES TRADING COMMISSION
    
    17 CFR Part 1
    
    
    Voting by Interested Members of Self-Regulatory Organization 
    Governing Boards and Committees
    
    AGENCY: Commodity Futures Trading Commission.
    
    ACTION: Final rulemaking.
    
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    SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
    ``CFTC'') has adopted a new Regulation 1.69 that implements 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\
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        \1\ Pub. L. No. 102-546, section 217, 106 Stat. 3590 (1992).
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        New Commission Regulation 1.69 requires self-regulatory 
    organizations (``SRO'') to adopt rules prohibiting governing board, 
    disciplinary committee and oversight panel members from deliberating or 
    voting on certain matters where the member has either a relationship 
    with the matter's named party in interest or a financial interest in 
    the matter's outcome. This final rulemaking also has amended Commission 
    Regulations 1.41 and 1.63 to make modifications made necessary by new 
    Commission Regulation 1.69.
    
    EFFECTIVE DATE: March 5, 1999.
    
    FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Acting Associate 
    Director, or Martha A. Mensoian, Attorney-Advisor, Division of Trading 
    and Markets, Commodity Futures Trading Commission, Three Lafayette 
    Centre, 1155 21st Street, N.W., Washington, D.C. 20581. Telephone: 
    (202) 418-5490.
    
    SUPPLEMENTARY INFORMATION
    
    I. Introduction
    
        Section 217 of the FTPA amended Section 5a(1)(17) of the CEA to 
    ``provide for the avoidance of conflict of interest in deliberations by 
    the governing board and any disciplinary and oversight committee.'' \2\ 
    On May 3, 1996, the Commission published for pubic comment in the 
    Federal Register a proposed new Regulation 1.69 and related amendments 
    to existing Commission Regulations 1.41 and 1.63 which would have 
    required SROs to adopt rules prohibiting governing board, disciplinary 
    committee and oversight panel members from deliberating and voting on 
    certain matters where the member had either a relationship with the 
    matter's named party in interest or a financial interest in the 
    matter's outcome.\3\ In response to that proposed rulemaking release, 
    the Commission received letters from eleven commenters. After reviewing 
    those comments, the Commission decided to incorporate into its 
    rulemaking many of the suggestions made by the commenters and to issue 
    for pubic comment re-proposed versions of Regulation 1.69 and amended 
    Regulations 1.41 and 1.63. The Commission published its re-proposed 
    rulemaking in the Federal Register on January 23, 1998.\4\ That release 
    extensively discusses the comments that were made on the originally 
    proposed rulemaking, indicates whether and how the re-proposed 
    rulemaking responds to the comments and explains the Commission's 
    reasons for proposing a re-proposed version of the rulemaking. The 
    comment period for the re-proposed rulemaking expired on March 25, 
    1998.
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        \2\ For the purposes of this release, the term ``committee'' 
    generally will be used to include governing boards, disciplinary 
    committees and oversight panels unless otherwise specified.
        \3\ 61 FR 19869 (May 3, 1996).
        \4\ 61 FR 3492 (Jan. 23, 1998).
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    II. Comments Received
    
        The Commission received ten comment letters in response to its re-
    proposed rulemaking. The comment letters were submitted by five futures 
    exchanges (the Chicago Board of Trade (``CBT''), the Chicago Mercantile 
    Exchange (``CME''), the Coffee, Sugar & Cocoa Exchange, Inc. 
    (``CSCE''), the Minneapolis Grain Exchange (``MGE''), and the New York 
    Mercantile Exchange (``NYMEX'')); a futures clearing organization (the 
    Board of Trade Clearing Corporation (``BOTCC'')); two trade 
    associations (the Futures Industry Association (``FIA'') and the 
    National Grain Trade Council (``NGTC'')); a futures commission merchant 
    (American Futures Group, Inc. (``AFG'')) and Mr. Evan Tucker, an 
    individual who was formerly an associated person with AFG.
        The Commission has carefully reviewed these comments and has 
    decided to issue new Regulation 1.69 and amended Regulations 1.41 and 
    1.63 as final with certain modifications from the re-proposed version 
    of the rulemaking. The following sections of this release analyze the 
    Commission's final rulemaking. Each section describes a provision of 
    the Commission's reproposed rulemaking, discusses comments which were 
    made on that particular provision, indicates how the provision has been 
    adopted in the final rulemaking, and explains the Commission's 
    rationale for adopting the provision. (For ease of reference, the re-
    proposed rulemaking will be referred to as the ``proposed'' rulemaking 
    throughout the remainder of this release.)
    
    III. Final Rulemaking
    
    A. Definitions (Regulation 1.69(a))
    
    1. Disciplinary Committee (Regulation 1.69(a)(1))
        As proposed, Regulation 1.69(a)(1) defined ``disciplinary 
    committee'' to mean ``any person or committee of persons, or any 
    subcommittee thereof'' that is authorized by an SRO ``to issue 
    disciplinary charges to conduct disciplinary proceedings, to settle 
    disciplinary charges, to impose disciplinary sanctions, or to hear 
    appeals thereof'' in any case involving a violation of an SRO's rules. 
    The proposed definition excluded persons who were individually 
    authorized by an SRO to impose sanctions summarily for decorum-type 
    rule violations. CBT, CME, CSCE, FIA and NYMEX each commented that the 
    definition should exclude any person or committee of persons that 
    summarily imposed minor disciplinary fines. These commenters contended 
    that imposing conflict of interest restrictions on anyone taking 
    summary actions, whether a single person or a committee, would be 
    cumbersome for SROs to implement.
        The Commission has reviewed these comments and concurs that 
    applying conflict of interest requirements to SRO disciplinary 
    authorities when they take summary actions for minor rule violations 
    could be administratively burdensome and might hamper the SROs' ability 
    to take quick, decisive actions in these circumstances. Accordingly, 
    the Commission has determined to establish a disciplinary committee 
    definition that would exclude committees and persons who summarily 
    issue minor penalties for violating rules regarding ``decorum, attire, 
    the timely submission of accurate records for clearing or verifying 
    each day's transactions or other similar activities.''
    
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    2. Family Relationship (Regulation 1.69(a)(2))
        As further discussed below, proposed Regulation 1.69(b)(1)(i)(E) 
    prohibited committee members from deliberating and voting on committee 
    matters in which they had a ``family relationship'' with the matter's 
    named party in interest. For these purposes, proposed Regulation 
    1.69(a)(2) defined ``family relationship'' to mean a person's ``spouse, 
    former spouse, parent, stepparent, child, stepchild, sibling, 
    stepbrother, stepsister, grandparent, grandchild, uncle, aunt, nephew, 
    niece or in-law.''
        CBT commented that the inclusion of ``former spouses'' in the 
    definition ran counter to the approach taken in proposed Regulation 
    1.69(b)(1)(i)(D) where conflicts of interests were limited to current, 
    ``ongoing'' business relationships with the named party in interest. 
    The Commission believes that the two types of relationships cited by 
    the CBT are distinguishable. The rationale for limiting conflict of 
    interest requirements to committee members with ``ongoing'' business 
    relationships is that, when a member and a matter's named party in 
    interest have an ongoing business relationship, a committee action that 
    could impact the party financially also could redound to the financial 
    advantage or disadvantage of anyone who is doing business with the 
    party at that point in time, including the committee member. Once a 
    business relationship between two parties no longer exists, however, 
    presumably the financial health of the two parties no longer has any 
    degree of interdependence. By contrast, a committee member's 
    relationship with a former spouse may have emotional and financial 
    implications that continue after their marriage, especially if there is 
    any sort of monetary support arrangement between the former spouses. 
    Accordingly, the Commission has determined to include former spouses in 
    the final definition of family relationship and to adopt the definition 
    as proposed.
    3. Governing Board (Regulation 1.69(a)(3))
        As proposed, Regulation 1.69(a)(3)'s definition of ``governing 
    board'' included any SRO ``board of directors, board of governors, 
    board of managers, or similar body, or any subcommittee thereof,'' such 
    as an executive committee that was authorized to ``take action or to 
    recommend the taking of action'' on behalf of its SRO. The CBT 
    commented that the definition should not include governing board 
    subcommittees because any potential harm from any conflict of interest 
    on such a subcommittee would be cured by the fact that its actions 
    would be subject to the independent review and oversight of a governing 
    board. The Commission believes that, although board subcommittee 
    actions usually have to be ratified by governing boards, oftentimes 
    recommendations of such subcommittee are the primary influence on board 
    decision. Accordingly, in order to advance the integrity of the SRO 
    committee decision-making process, the Commission has decided to apply 
    its conflict of interest restrictions to governing board subcommittees 
    and to adopt the same governing board definition as proposed.
    4. Oversight Panel (Regulation 1.69(a)(4))
        In the proposed rulemaking, the Commission defined ``oversight 
    panel'' as an SRO committee authorized to ``recommend or establish 
    policies or procedures with respect to the [SRO's] surveillance, 
    compliance, rule enforcement, or disciplinary responsibilities.'' \5\ 
    The CBT and NYCE commented that this definition was too broad and 
    should not include committees which recommend policies as such a 
    definition would deter people, inside and outside of the futures 
    industry, from serving on task forces and planning committees that 
    formulate ideas that are helpful to the SROs.
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        \5\ See proposed Commission Regulation 1.69(a)(4).
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        The Commission believes that SRO policies with respect to 
    surveillance, compliance, rule enforcement and disciplinary 
    responsibilities are an integral part of the self-regulatory process 
    and that persons who are entrusted with recommending such policies 
    should be free from conflicts of interests. Accordingly, the Commission 
    has decided to adopt the proposed definition of oversight panels.
    5. Member's Affiliated Firm (Regulation 1.69(a)(5))
        Under proposed Regulation 1.69(a)(5), a ``member's affiliated 
    firm'' was defined as any firm at which a committee member was either: 
    (1) A principal, as defined by Regulation 3.1(a), or (2) an employee. 
    The term became operative under proposed Regulation 1.69(b)(2)(iii) 
    which required SROs to review positions at a committee member's 
    ``affiliated firm'' when determining whether the member had a direct 
    and substantial financial interest in the outcome of a significant 
    action. CME commented that the ``member's affiliated firm'' definition 
    should be limited to firms where the member was a principal. CME 
    contended that firms which employ committee members should not be 
    included in the definition as firm employees have much less knowledge 
    regarding their firms' positions than do principals. The Commission 
    believes the potential for a committee member to be influenced by an 
    employment relationship is sufficient to warrant his or her 
    disqualification from deliberating and voting on significant actions 
    which might impact the member's employer. Many firm employees have as 
    much knowledge of their firm's positions as do the firm's principals. 
    In fact, the Commission believes that in some instances an employment 
    relationship may have an even greater influence on a committee member 
    than an ownership relationship in that employees may be under the 
    control of their employing firm. Accordingly, the Commission has 
    determined not to modify this aspect of the definition of ``member's 
    affiliated firm'' but rather to adopt the definition as proposed.
    6. Named Party in Interest (Regulation 1.69(a)(6))
        In its proposed rulemaking, the term ``named party in interest'' 
    was defined to mean a party who was ``the subject of any matter being 
    considered'' by an SRO committee. In its comment letter, CBT suggested 
    that ``named party in interest'' be defined to mean a ``person who is 
    identified by name to a governing board, disciplinary committee or 
    oversight panel as the subject of a matter to be considered by it.'' 
    The Commission believes the CBT's suggestion would help to clarify the 
    named party in interest definition. Accordingly, the Commission has 
    adopted the substance of CBT's proposed definition with the 
    modification that the provision include any ``person or entity'' that 
    is identified by name as a subject of a committee action. In adopting 
    this definition of ``named party in interest,'' the Commission reminds 
    the SROs that it would be inconsistent with the intent of Regulation 
    1.69 for SROs to shield the identities of named parties in interests 
    from committee members in order to circumvent the conflict of interest 
    requirements.
    7. Self-Regulatory Organization (Regulation 1.69(a)(7))
        Proposed Regulation 1.69 defined SROs to include exchanges, 
    clearing organizations and registered futures associations 
    (``RFAs'')(with RFAs being excluded from the definition for the 
    purposes of Regulation 1.69(b)(2)
    
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    ``financial interest'' conflicts of interest). BOTCC and CBT both 
    objected to the inclusion of clearing organizations in the definition 
    of SRO on the ground that CEA Section 5a(a)(17), Regulation 1.69's 
    statutory enabling provision, only applies to contract markets and not 
    clearing organizations.
        The Commission believes that BOTCC's and CBT's suggestions would 
    lead to significant inconsistencies in the application of Regulation 
    1.69. Some contract markets have in-house clearing organizations (e.g., 
    CME and NYMEX), while other contract markets are cleared by independent 
    clearing organizations (e.g., CBT and CSCE). Applying Regulation 1.69 
    to clearing organizations, as well as contract markets, would ensure 
    that there would not be differing treatment of contract markets based 
    on whether or not they had an in-house or independent clearing 
    mechanism.
        The Commission notes that, while CEA Section 5a(a)(17) only 
    specifies ``contract markets,'' the provision also requires that its 
    conflict of interest restrictions shall apply to committees handling 
    certain types of margin changes. Margin levels in the futures industry 
    are established by both contract markets and clearing organizations. 
    The Commission also notes that there have been previous occasions when 
    CEA requirements for contract markets have been applied to clearing 
    organizations. For example, Section 5a(a)(12)(A) of the CEA mandates 
    Commission review of ``contract market'' rules while Commission 
    Regulation 1.41, which establishes procedures for Commission review of 
    proposed rules, specifically includes clearing organizations within its 
    definition of contract markets for these purposes. In addition, 
    clearing organizations already are subject to regulatory requirements 
    that are comparable to Regulation 1.69 such as Regulation 1.41(f)'s 
    emergency action provisions and Regulation 1.63's prohibition on 
    committee service by persons with disciplinary histories.
        For each of the above reasons, the Commission has determined that 
    it is appropriate to make clearing organizations subject to Regulation 
    1.69 and to include them in the definition of SRO.
    8. Significant Actions (Regulation 1.69(a)(8))
        Proposed Regulation 1.69(b)(2) applied conflict of interest 
    restrictions to SRO committees whenever they considered any significant 
    action. The term ``significant action'' was proposed to mean: (1) 
    Actions or rule changes that address Regulation 1.41(a)(4) non-physical 
    emergencies; (2) margin changes that respond to extraordinary market 
    conditions, such as ``an actual or attempted corner, squeeze, 
    congestion or undue concentration of positions''; and (3) margin 
    changes that are likely to have a substantial effect on contract prices 
    of any contract traded or cleared at the particular SRO. BOTCC and CBT 
    commented that this provision should track the language of the CEA and 
    that, accordingly, the rulemaking should pertain only to those contract 
    market margin changes that respond to extraordinary market conditions 
    that are likely to have a substantial effect on contract prices.
        The Commission believes that margin changes that are made in 
    response to corners, squeezes, congestion, or undue concentrations of 
    positions serve important market integrity purposes and that committee 
    members should not be influenced by their personal interests when 
    considering such decisions. Accordingly, the Commission has determined 
    not to reduce the scope of the significant action definition, but 
    rather to adopt the provision as it was proposed.
    
    B. Self-Regulatory Organization Rules (Regulation 1.69(b))
    
        Proposed Commission Regulation 1.69(b) required SROs to adopt rules 
    prohibiting committee members from deliberating and voting on certain 
    types of matters as to which they had conflicts of interest. Proposed 
    Regulation 1.69(b)(1) restricted committee participation for members 
    who had a relationship with a matter's named party in interest. 
    Proposed Regulation 1.69(b)(2) restricted committee participation for 
    members who had a ``direct and substantial financial interest'' in 
    certain types of committee actions that do not require prior Commission 
    review and approval. Proposed Commission Regulations 1.69(b)(1) and (2) 
    also mandated certain procedures that SROs must follow when making a 
    determination as to the existence of a conflict of interest.
    1. Conflict of Interest Due to a Relationship With Named Party in 
    Interest (Regulation 1.69(b)(1))
    a. Nature of Relationship (Regulation 1.69(b)(1)(i))
        Under proposed Regulation 1.69(b)(1)(i), SRO committee members were 
    required to abstain from deliberating and voting on any matter where 
    they had a significant relationship with the ``named party in 
    interest.'' These relationships would include family, employment, 
    broker association and ``significant, ongoing business'' relationships. 
    In its comment letter, the CBT noted that CEA Section 5a(a)(17) limits 
    this abstention requirement to ``confidential'' deliberations and 
    voting. Accordingly, CBT suggested that Regulation 1.69(b)(1)(i) should 
    be revised to conform with Section 5a(a)(17) in this regard.
        Although the CEA only mandates that, at a minimum, committee 
    members must abstain from confidential deliberations on matters in 
    which they have a relationship with a named party in interest, the 
    Commission believes that adopting a more prophylactic approach in these 
    types of matters would ensure that SRO committees could not undermine 
    the intent of this provision by declaring ``open'' committee meetings 
    in lieu of applying conflict of interest restrictions. Accordingly, the 
    Commission has decided to adopt Regulation 1.69(b)(1)(i) as proposed 
    and to apply its requirements to all committee deliberations, 
    regardless of whether they are confidential or not.
        CME, CSCE and NYMEX commented that the Commission should clarify 
    Regulation 1.69(b)(1)(i) so that it does not apply to committee actions 
    such as price change register revisions and the certification of the 
    late submission of pit cards. The commenters contended that these 
    situations already are addressed by their own existing procedures and 
    that, accordingly, a Commission rulemaking in this area would be an 
    unnecessary administrative encumbrance.
        The fact that these commenters already have their own conflict of 
    interest requirements for price change register revisions and late pit 
    card certifications does not obviate the need for the Commission to 
    establish an industry-wide standard in this area. In addition, the 
    existence of such requirements at these exchanges also would seem to 
    contradict the contention that Commission-established requirements 
    would be administratively cumbersome to enforce. Accordingly, in 
    connection with this provision, the Commission wishes to clarify that, 
    if a particular, identifiable person approaches an SRO committee member 
    to request sign-off on a price change register revision or a late pit 
    card certification, Regulation 1.69(b)(1) should apply, and the 
    committee member should abstain from handling the matter if his or her 
    relationship with
    
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    the requesting member falls within the parameters of Regulation 
    1.69(b)(1)(i).\6\
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        \6\ The Commission notes that committees which act in these 
    capacities would qualify as oversight panels under Regulation 
    1.69(a)(4), rather than disciplinary committees or governing boards.
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        The Commission recognizes that a floor committee would not be 
    subject to Regulation 1.69(b)(1)'s requirements when taking summary 
    disciplinary actions for minor rule violations,\7\ while the same 
    committee would be subject to Regulation 1.69(b)(1)'s requirements when 
    taking actions such as price change register revisions and the 
    certification of the late submission of pit cards. This distinction 
    reflects the important regulatory interests implicated by these latter 
    actions but not summary actions for minor rule violations.
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        \1\ See discussion of Regulation 1.69(a)(1)'s definition of 
    disciplinary committee in Section III.A.1 above.
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        AFG and Mr. Tucker each suggested that regulation 1.69(b)(1)(i)'s 
    restrictions should extend to relationships where a committee member 
    and a matter's named party in interest may have shared liability for 
    facts that are under consideration by a committee. AFG and Mr. Tucker 
    indicated that their suggestions were prompted by a particular SRO 
    enforcement case in which a member of the disciplinary committee 
    hearing the case potentially shared liability with the case's named 
    party. The Commission believes that the proposed provision would be 
    difficult to formulate and would likely be overbroad in application. In 
    addition, the types of relationships described by the commenters would 
    probably qualify as employment or significant business relationships 
    and, thus, would already appear to qualify as one of Regulation 
    1.69(b)(1)(i)'s list of disqualifying relationships.
        MGE commented that, because of its small size, some of its broker 
    associations contain practically all of the exchange's floor brokers 
    and consequently, under proposed Regulation 1.69(b)(1)(i)(C), a large 
    number of MGE committee members would be disqualified in matters where 
    a floor broker was a named party in interest. In order to address 
    possible hardships that Regulation 1.69 may impose on smaller futures 
    exchanges, the Commission has decided to consider granting small 
    exchanges exemptions from certain provisions of Regulation 1.69 on a 
    case-by-case basis. In making a request for such an exemption, the 
    requesting exchange must: (1) Demonstrate that the pertinent provision 
    of Regulation 1.69 would create a material hardship and (2) provide for 
    alternative procedures that are not inconsistent with the policy 
    considerations underlying Regulation 1.69.
    b. Disclosure of Relationship (Regulation 1.69(b)(1)(ii))
        Proposed Regulation 1.69(b)(1)(ii) required that SRO committee 
    members disclose to the appropriate SRO staff whether they had any one 
    of the relationships listed in Regulation 1.69(b)(1)(i) with respect to 
    a matter's named party in interest. No commenter addressed this 
    provision, and the Commission has determined to adopt Regulation 
    1.69(b)(1)(ii) as proposed.
    c. Procedures for Determination (Regulation 1.69(b)(1)(iii))
        Proposed Regulation 1.69(b)(1)(iii) required that SROs establish 
    procedures for determining whether committee members had a 
    disqualifying relationship with a matter's named party in interest. The 
    provision mandated that the determination must be based upon: (1) 
    information provided by the committee members to the appropriate SRO 
    staff (Regulation 1.69(b)(1)(iii)(A)), and (2) ``any other source of 
    information that is reasonably available'' to the SRO (Regulation 
    1.69(b)(1)(iii)(B)).
        The CBT, CSCE and NYMEX each proposed amendments to the clause 
    covering ``any other source of information reasonably available'' to 
    the SRO. CBT suggested that SROs be able to rely upon ``any information 
    of which the [SRO] has actual knowledge.'' CSCE suggested that SROs be 
    able to rely upon ``any information otherwise known to the SRO in the 
    ordinary course of business.'' Finally, NYMEX proposed that SROs be 
    permitted to rely upon information in their membership and broker 
    association files.
        The Commission believes that CBT's and CSCE's respective proposed 
    changes could create an undesirable incentive for SROs to remain 
    ignorant of their committee members' relationships. On the other hand, 
    the Commission believes that NYMEX's proposed change is too limited in 
    that it would permit SROs to overlook committee member information they 
    may hold somewhere other than in their membership or broker association 
    files.
        In order to avoid the ambiguities and compliance issues created by 
    proposed Regulation 1.69(b)(1)(iii)(B)'s knowledge standard, the 
    Commission has determined to establish a more defined, narrower scope 
    for SRO reviews undertaken to determine whether committee members have 
    a conflict of interest with a named party in interest. Accordingly, in 
    addition to the particular information required to be provided to SROs 
    by committee members pursuant to Regulation 1.69(b)(1)(iii)(A), final 
    Regulation 1.69(b)(1)(iii)(B) requires that SROs review information 
    that is ``held by and reasonably available'' to them.
        NYMEX also suggested that SROs be permitted to take into account 
    the ``exigency'' of a committee action in determining what type of 
    information to review when assessing committee member relationships 
    with named parties in interest. The Commission has determined to adopt 
    NYMEX's suggestion and has incorporated an ``exigency'' modifier into 
    final Regulation 1.69(b)(1)(iii). The Commission notes that the 
    revision parallels what proposed Regulation 1.69(b)(2)(iv) already 
    provided in connection with SRO determinations of conflict due to 
    financial interests in significant actions.
    2. Conflict of Interest Due to a Financial Interest in a Significant 
    Action (Regulation 1.69(b)(2))
        Proposed Regulation 1.69(b)(2) required committee members to 
    abstain from ``significant actions'' by their committees, as that term 
    is defined in Regulation 1.69(a), if the member knowingly had a direct 
    and substantial financial interest in the outcome of the matter.
        While most of the comments addressing proposed Commission 
    Regulation 1.69(b)(2) focused on the provisions that mandated SRO 
    procedures for implementing this provision, See Regulations 
    1.69(b)(2)(ii) through (iv), MGE and NGTC both contended that 
    Regulation 1.69(b)(2)'s basic restriction would adversely impact small 
    exchanges. They commented that small exchanges often have a single 
    dominant contract that most of the exchange members (and hence most 
    committee members) trade. According to these commenters, apply 
    Regulation 1.69(b)(2) to significant actions concerning these contracts 
    would cause a large number of committee members to abstain and would 
    cripple the decisionmaking ability of small exchange committees.
        The Commission is prepared to consider granting small exchanges 
    exemptions from Regulation 1.69(b)(2), on a case-by-case basis. In 
    applying for such an exemption, an exchange must: (1) Demonstrate that 
    Regulation 1.69(b)(2) would create a material hardship (e.g., an 
    exchange that has a single large contract which is traded by a large 
    majority of its members), and (2) provide for alternative procedures 
    that
    
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    are not inconsistent with the policy considerations underlying 
    Regulation 1.69(b(2).
    a. Nature of Interest (Regulation 1.69(b)(2)(i))
        Proposed Commission Regulation 1.69(b)(2)(i) required that SRO 
    committee members abstain from committee deliberations and voting on 
    certain matters in which they ``knowingly [had] a direct and 
    substantial financial interest.'' The proposed restriction applied 
    whenever a committee considered significant actions.\8\ No commenter 
    addressed this provision in particular. Accordingly, the Commission has 
    determined to adopt Regulation 1.69(b)(2)(i) as proposed. In adopting 
    this provision, however, the Commission emphasizes that Regulation 
    1.69(b)(2)(i) itself states that the bases for a committee member's 
    direct and substantial financial interest in a significant action are 
    limited to exchange and non-exchange positions that ``reasonably could 
    be expected to be affected by the action.'' SROs should follow this 
    standard in establishing the level of disclosure made by committee 
    members pursuant to Regulation 1.69(b)(2)(ii) and the level of position 
    review made by them and their staffs pursuant to Regulations 1.69(b)(2) 
    (iii) and (iv).\9\
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        \8\ The definition of such significant actions is established by 
    final Regulation 1.69(a)(8) and is discussed above in Section 
    III.A.8.
        \9\ BOTCC, CBT and CME each requested clarification on this 
    particular point in their respective comment letters.
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    b. Disclosure of Interest (Regulation 1.69(b)(2)(ii))
        Proposed Regulation 1.69(b)(2)(ii) required that, prior to the 
    consideration of a significant action, committee members must disclose 
    to appropriate SRO staff prescribed position information that was 
    ``known'' to the committee member.
        BOTCC, CBT, CME and FIA each suggested that Regulation 1.69 
    specifically permit a committee member to recuse himself/herself from 
    deliberating and voting on a matter without having to make the required 
    disclosure pursuant to Regulation 1.69(b)(2)(ii). The commenters' 
    suggestions are consistent with the Commission's original intent in 
    proposing Regulation 1.69(b)(2)(ii). Accordingly, the Commission has 
    made responsive changes to the final provision.
    c. Procedure for Determination (Regulation 1.69(b)(2)(iii))
        In determining a committee member's financial interest in a 
    significant action, proposed Regulation 1.69(b)(2)(iii) (A) through (D) 
    required SROs to review certain types of positions held at the SRO by 
    the member, the member's affiliated firm, and customers of the member's 
    firm in any contract that could be affected by the committee's 
    significant action. In addition, Regulation 1.69(b)(2)(iii)(E) required 
    SROs to review ``any other types of positions, whether at that [SRO] or 
    elsewhere,'' that the SRO ``reasonably expect[ed] could be affected by 
    the significant action.''
        CBT commented that the review of positions held outside of the 
    particular SRO should be limited to positions owned or controlled by 
    the committee member himself or herself and should not include outside 
    positions held by the member's firm or customers of the member's firm. 
    The Commission concurs with this suggestion insofar as it pertains to 
    positions held outside of an SRO by customers of a committee member's 
    firm. Such positions would be both difficult to ascertain and would be 
    less likely to influence a committee member's decisionmaking. In 
    contrast, positions held by a committee member are certainly less 
    difficult to ascertain, and both positions held by a member and in the 
    proprietary accounts of a member's affiliated firm are more likely to 
    influence a committee member's decisionmaking. Accordingly, the 
    Commission has amended final Regulation 1.69(b)(2)(iii)(E) to require 
    SRO review of outside positions held in a member's personal accounts or 
    the proprietary accounts of a member's affiliated firm.
        CME suggested that it was not necessary to have an SRO conduct the 
    same level of review for positions held outside of the SRO as for 
    positions held at the SRO and that Regulation 1.69(b)(2)(iii) should be 
    appropriately amended. The Commission does not believe that it is 
    appropriate to establish some lessened level of review standard for 
    positions held outside of the subject SRO. Regulation 1.69(b)(2) 
    already includes provisions that serve the same purpose. For example, 
    Regulation 1.69(b)(2)(i) limits the bases for conflict of interest 
    determinations to positions that ``reasonably'' could be expected to be 
    affected by a significant action. In addition, Regulation 
    1.69(b)(2)(iv) states that SROs may take into account ``the exigency of 
    the significant action'' when undertaking a review of the various 
    sources of information to be considered when making a conflict of 
    interest determination.
    d. Bases for Determination (Regulation 1.69(b)(2)(iv))
        Proposed Regulation 1.69(b)(2)(iv) specified what sources of 
    information SROs should rely upon in determining whether a committee 
    member had a conflict of interest in a significant action. Generally, 
    the provision directed SROs to consult: (1) The most recent large 
    trader reports and clearing records available to the SRO (Regulation 
    1.69(b)(2)(iv)(A)); (2) position information provided to the SRO by the 
    committee member (Regulation 1.69(b)(2)(iv)(B)); and (3) any other 
    source of information that was ``held by and reasonably available'' to 
    the SRO, whether it be from inside or outside the SRO (Regulation 
    1.69(b)(2)(iv)(C)).
        CBT and CSCE each suggested replacement language for Regulation 
    1.69(b)(2)(iv)(C)'s requirement that SROs consult ``any other source of 
    information that is reasonably available'' to the SRO. CBT suggested 
    that SROs be permitted to rely on ``any information of which the [SRO] 
    has actual knowledge.'' CSCE suggested that SROs be able to rely on 
    ``any information otherwise known to [the SRO] in the ordinary course 
    of business.''
        The Commission does not believe that either of these suggested 
    review standards would be appropriate in that they could create a 
    disincentive for SROs to remain apprised of their committee members' 
    positions. The Commission has adopted an alternative revision to 
    Regulation 1.69(b)(2)(iv)(C) which provides that SROs consult ``any 
    other source of information that is held by and reasonably available'' 
    to the SRO. The Commission notes that this revision parallels the 
    standard which the Commission has adopted in Regulation 1.69(b)(1)(iii) 
    with respect to information that SROs should consult in determining 
    whether a committee member has a conflict due to a relationship with a 
    matter's named party in interest.
    3. Participation in Deliberations (Regulation 1.69(b)(3))
        CEA Section 5a(a)(17) recognizes that in some instances a committee 
    member with a conflict in a particular committee matter also might have 
    special knowledge or experience regarding that matter. Accordingly, in 
    a limited number of circumstances, proposed Commission Regulation 
    1.69(b)(3) permitted SRO committees to allow a committee member, who 
    otherwise would be required to abstain from
    
    [[Page 21]]
    
    deliberations and voting on a matter because of a conflict, to 
    deliberate but not to vote on the matter. This ``deliberation 
    exception'' was only made applicable to matters in which a committee 
    member had a conflict of interest as the result of having a ``direct 
    and substantial financial interest'' in the outcome of a vote on a 
    significant action under Regulation 1.69(b)(2). Consistent with Section 
    5a(a)(17), proposed Regulation 1.69(b)(3)'s deliberation exception did 
    not apply to matters in which a committee member had a conflict due to 
    his or her relationship with a matter's named party in interest under 
    Regulation 1.69(b)(1).
        In determining whether to permit a ``conflicted'' committee member 
    to deliberate on a matter, proposed Regulation 1.69(b)(3) required that 
    the presiding committee consider a number of factors including: (1) 
    Whether the member had unique or special expertise, knowledge or 
    experience in the matter involved, and (2) whether the member's 
    participation in deliberations would be necessary for the committee to 
    obtain a quorum.\10\ Proposed Regulation 1.69(b)(3)(iii) also required 
    that when SRO committees determine whether to grant a deliberation 
    exception, they ``must fully consider the position information'' which 
    evidences the committee member's financial interest in the matter.
    ---------------------------------------------------------------------------
    
        \10\ The Commission, in its proposed rulemaking, indicated that 
    it believed that, given the factors that must be considered, 
    deliberation exception determinations should be made by the 
    committee involved, rather than SRO staff. For any particular SRO 
    committee matter, the committee members themselves would be in a 
    better position than SRO staff to assess their individual levels of 
    expertise in the matter and their need for input during 
    deliberations from the committee member who otherwise would be 
    required to abstain. The Commission continues to adhere to this 
    view, and no commenters on the proposed rulemaking addressed this 
    issue. Accordingly, final Regulations 1.69 specifically confers the 
    responsibility for deliberation exception determinations on the SRO 
    committee involved.
    ---------------------------------------------------------------------------
    
        The Commission has decided to retain the basic requirements of 
    proposed Regulation 1.69(b)(3)'s deliberation exception provision in 
    this final rulemaking. The Commission believes that the provision 
    strikes a reasonable 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 a matter.
        Only two commenters addressed proposed Regulation 1.69(b)(3). 
    Specifically, CBT and CSCE commented that Regulation 1.69(b)(3)(iii) 
    should not be interpreted to mean that a member's precise position 
    information must be disclosed to the entire SRO committee and that, 
    instead, some sort of general summary of the member's positions should 
    be sufficient disclosure.
        The disclosure of a ``conflicted'' committee member's position 
    information to the committee, pursuant to Regulation 1.69(b)(3)(iii), 
    generally serves two purposes. First, it enables the committee to 
    evaluate the depth of a committee member's financial interest in the 
    outcome of a significant action and to balance whether his or her 
    participation in deliberations would be worthwhile. Second, in the case 
    of a committee member who receives a deliberation exception, the 
    disclosure of the member's interest to his or her fellow committee 
    members should help to mitigate any prejudicial influence such member's 
    views could have on the other members during the course of 
    deliberations. In light of this important need for accurate position 
    information, the Commission does not believe that it would be 
    appropriate for SRO committees to make deliberation exception 
    determinations based upon a general summary of a conflicted member's 
    position information. Accordingly, the Commission has not revised this 
    provision in the final rulemaking.
    4. Documentation of Determination (Regulation 1.69(b)(4))
        Whenever an SRO committee made a conflict of interest 
    determination, proposed Regulation 1.69(b)(4) required that certain 
    information regarding the abstention determination be recorded. Such a 
    record was required to indicate: (1) The committee members who attended 
    the meeting (Regulation 1.69(b)(4)(i)), (2) the name of any committee 
    member who was directed to abstain or who voluntarily recused himself 
    or herself and the reasons why (Regulation 1.69(b)(4)(ii)), (3) a 
    listing of the position information reviewed for each committee member 
    (Regulation 1.69(b)(4)(iii)), and (4) in those instances when a 
    committee member was granted a deliberation exception, a general 
    description of the views expressed by the member during the committee's 
    deliberations on the underlying significant action (Regulation 
    1.69(b)(4)(iv)).
        The CSCE commented that, under the proposal, committee members who 
    received a deliberation exemption would be ``chilled'' from expressing 
    their opinions by the requirement that their views be particularly 
    recorded. The Commission concurs with CSCE's comment and, accordingly, 
    has deleted this requirement from final Regulation 1.69.
    
    C. Amendments to Other Commission Regulations Made Necessary by Final 
    Commission Regulation 1.69
    
        Section 213 of the FTPA amended Section 5a(a)(12)(B) of the CEA to 
    require that the Commission issue regulations establishing ``terms and 
    conditions'' under which contract markets may take temporary emergency 
    actions without prior Commission approval. Section 5a(a)(12)(B) and 
    Regulation 1.41(f), the Commission's implementing regulation, require 
    that any such temporary emergency action be adopted by a two-thirds 
    vote of a contract market's governing board. In recognition of the fact 
    that governing board members may be required to abstain from 
    deliberations and voting on such actions under contract market rules 
    implementing Regulation 1.69, the Commission, as part of its proposed 
    conflict of interest rulemaking, proposed to amend Regulation 1.41(f) 
    to provide that such abstaining board members not be included in 
    determining whether a temporary emergency action has been approved by a 
    two-thirds majority of a governing board. Abstaining board members are, 
    however, included for quorum purposes so that the existence of 
    conflicted members will not prevent a board from taking temporary 
    emergency actions.
        No commenters addressed this provision, and the Commission has 
    determined to amend Regulation 1.41(f)(10) as proposed.
        The Commission also proposed to amend Commission Regulation 1.63's 
    definition of ``disciplinary committee'' so that it more closely 
    conformed with Regulation 1.69's definition of the same term. As 
    indicated above in Section III.A.1., the Commission now has revised 
    Regulation 1.69(a)(1)'s definition of disciplinary committee to exclude 
    committees and persons who summarily issue minor penalties for minor 
    offenses regarding ``decorum, attire, the timely submission of accurate 
    records for clearing or verifying each day's transactions or other 
    similar activities.'' This revision was made in response to the concern 
    that the application of conflict of interest requirements to SRO 
    disciplinary authorities when they take summary actions for minor rule 
    violations would be administratively burdensome and might hamper the 
    SROs' ability to take quick and decisive actions in such circumstances. 
    The same concerns are not presented by Regulation 1.63 which generally 
    prohibits persons with disciplinary histories from serving on 
    disciplinary committees for at least three years after the date of the
    
    [[Page 22]]
    
    underlying disciplinary judgment or settlement agreement. Accordingly, 
    the Commission has determined to adopt Regulation 1.63(a)(2)'s 
    disciplinary committee definition as proposed. The definition is 
    identical to Regulation 1.69's disciplinary committee definition, 
    except that Regulation 1.63's definition does not exclude committees 
    that handle summary disciplinary matters.
        Finally, the CME in its comment on proposed Regulation 1.69 
    suggested that Commission Regulation 8.17(a)(1), which already imposes 
    a general conflict of interest requirement on disciplinary committees, 
    be amended to clarify that Regulation 1.69 pre-empts Regulation 
    8.17(a)(1). The Commission does not believe that compliance with 
    Regulation 1.69 will necessarily constitute compliance with Regulation 
    8.17(a)(1). Specifically, instances when a disciplinary committee 
    member is a witness to the alleged misconduct, testifies about the 
    alleged misconduct or investigates the alleged misconduct would not 
    constitute a conflict of interest pursuant to Regulation 1.69 but would 
    possibly be a conflict of interest pursuant to Regulation 8.17(a)(1) 
    requiring the member's recusal from the disciplinary committee. See In 
    the Matter of Malato, [1987-1990 Transfer Binder] Comm. Fut. L. Rep. 
    (CCH) para. 24,084, at 34,704 (CFTC Dec. 22, 1987). Accordingly, for 
    these reasons, the Commission has determined not to amend Regulation 
    8.17(a)(1) as suggested by the CME.
    
    D. Conclusion
    
        The Commission believes that final Regulation 1.69 and the 
    amendments to Regulation 1.41 and 1.63 meet the statutory directives of 
    Section 5a(a)(17) of the CEA as it was amended by Section 217 of the 
    FTPA. The rulemaking establishes guidelines and factors to be 
    considered in determining whether an SRO committee member is subject to 
    a conflict of interest which could potentially impinge on his or her 
    ability to make fair and impartial decisions in a matter and, thus, 
    warrants abstention from participation in committee deliberations and 
    voting.
    
    IV. Related Matters
    
    A. Regulatory Flexibility Act
    
        The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq. 
    (1980), requires that agencies, in promulgating 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. 47 Fed. Reg. 18618, 18619 (Apr. 30, 1982). 
    Furthermore, the then Chairman of the Commission previously has 
    certified on behalf of the Commission that comparable rules affecting 
    clearing organizations and registered futures associations did not have 
    a significant economic impact on a substantial number of small 
    entities. 51 FR 44866, 44868 (Dec. 12, 1986).
        This rulemaking will affect individuals who serve on SRO governing 
    boards, disciplinary committees and oversight panels. The Commission 
    believes that this rulemaking will not have a significant economic 
    impact on these SRO committee members. This rulemaking requires these 
    committee members to disclose to their SROs certain information which 
    is known to them at the time that their committees consider certain 
    types of matters. The Commission believes that this requirement will 
    not have any significant economic impact on such members because the 
    information which they are required to provide should be readily 
    available to them.
        Accordingly, the Chairperson, on behalf of the Commission, hereby 
    certifies, pursuant to Section 3(a) of the RFA, 5 U.S.C. Sec. 605(b), 
    that the action taken herein will not have a significant economic 
    impact on a substantial number of small entities.
    
    B. Agency Information Activities; Proposed Collection; Comment Request
    
        When publishing final rules, the Paperwork Reduction Act of 1995 
    (``PRA'') (Pub. L. 104-13 (May 13, 1995)) imposes certain requirements 
    on federal agencies (including the Commission) in connection with their 
    conducting or sponsoring any collection of information as defined by 
    PRA. In compliance with the Act, this final rule informs the public of:
    
        (1) The reasons the information is planned to be and/or has been 
    collected; (2) the way such information is planned to be and/or has 
    been used to further the proper performance of the functions of the 
    agency; (3) an estimate, to the extent practicable, of the average 
    burden of the collection (together with a request that the public 
    direct to the agency any comments concerning the accuracy of this 
    burden estimate and any suggestions for reducing this burden); (4) 
    whether responses to the collection of information are voluntary, 
    required to obtain or retain a benefit, or mandatory; (5) the nature 
    and extent of confidentiality to be provided, if any; and (6) the 
    fact that an agency may not conduct or sponsor, and a person is not 
    required to respond to, a collection of information unless it 
    displays a currently valid Office of Management and Budget (``OMB'' 
    control number.
    
    The Commission previously submitted this rule in proposed form and its 
    associated information collection requirements to OMB. OMB approved the 
    collection of information associated with this rule on October 24, 
    1998, and assigned OMB control number 3038-0022, Rules Pertaining to 
    Contract Markets and their Members, to the rule. The burden associated 
    with this entire collection, including this final rule, is as follows:
        Average burden hours per response: 788,857.
        Number of respondents: 434,052.
        Frequency of response: On occasion.
        The burden associated with this specific final rule, is as follows:
        Average burden hours per response: 2.00.
        Number of respondents: 20.
        Frequency of response: On occasion.
        Persons wishing to comment on the information required by this 
    final rule should contact the Desk Officer, CFTC, Room 10202, NEOB, 
    Washington, DC 20503, (202) 395-7340. Copies of the information 
    collection submission to OMB are available from the CFTC Clearance 
    Officer, 1155 21st Street NW., Washington, DC 20581, (202) 418-5160.
    
    List of Subjects in 17 CFR Part 1
    
        Commodity futures, Contract markets, Clearing organizations, 
    Members of contract market.
    
        In consideration of the foregoing, and based on the authority 
    contained in the Commodity Exchange Act and, in particular, Sections 3, 
    4b, 5, 5a, 6, 6b, 8, 8a, 9, 17, and 23(b) thereof, 7 U.S.C. 5, 6b, 7, 
    7a, 8, 13a, 12, 12a, 13, 21 and 26(b), the Commission hereby amends 
    Title 17, Chapter I, Part 1 of the Code of Federal Regulations as 
    follows:
    
    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
    
        1. The authority citation for Part 1 continues to read as follows:
    
        Authority: 7 U.S.C. 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 
    6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 8, 9, 12, 12a, 12c, 13a, 13a-
    1, 16, 19, 21, 23, and 24, unless otherwise stated.
    
        2. Section 1.41 is 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-
    
    [[Page 23]]
    
    thirds vote required by this regulation. Such members can be counted 
    for the purpose of determining whether a quorum exists.
        3. Section 1.63 is amended by revising paragraph (a)(2) to read as 
    follows:
    
    
    Sec. 1.63  Service on self-regulatory organization governing boards or 
    committees by persons with disciplinary histories.
    
        (a) * * *
        (2) Disciplinary committee means any person or committee of 
    persons, or any subcommittee thereof, that is authorized by a self-
    regulatory organization to issue disciplinary charges, to conduct 
    disciplinary proceedings, to settle disciplinary charges, to impose 
    disciplinary sanctions or to hear appeals thereof.
    * * * * *
        4. Section 1.69 is added to read as follows:
    
    
    Sec. 1.69  Voting by interested members of self-regulatory organization 
    governing boards and various committees.
    
        (a) Definitions. For purposes of this section:
        (1) Disciplinary committee means any person or committee of 
    persons, or any subcommittee thereof, that is authorized by a self-
    regulatory organization to issue disciplinary charges, to conduct 
    disciplinary proceedings, to settle disciplinary charges, to impose 
    disciplinary sanctions, or to hear appeals thereof in cases involving 
    any violation of the rules of the self-regulatory organization except 
    those cases where the person or committee is authorized summarily to 
    impose minor penalties for violating rules regarding decorum, attire, 
    the timely submission of accurate records for clearing or verifying 
    each day's transactions or other similar activities.
        (2) Family relationship of a person means the person's spouse, 
    former spouse, parent, stepparent, child, stepchild, sibling, 
    stepbrother, stepsister, grandparent, grandchild, uncle, aunt, nephew, 
    niece or in-law.
        (3) Governing board means a self-regulatory organization's board of 
    directors, board of governors, board of managers, or similar body, or 
    any subcommittee thereof, duly authorized, pursuant to a rule of the 
    self-regulatory organization that has been approved by the Commission 
    or has become effective pursuant to either Section 5a(a)(12)(A) or 
    17(j) of the Act to take action or to recommend the taking of action on 
    behalf of the self-regulatory organization.
        (4) Oversight panel means any panel, or any subcommittee thereof, 
    authorized by a self-regulatory organization to recommend or establish 
    policies or procedures with respect to the self-regulatory 
    organization's surveillance, compliance, rule enforcement, or 
    disciplinary responsibilities.
        (5) Member's affiliated firm is a firm in which the member is a 
    ``principal,'' as defined in Sec. 3.1(a), or an employee.
        (6) Named party in interest means a person or entity that is 
    identified by name as a subject of any matter being considered by a 
    governing board, disciplinary committee, or oversight panel.
        (7) Self-regulatory organization means a ``self-regulatory 
    organization'' as defined in Sec. 1.3(ee) and includes a ``clearing 
    organization'' as defined in Sec. 1.3(d), but excludes registered 
    futures associations for the purposes of paragraph (b)(2) of this 
    section.
        8 (Significant action) includes any of the following types of self-
    regulatory organization actions or rule changes that can be implemented 
    without the Commission's prior approval:
        (i) Any actions or rule changes which address an ``emergency'' as 
    defined in Sec. 1.41(a)(4)(i) through (iv) and (vi) through (viii); 
    and,
        (ii) Any changes in margin levels that are designed to respond to 
    extraordinary market conditions such as an actual or attempted corner, 
    squeeze, congestion or undue concentration of positions, or that 
    otherwise are likely to have a substantial effect on prices in any 
    contract traded or cleared at such self-regulatory organization; but 
    does not include any rule not submitted for prior Commission approval 
    because such rule is unrelated to the terms and conditions of any 
    contract traded at such self-regulatory organization.
        (b) Self-regulatory organization rules. Each self-regulatory 
    organization shall maintain in effect rules that have been submitted to 
    the Commission pursuant to Section 5a(a)(12)(A) of the Act and 
    Sec. 1.41 or, in the case of a registered futures association, pursuant 
    to Section 17(j) of the Act, to address the avoidance of conflicts of 
    interest in the execution of its self-regulatory functions. Such rules 
    must provide for the following:
        (1) Relationship with named party in interest--(i) Nature of 
    relationship. A member of a self-regulatory organization's governing 
    board, disciplinary committee or oversight panel must abstain from such 
    body's deliberations and voting on any matter involving a named party 
    in interest where such member:
        (A) is a named party in interest;
        (B) is an employer, employee, or fellow employee of a named party 
    in interest;
        (C) is associated with a named party in interest through a ``broker 
    association'' as defined in Sec. 156.1;
        (D) has any other significant, ongoing business relationship with a 
    named party in interest, not including relationships limited to 
    executing futures or option transactions opposite of each other or to 
    clearing futures or option transactions through the same clearing 
    member; or,
        (E) Has a family relationship with a named party in interest.
        (ii) Disclosure of relationship. Prior to the consideration of any 
    matter involving a named party in interest, each member of a self-
    regulatory organization governing board, disciplinary committee or 
    oversight panel must disclose to the appropriate self-regulatory 
    organization staff whether he or she has one of the relationships 
    listed in paragraph (b)(1)(i) of this section with a named party in 
    interest.
        (iii) Procedure for Determination. Each self-regulatory 
    organization must establish procedures for determining whether any 
    member of its governing board, disciplinary committees or oversight 
    committees is subject to a conflicts restriction in any matter 
    involving a named party in interest. Taking into consideration the 
    exigency of the committee action, such determinations should be based 
    upon:
        (A) information provided by the member pursuant to paragraph 
    (b)(1)(ii) of this section; and
        (B) any other source of information that is held by and reasonably 
    available to the self-regulatory organization.
        (2) Financial Interest in a Significant Action--(i) Nature of 
    Interest. A member of a self-regulatory organization's governing board, 
    disciplinary committee or oversight panel must abstain from such body's 
    deliberations and voting on any significant action if the member 
    knowingly has a direct and substantial financial interest in the result 
    of the vote based upon either exchange or non-exchange positions that 
    could reasonably be expected to be affected by the action.
        (ii) Disclosure of Interest. Prior to the consideration of any 
    significant action, each member of a self-regulatory organization 
    governing board, disciplinary committee or oversight panel must 
    disclose to the appropriate self-regulatory organization staff the 
    position information referred to in paragraph (b)(2)(iii) of this 
    section that is known to him or her. This
    
    [[Page 24]]
    
    requirement does not apply to members who choose to abstain from 
    deliberations and voting on the subject significant action.
        (iii) Procedure for Determination. Each self-regulatory 
    organization must establish procedures for determining whether any 
    member of its governing board, disciplinary committees or oversight 
    committees is subject to a conflicts restriction under this section in 
    any significant action. Such determination must include a review of:
        (A) gross positions held at that self-regulatory organization in 
    the member's personal accounts or ``controlled accounts,'' as defined 
    in Sec. 1.3(j);
        (B) gross positions held at that self-regulatory organization in 
    proprietary accounts, as defined in Sec. 1.17(b)(3), at the member's 
    affiliated firm;
        (C) gross positions held at that self-regulatory organization in 
    accounts in which the member is a principal, as defined in Sec. 3.1(a);
        (D) net positions held at that self-regulatory organization in 
    ``customer'' accounts, as defined in Sec. 1.17(b)(2), at the member's 
    affiliated firm; and,
        (E) any other types of positions, whether maintained at that self-
    regulatory organization or elsewhere, held in the member's personal 
    accounts or the proprietary accounts of the member's affiliated firm 
    that the self-regulatory organization reasonably expects could be 
    affected by the significant action.
        (iv) Bases for Determination. Taking into consideration the 
    exigency of the significant action, such determinations should be based 
    upon:
        (A) the most recent large trader reports and clearing records 
    available to the self-regulatory organization;
        (B) information provided by the member with respect to positions 
    pursuant to paragraph (b)(2)(ii) of this section; and,
        (C) any other source of information that is held by and reasonably 
    available to the self-regulatory organization.
        (3) Participation in Deliberations. (i) Under the rules required by 
    this section, a self-regulatory organization governing board, 
    disciplinary committee or oversight panel may permit a member to 
    participate in deliberations prior to a vote on a significant action 
    for which he or she otherwise would be required to abstain, pursuant to 
    paragraph (b)(2) of this section, if such participation would be 
    consistent with the public interest and the member recuses himself or 
    herself from voting on such action.
        (ii) In making a determination as to whether to permit a member to 
    participate in deliberations on a significant action for which he or 
    she otherwise would be required to abstain, the deliberating body shall 
    consider the following factors:
        (A) whether the member's participation in deliberations is 
    necessary for the deliberating body to achieve a quorum in the matter; 
    and
        (B) whether the member has unique or special expertise, knowledge 
    or experience in the matter under consideration.
        (iii) Prior to any determination pursuant to paragraph (b)(3)(i) of 
    this section, the deliberating body must fully consider the position 
    information which is the basis for the member's direct and substantial 
    financial interest in the result of a vote on a significant action 
    pursuant to paragraph (b)(2) of this section.
        (4) Documentation of Determination. Self-regulatory organization 
    governing boards, disciplinary committees, and oversight panels must 
    reflect in their minutes or otherwise document that the conflicts 
    determination procedures required by this section have been followed. 
    Such records also must include:
        (i) the names of all members who attended the meeting in person or 
    who otherwise were present by electronic means;
        (ii) the name of any member who voluntarily recused himself or 
    herself or was required to abstain from deliberations and/or voting on 
    a matter and the reason for the recusal or abstention, if stated; and
        (iii) information on the position information that was reviewed for 
    each member.
    
        Issued in Washington, D.C. on December 23, 1998, by the 
    Commission.
    Catherine D. Dixon,
    Assistant Secretary of the Commission.
    [FR Doc. 98-34516 Filed 12-31-98; 8:45 am]
    BILLING CODE 6351-01-M
    
    
    

Document Information

Effective Date:
3/5/1999
Published:
01/04/1999
Department:
Commodity Futures Trading Commission
Entry Type:
Rule
Action:
Final rulemaking.
Document Number:
98-34516
Dates:
March 5, 1999.
Pages:
16-24 (9 pages)
PDF File:
98-34516.pdf
CFR: (3)
17 CFR 1.41
17 CFR 1.63
17 CFR 1.69