E7-22878. Conflicts of Interest in Self-Regulation and Self-Regulatory Organizations

AGENCY:

Commodity Futures Trading Commission (“Commission”)

ACTION:

Final rule; notice of stay.

SUMMARY:

On January 31, 2007, the Commission adopted Acceptable Practices for Section 5(d)(15) (“Core Principle 15”) of the Commodity Exchange Act. The new Acceptable Practices were published in the Federal Register on February 14, 2007, and became effective on March 16, 2007. On March 26, 2007, the Commission published certain proposed amendments to the Acceptable Practices in an effort to clarify the definition of “public director” contained therein.^[1] The Commission has yet to act upon the proposed amendments, which are central to every element of the Acceptable Practices. Accordingly, the Commission hereby notifies all designated contract markets (“DCMs”) that, until further notice, the Acceptable Practices contained in paragraph (b) of Core Principle 15 in Appendix B to 17 CFR part 38 are stayed indefinitely.

DATES:

Effective November 23, 2007, paragraph (b) of Core Principle 15 in Appendix B to 17 CFR part 38 is stayed indefinitely. The Commission will publish a new Federal Register document lifting the stay on a future date.

FOR FURTHER INFORMATION CONTACT:

Rachel F. Berdansky, Acting Deputy Director for Market Compliance, 202-418-5429, or Sebastian Pujol Schott, Special Counsel, 202-418-5641, Division of Market Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

On January 31, 2007 the Commission adopted its first Acceptable Practices for Core Principle 15. The Acceptable Practices are structured in four parts, including three operational provisions. The operational provisions include: (1) DCM boards of directors composed of at least 35% public directors; (2) board-level regulatory oversight committees (“ROC”) consisting exclusively of public directors; and (3) disciplinary panels including at least one public person. The Acceptable Practices also include an important fourth provision which defines “public director” and also impacts ROC members and disciplinary panel members. All three operational provisions of the Acceptable Practices are dependent upon the definition of public director.

The Acceptable Practices were published in the Federal Register on February 14, 2007, with an effective date of March 16, 2007. The Commission stated at that time that it would survey all DCMs within six months to evaluate their plans for compliance with Core Principle 15. The Commission further stated that all DCMs would be granted the lesser of two years or two regularly scheduled board elections to fully implement the new Acceptable Practices or otherwise demonstrate full compliance with Core Principle 15.

On March 26, 2007, the Commission published proposed amendments to the definition of DCM “public director,” which, as noted above, also impacts ROC and disciplinary panel members. The comment period for the proposed amendments ended on April 25, 2007. Six comment letters were received, including letters from the National Futures Association; the Futures Industry Association; the CBOE Futures Exchange; the Chicago Board of Trade; the Chicago Mercantile Exchange and Kansas City Board of Trade writing jointly; and Mr. Dennis Gartman. The comments received were studied carefully and are under advisement by the Commission. However, the Commission has yet to take final action on the proposed amendments.

Until such time as the definition of “public director” is finalized, the operational provisions of the Acceptable Practices, which are dependent on the definition, cannot be properly applied by DCMs or enforced by the Commission. Recognizing this fact, and in order to carefully consider its next steps, the Commission has determined to stay the Acceptable Practices for Core Principle 15 adopted on January 31, 2007. Accordingly, the two-year compliance period is also stayed.

Related Matters

A. Cost-Benefit Analysis

Section 15(a) of the Act requires the Commission to consider the costs and benefits of its actions in advance of issuing any new regulation or order.^[2] More specifically, Section 15(a) states that the costs and benefits of a proposed rule or order shall be evaluated with regard to five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. In conducting its analysis, the Commission may give greater weight to any one of the five enumerated areas of market and public concern and determine, notwithstanding potential costs, that the implementation of a particular rule or order is necessary or appropriate to protect the public's interest or to effectuate or accomplish any of the provisions or purposes of the Act.^[3]

On February 14, 2007, the Commission published its first Acceptable Practices for Core Principle 15. The four-part Acceptable Practices, described above, were designed to facilitate the reduction of conflicts of interest in DCMs' decision making processes.^[4] Although the Acceptable Practices became effective on March 16, 2007, the Commission established a phase-in period for DCMs to implement the Acceptable Practices or to otherwise come into full compliance with Core Principle 15. The phase-in period extended well beyond the date of effectiveness and consisted of the lesser of two years or two regularly scheduled board elections.

On March 26, 2007, the Commission published proposed amendments to one element of the new Acceptable Practices—the definition of “public director.” To date, the Commission has yet to act upon the proposed amendments. The Commission recognizes that the operational provisions of Acceptable Practices cannot be properly applied by DCMs until the definition of “public director” is resolved. Accordingly, the Commission has determined, for the purpose of regulatory clarity, to stay the Acceptable Practices for Core Principle 15 and thereby lift any potential compliance costs associated with those Acceptable Practices.

B. Paperwork Reduction Act of 1995

The stay of the effective date of the Acceptable Practices for Core Principle 15 reduces the information collection burden to levels previously approved by the Office of Management and Budget (OMB). The OMB control number for this collection is 3038-0052. The Commission has submitted the required Paperwork Reduction Act Change Worksheet (OMB-83C) to OMB to reflect the change.

C. Regulatory Flexibility Act

The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., requires federal agencies, in promulgating rules, to consider the impact of those rules on small entities. The stay of the effective date for the Acceptable Practices for Core Principle 15 affects DCMs. The Commission has previously determined that DCMs are not small entities for purposes of the Regulatory Flexibility Act.^[5] Accordingly, the acting Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the stay of the Acceptable Practices will not have a significant economic impact on a substantial number of small entities.

Therefore, paragraph (b) of Core Principle 15 in Appendix B to 17 CFR part 38 is stayed indefinitely.

Issued in Washington, DC, on November 16, 2007, by the Commission.

David Stawick,

Secretary of the Commission.

Footnotes

1.  Under the Acceptable Practices, the definition of “public director” is also relevant to members of DCM regulatory oversight committees (all of whom must be public directors) and to members of DCM disciplinary panels (panelists need not be directors, but must include at least one member who meets certain elements of the definition of public director).

2.  7 U.S.C. 19(a).

3.  Fishermen's Dock Co-op., Inc. v. Brown, 75 F.3d 164 (4th Cir. 1996); Center for Auto Safety v. Peck, 751 F.2d 1336 (D.C. Cir. 1985) (agency has discretion to weigh factors in undertaking costs-benefits analyses).

4.  72 FR 6936 (February 14, 2007).

5.  See Policy Statement and Establishment of Definitions of “Small Entities” for Purposes of the Regulatory Flexibility Act, 47 FR 18618, 18619 (Apr. 30, 1982).