[Federal Register Volume 61, Number 87 (Friday, May 3, 1996)]
[Proposed Rules]
[Pages 19869-19878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10936]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1 and 156
Proposed Rulemaking Concerning Voting by Interested Members of
Self-Regulatory Organization Governing Boards and Committees and
Concerning the Publicizing of Broker Association Memberships
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
proposing a rulemaking which would implement the statutory directives
of Section 5a(a)(17) of the Commodity Exchange Act (``CEA'') as it was
amended by Section 217 of the Futures Trading Practices Act of 1992
(``FTPA'').1
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\1\ Pub. L. No. 102-546, sec. 217, 106 Stat. 3590 (1992).
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The proposed rulemaking would establish a new Commission Regulation
1.69 which would require self-regulatory organizations (``SROs'') to
adopt rules prohibiting governing board, disciplinary committee and
oversight panel members from deliberating and voting on certain matters
where the member has either a relationship with the matter's named
party in interest or a financial interest in the matter's outcome. The
proposed rulemaking also would amend existing Commission Regulations
1.3, 1.41 and 1.63 to make modifications made necessary by new
Commission Regulation 1.69. The Commission also is proposing to add a
new Regulation 156.4 to require that contract markets make more readily
available to the public the identity of members of broker associations
at their respective exchanges.
DATES: Comments on the proposed rules and proposed rule amendments must
be received by July 2, 1996.
ADDRESSES: Interested persons should submit their views and comments to
Jean A. Webb, Secretary, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581.
Telephone: (202) 418-5100.
FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Special Counsel,
Division of Trading and Markets, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581.
Telephone: (202) 418-5481.
SUPPLEMENTARY INFORMATION:
I. Introduction
Section 217 of the FTPA amended Section 5a(a)(17) of the CEA to
provide that each contract market must ``provide for the avoidance of
conflict of interest in deliberations by [its] governing board and any
disciplinary and oversight committees.'' 2 FTPA Section 217
further describes certain conflict situations where committee members
must abstain from deliberations and voting, while also requiring that
the Commission promulgate regulations in this regard.
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\2\ For the purposes of this release, the term ``committee''
will generally be used to include governing boards, disciplinary
committees and oversight committees unless otherwise specified.
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Consistent with Section 217 of the FTPA, proposed Commission
Regulation 1.69 would generally bar an SRO committee member from
deliberations and voting on a committee decision where the member could
potentially be unduly influenced, due to either financial or personal
concerns, by the outcome of the decision. The Commission's proposed
rulemaking is intended to ensure that SRO committee actions are not
infected by any conflict of interest and are in the best interest of
the entire SRO. By furthering the impartiality of the SRO
decisionmaking process, the Commission believes that Regulation 1.69
should promote public confidence in the integrity of the self-
regulatory process.3
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\3\ The Commission notes that proposed Regulation 1.69 would be
the latest in an ongoing series of recent Commission rulemakings
aimed at enhancing the fairness and impartiality of the SRO
committee decisionmaking process. In 1990, the Commission adopted
Regulation 1.63 prohibiting persons with histories of disciplinary
violations from serving on various SRO committees. Prompted by the
FTPA, in 1993, the Commission adopted three separate rulemakings
dealing with SRO committee procedures and service. First, the
Commission amended Regulation 1.41 to establish conditions under
which contract markets may take emergency actions without prior
Commission approval, while also establishing specific procedures for
Commission review of such emergency actions. Second, the Commission
amended Regulation 1.59 to enhance its prohibition of SRO governing
board members and employees disclosing or trading on inside
information. Third, the Commission promulgated Regulation 1.64 which
establishes committee composition requirements to ensure that a
diversity of each SRO's membership is represented on its committees.
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[[Page 19870]]
The Commission notes that the governing boards of futures exchanges
are legally bound to not act in ``bad faith'' when taking actions on
behalf of an exchange. This ``bad faith'' standard was first
articulated in Daniel v. Board of Trade of the City of Chicago, 164
F.2d 815 (7th Cir., 1947), a case arising from Chicago Board of Trade
(``CBOT'') emergency actions raising the price limits on various grain
futures contracts due to price volatility. The plaintiffs in the case
lost money on their grain positions as a result of the CBOT's actions
and claimed that the CBOT's Board members acted ``wilfully,
maliciously, and for their own personal gain'' in imposing the
emergency price limits. 164 F.2d at 818. In the Daniel case, the Court
recognized that while exchange boards have a ``duty'' to address market
emergencies, they also have a ``relation to the public'' which requires
that they ``act with the utmost, objectivity, impartiality, honesty,
and good faith.'' 164 F.2d at 819-20. In order to prevail in a suit
challenging an emergency action, the Court determined that the
plaintiff must show ``bad faith amounting to fraud,'' since fraud would
imply a board's breach of its public trust. Id.
The ``bad faith'' standard governing exchange boards has been
consistently followed and further refined by the Commission and the
courts. Most recently, the Commission included a bad faith standard as
part of its amendment to Commission Regulation 1.41(f) setting forth
standards to be used by the Commission in assessing temporary exchange
actions addressing Regulation 1.41(a)(4) emergencies.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
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\4\ Under Regulation 1.41(f)(4)(i), within ten days after
Commission receipt of a notice of an exchange temporary emergency
action, the Commission will make a determination to permit such an
action to remain in effect unless it is: (1) arbitrary, capricious
or an abuse of discretion; (2) lacking a reasonable basis in fact;
or, (3) taken in bad faith by the contract market or its officials.
See 58 FR 26229 (May 3, 1993) for a full description of the
Commission's rulemaking regarding the review of contract market
emergency actions.
\5\ See, e.g., Sam Wong & Sons, Inc. v. New York Mercantile
Exchange, 735 F.2d 355 (7th Cir. 1975) and Bishop v. Commodity
Exchange, Inc., 564 F.Supp. 1557 (S.D.N.Y. 1983).
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The Commission believes that by including more specificity in the
factors to be considered with respect to barring persons with potential
financial or personal interests from deliberating and voting on
committee decisions, the proposed rulemaking should reduce the
potential for collateral attack of such committee decisions on the
grounds that they were made in ``bad faith.'' The Commission has
attempted to structure proposed Regulation 1.69 to provide guidance to
SROs, consistent with the new provisions of the FTPA, on what type of
committee member circumstances could be the basis for ``bad faith''
challenges.
In proposing Commission Regulation 1.69, the Commission does not
intend to exclude the views of any particular group or groups
represented on SRO committees. By requiring that committee members with
potential biases abstain from participating in committee proceedings,
the Commission is attempting only to ensure that SRO committee
decisions serve the best interests of the entire SRO membership and the
public, rather than the self-interests of a few committee
members.6
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\6\ The Commission notes that current Regulation 1.64
establishes composition requirements for SRO committees in order to
ensure that a diversity of membership interests are represented on
such committees. See 58 FR 37644 (July 13, 1993) for a full
description of Commission Regulation 1.64 and its underlying
rationale. In this connection, the Commission specifically invites
comment on how to balance the goals of Regulation 1.64 and the goals
of FTPA Section 217 and proposed Commission Regulation 1.69 with
respect to conflicts.
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II. Description of Proposed Rulemaking
The following description consists of a section-by-section analysis
of the Commission's proposed rulemaking. In addition to explaining the
rationale and operation of the proposal, this description is intended
to provide interested persons with a framework for addressing issues
which may be raised by particular provisions of the rulemaking.
A. Proposed Regulation 1.69(a)--Definitions 7
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\7\ This section will discuss only those term definitions which
could raise noteworthy issues.
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1. Self-Regulatory Organizations
Proposed Regulation 1.69's conflicts restrictions would apply to
each SRO governing board, disciplinary committee and oversight panel.
Proposed Regulation 1.69(a)(6)'s definition of SRO would include
contract markets, clearing organizations and registered futures
associations (``RFAs''). While Section 217 of the FTPA specifies that
``contract markets'' must adopt conflict of interest provisions, the
Commission believes that it is appropriate for proposed Regulation
1.69's conflicts restrictions to extend to clearing organizations and
RFAs as well.
In making clearing organizations subject to proposed Regulation
1.69, the Commission notes that FTPA Section 217 requires that its
conflicts restrictions apply to committees handling certain types of
margin changes. Margin levels in the futures industry, however, are
established by both contract markets and clearing organizations. The
Commission does not find any reason to distinguish between contract
markets and clearing organizations with respect to the potential for
conflicts of interests when making margin decisions. In addition, there
are already a number of instances where the Commission has taken CEA
requirements addressed to contract markets and applied them to clearing
organizations. For example, Section 5a(a)(12)(A) of the CEA mandates
Commission review of ``contract market'' rules, while Commission
Regulation 1.41, which establishes procedures for Commission review of
such rules, specifically includes clearing organizations within the
definition of contract markets for these purposes. For these reasons,
the Commission believes that it would be appropriate to make clearing
organizations subject to proposed Regulation 1.69.
The Commission also believes that it would be beneficial to apply
its proposed rulemaking to RFAs in order to ensure that their
committees would be able to make decisions which were free from the
potential taint of committee member bias and self-interest.8
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\8\ As noted in footnote 10 below, however, the rulemaking would
have a more limited impact on RFAs as opposed to contract markets
and clearing organizations.
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The Commission particularly seeks comment on its proposed
definition of SRO and whether it would be consistent with the
principles endorsed by FTPA Section 217 to extend this proposed
rulemaking to clearing organizations and RFAs in addition to contract
markets.
2. Governing Boards and Oversight Panels
Proposed Regulation 1.69(a)(2)'s definition of governing board
would
[[Page 19871]]
include any SRO ``board of directors, board of governors, board of
managers, or any similar body'' and any subcommittee thereof, such as
an executive committee, which is authorized to take action on behalf of
the SRO. Proposed Regulation 1.69 also would apply to SRO oversight
panels which have the responsibility of formulating and carrying out an
SRO's self-regulatory responsibilities.9
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\9\ In order to consolidate the Commission's Regulations,
``oversight panel'' would be defined by a new Commission Regulation
1.3(tt). That provision would define oversight panel for application
in both current Regulation 1.63 and proposed Regulation 1.69. The
definition would be identical to Commission Regulation 1.63(a)(4)'s
current oversight panel definition.
The Commission notes that its ``oversight panel'' definition is
intended to cover floor committees when they make decisions such as
changing a price quote on a price change register, setting modified
closing call ranges and establishing settlement prices. Please
comment on whether the oversight panel definition needs to be
clarified in any way to incorporate floor committees when they
engage in such activities.
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3. Disciplinary Committees
Proposed Regulation 1.69(a)(1) would define an SRO ``disciplinary
committee'' to mean a body which was authorized by an SRO ``to conduct
disciplinary proceedings, to settle disciplinary charges, to impose
sanctions, or to hear appeals thereof.'' 10 This definition, in
combination with the proposed formulation of Regulations 1.69(b)(1) and
(2), would ensure that Regulation 1.69's conflicts restrictions would
apply to disciplinary committee members when they deliberated and voted
on matters as a body, but would not apply to members of disciplinary
committees when they individually exercised disciplinary powers. Thus,
it would not include a floor committee member who disposes of minor
disciplinary violations by individually issuing summary fines or other
limited penalties, but it would apply to instances where more than one
floor committee member is required to endorse a decision.
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\10\ In this connection, the Commission also is proposing to
amend Regulation 1.63's definition of ``disciplinary committee'' so
that it will be identical to proposed Regulation 1.69(a)(1). To make
these two definitions identical, Regulation 1.63(a)(2) would be
revised by deleting ``disciplinary hearings'' and substituting
``disciplinary proceedings.''
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While the Commission recognizes that restrictions on conflicted
members participating in disciplinary matters promotes the impartiality
of the disciplinary process, it also believes that applying such
restrictions to floor committee members acting individually may present
countervailing problems. One apparent disadvantage of such an
application would be that it might actually diminish the coverage of an
SRO's compliance program. For example, if an individual floor committee
member were subject to Regulation 1.69's conflicts restrictions, he
would be prohibited from summarily fining any floor trader with whom he
had one of the specified relationships, even if he directly observed
violative conduct by such a trader. In those instances where such a
floor committee member was the only committee member responsible for
monitoring trading activity in a particular pit, such behavior might go
unpunished.
Applying conflicts restrictions to disciplinary committee members
when they act individually might also present more practical
difficulties. As currently proposed, Regulation 1.69 would require that
before each disciplinary proceeding SRO staff must determine whether
any committee member has a conflict in the matter. Floor committee
members, however, typically issue summary fines to SRO members who
commit minor rule violations on the trading floor (e.g., violations of
dress and decorum rules). Requiring floor committee members to submit
to some prior staff review in these circumstances could undermine, or
possibly eliminate, their ability to discipline violative behavior
expeditiously.
The Commission seeks comment on its proposed application of
Commission Regulation 1.69's conflicts restrictions to disciplinary
committees and floor committees in particular. Does the current
proposed approach strike an equitable balance between the need for an
impartial disciplinary mechanism versus the need for the deterrent
effect of having floor committee members on exchange trading floors?
Are there other ways in which to further both of these goals?
4. Significant Actions
As explained below, proposed Regulation 1.69's conflicts
restrictions would apply to SRO committees when they consider any
``significant action which would not be submitted to the Commission for
its prior approval.'' Proposed Regulation 1.69(a)(7)'s definition of
that term would include, at a minimum, two types of SRO actions. First,
the term would include SRO actions or rule changes which address
emergencies at an SRO, as they are defined by Commission Regulation
1.41(a)(4), including actual or attempted market corners, squeezes or
manipulations. Second, proposed Regulation 1.69(a)(7)'s definition also
would include SRO margin changes which ``respond to extraordinary
market conditions when such conditions are likely to have a substantial
effect on prices in any contract traded or cleared'' at the SRO.11
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\11\ Notably, under this definition, RFA committees would not
consider either of the two types of SRO actions which would
constitute a ``significant action which would not be submitted to
the Commission for its prior approval.'' Accordingly, this aspect of
Regulation 1.69's conflicts restrictions would be inapplicable to
RFA committee members. See proposed Commission Regulation 1.69(b)(2)
and Section II.C. below. RFA committee members would, however, be
subject to proposed Regulation 1.69(b)(1)'s restrictions on SRO
committee members considering matters in which they had a
relationship with the named party in interest (e.g., disciplinary
cases). See proposed Commission Regulation 1.69(b)(1) and Section
II.B. below. The Commission invites comment on whether it should
revise proposed Commission Regulation 1.69 to specifically exclude
RFA committees from being subject to Regulation 1.69(b)(2)'s
restrictions on SRO committees which consider a ``significant action
which would not be submitted to the Commission for its prior
approval.''
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The proposed definition of a ``significant action which would not
be submitted to the Commission for its prior approval'' generally
follows Congress' definition of that same term in FTPA Section 217. The
Commission believes that its proposed definition should capture those
circumstances in which a committee member's conflict would have the
greatest potential to influence SRO actions. The proposed definition
has been limited to committee actions which could have an immediate
impact on the marketplace and, consequently, the positions of SRO
committee members, because those are the situations in which a
decision- maker most likely would be influenced by self-interest. The
proposal does not intend to suggest that any particular significant
action would have a predictable impact on market prices; in fact, the
experience of the Commission in assessing the consequences of prior
emergency actions has been to the contrary. That being said, it is
critical for public confidence in self-regulation that such actions be
perceived as being applied even-handedly and not to the advantage or
disadvantage of any given group. The Commission has attempted to
formulate a definition which addresses the objectives explicitly set
forth in the legislation the rulemaking is intended to implement, but
which, at the same time, does not do unnecessary injury to the
mechanics of the SRO committee decisionmaking process and the ability
of the SRO to engage in effective self-governance activities.
The Commission seeks comment on whether there are any other types
of SRO actions or rule changes which should be subject to Regulation
1.69's conflicts restrictions. For instance, the Commission currently
proposes to limit
[[Page 19872]]
the conflicts restrictions to SRO actions which would not be submitted
for prior Commission review, because the Commission approval process is
intended to consider the public interest and to insulate SRO actions
from impropriety. The rule approval process requires a discussion of
all opposing views and a statement of the purpose of each rule change.
Ordinarily, such rule changes do not even have the potential to affect
prices. Nonetheless, the Commission requests comment on whether the
public interest would be better served if a broader range of SRO
actions, whether or not there was prior Commission review, were subject
to conflicts restrictions. If so, what other types of SRO actions
should be covered? 12
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\12\ For example, should changes to a price quote on a price
change register, setting modified closing call ranges, or
establishing settlement prices be particularly included in
Regulation 1.69's definition of a ``significant action which would
not be submitted to the Commission for its prior approval.''
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B. Proposed Regulation 1.69(b)(1)--Relationship With Named Party in
Interest
Proposed Regulation 1.69(b)(1) would mandate that SROs implement
rules requiring that committee members abstain from deliberating and
voting on any matter in which they had a significant relationship with
the matter's ``named party in interest.'' 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.
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\13\ For these purposes, proposed Commission Regulation
1.69(a)(5) would define a ``named party in interest'' as a ``party
who is identified as the subject of any matter being considered'' by
an SRO committee.
\14\ Proposed Regulation 1.69(b)(1)(v) would prohibit a
committee member from deliberating and voting on a matter if he was
in the immediate family of the named party in interest. Proposed
Regulation 1.69(a)(3) would define ``immediate family'' to mean a
person's ``spouse, parent, stepparent, child, stepchild, sibling,
stepbrother, stepsister, or in-law.''
\15\ Under proposed Regulation 1.69(b)(1)(ii), a committee
member could not deliberate or vote on any matter in which the named
party interest was an employer, employee or fellow employee of the
committee member.
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Another type of relationship which would be the basis for
abstention, under proposed Regulation 1.69(b)(1)(iv), would be if the
committee member and the named party in interest had a ``significant,
ongoing business relationship.'' Under this provision, for example, a
committee member would be prohibited from participating in a matter in
which he and the named party were co-owners of a business venture. In
order to clarify this provision, the Commission proposes to include any
clearing relationship within the scope of a ``significant, ongoing
business relationship,'' but proposes to exclude relationships which
are limited to executing futures or option contract transactions
16 with each other. In drawing this distinction, the Commission
notes that two parties in a clearing relationship typically rely upon
each other, to some degree, to carry on their respective businesses.
Accordingly, the Commission believes that parties to a clearing
relationship may not be totally impartial if one party was involved in
considering an SRO committee action which directly bore upon the other
party. The Commission notes that under proposed Commission Regulation
1.69(b)(1)(iii), members of a broker association would be required to
abstain from deliberations and voting on any SRO committee matter in
which one of its members was a named party in interest.
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\16\ For these purposes, the Commission would consider exchange
of futures for physical transactions and CEA Section 4(c) contract
market transactions to be futures and option contract transactions
under proposed Regulation 1.69(b)(1)(iv).
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The Commission invites comment as to whether any other specific
type of relationship should be included or excluded as a ``significant,
ongoing business relationship'' for the purposes of proposed Regulation
1.69(b)(1)(iv). For example, two SRO members might do a significant
amount of transactional business with each other outside of the SRO as
counterparties in the over-the-counter market. Could such a
relationship give rise to a potential conflict because of the frequency
of contacts? Or, should whether or not a transaction is arms length
govern the possibility for conflicts?
While the Commission anticipates that proposed Regulation
1.69(b)(1)'s restrictions would most oftentimes be applied to
disciplinary cases because they involve named respondents, the
provision also would pertain to any matter handled by an SRO governing
board, disciplinary committee or oversight panel in which there was a
particular named party in interest. Accordingly, the proposed conflict
restrictions would apply to such committees if they were to review a
membership application or consider some action with respect to a
particular individual (e.g., directing a person to reduce his position
in a contract).
The Commission believes that this proposed provision should reduce
the potential for committee members to be unduly influenced by family
and personal business considerations. Accordingly, the provision should
help to assure that committee decisions will be the result of fair
deliberations and will not be tainted by the real or perceived self-
interest of committee members.
The Commission notes that Section 217 of the FTPA states that
contract markets must adopt rules requiring that committee members
abstain from ``confidential'' deliberations and voting on matters where
they have a relationship with the named party in interest. Commission
Regulation 1.69(b)(1), which is being proposed in furtherance of that
provision, takes the more prophylactic approach of applying its
conflicts restrictions to all deliberations and voting on such matters,
whether they are confidential or non-confidential. The Commission
believes that this approach should help to reduce the potential for
biased decisionmaking in both settings. Theoretically, in non-
confidential committee meetings outsiders would be able to monitor the
fairness of a committee's decision-making process. The Commission
questions, however, whether there could ever be an effective outside
presence at SRO committee proceedings given their history of usually
being closed to the public. In addition, the Commission believes that
even in a public setting it would be difficult to detect any one
committee member's bias or prejudice on a matter unless the member also
publicly disclosed any possible relationships with the named party in
interest.
C. Proposed Regulation 1.69(b)(2)--Financial Interest in an Action
Proposed Commission Regulation 1.69(b)(2) would require that SRO
committee members abstain from committee deliberations and voting on
certain matters in which they would have a ``direct and substantial
financial interest.'' The proposed restriction would only apply when a
committee is considering ``a significant action which would not be
submitted to the Commission for its prior approval.'' As discussed in
Section II.A. above, those committee actions would include, at a
minimum, Regulation 1.41(a)(4) emergency actions and margin changes
which respond to market conditions which are likely to have a
substantial effect on the prices of any contract traded or cleared at
the SRO.17
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\17\ See proposed Commission Regulation 1.69(a)(7).
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[[Page 19873]]
In determining a committee member's financial interest in a
possible committee action, Regulation 1.69(b)(2) would require SROs to
review for positions of the member, the member's family, the member's
firm and the customers of the member's firm held in any contract which
could be affected by the committee action.18 With respect to a
committee member's personal positions, proposed Regulations 1.69(b)(2)
(i) and (ii) specifically would require that SROs consider gross
positions in the subject contract held in the member's personal
accounts, the member's Regulation 1.3(j) controlled accounts and any
accounts in which the member had a significant financial interest.
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\18\ While proposed Regulation 1.69(b)(2) would specify what
positions SROs must review in determining whether an SRO committee
member would have a ``direct and substantial financial interest'' in
an SRO committee action, proposed Regulation 1.69(b)(3) would
specify what sources of position information an SRO would be
required to consider, at a minimum, in making such a determination.
See Section II.D. of this release below for a further description of
Regulation 1.69(b)(3).
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Regarding positions of the member's family, proposed Regulation
1.69(b)(2)(iv) would require that SROs review gross positions held in
the personal accounts or Regulation 1.3(j) controlled accounts of the
member's immediate family. For these purposes a committee member's
immediate family would be defined by proposed Regulation 1.69(a)(3),
excluding those immediate family members who were not dependents of the
member and who did not reside with the member. The Commission has
proposed this exclusion in order to limit the provision to position
information which a committee member likely would know in the ordinary
course.
SROs reviewing for a committee member's financial interest in a
committee matter also would be required to consider gross positions
held in the member's firm's proprietary accounts, net positions held in
customer accounts at the member's firm and gross positions held by any
customers who constituted a significant proportion of business for the
member's firm.
Proposed Commission Regulation 1.69(b)(2) would specifically fix
the types of positions which SROs would have to review in determining
whether a committee member had a ``direct and substantial financial
interest'' in the outcome of the committee's consideration of ``a
significant action which would not be submitted to the Commission for
its prior approval.'' The proposal would not, however, set any specific
standards as to what position size warranted a member's abstention from
deliberations and voting on a matter. Rather, the Commission has
endeavored to give SROs flexibility in complying with this aspect of
its proposed rulemaking.
The criteria for each SRO in evaluating whether a committee member
would have a ``direct and substantial financial interest'' in a
committee action must be the extent to which an individual would be
exposed to market risk, the size of the individual's positions, whether
or not market neutral, relative to the market and, with respect to a
committee member's affiliated firm, the potential effect on the firm's
capital. The Commission would expect each SRO to weigh a variety of
factors in making these determinations. Each SRO should assess the
magnitude and probable market impact of the underlying ``significant
action.'' A possible margin change or emergency action for a contract
might be so profound that even the smallest position in the contract
could be affected by the measure. Likewise, a committee member might
not have a particularly large position in any one of the categories
listed in Regulation 1.69(b)(2) (i) through (vi). However, if a
member's positions in each one of these categories were similarly
aligned such that they all would be favorably or unfavorably impacted
by even a moderate margin change, the member should be required to
abstain from participating in deliberations and voting on such a
possible margin action.
The Commission invites comment on its proposed approach to
determining whether a committee member has a ``direct and substantial
financial interest'' in a matter being considered by an SRO committee.
What numerical thresholds for margin changes or position sizes could
the Commission establish for SROs in this regard? What other
requirements could the Commission impose in this area to require SROs
to make more objective abstention decisions? For example, a
straightforward approach to this issue could be to require abstention
by committee members with any position in a contract which could be
impacted by a committee's significant action. Please comment on the
effect of such an approach.
D. Proposed Regulation 1.69(b)(3)--Abstention Decision
Proposed Commission Regulation 1.69(b)(3) would mandate procedures
which SROs would have to follow in determining whether any SRO
committee members must abstain from deliberations and voting on a
matter due to a conflict. These procedural requirements would apply
whenever an SRO governing board, disciplinary committee or oversight
panel took up a matter involving: (1) a named party in interest (See
proposed Regulation 1.69(b)(1)); (2) an action or rule change
addressing a Regulation 1.41(a)(4) emergency (See proposed Regulations
1.69(a)(7)(i) and 1.69(b)(2)); or, (3) a margin change designed to
respond to extraordinary market conditions when such conditions would
be likely to have a substantial effect on prices in any contract traded
at the SRO (See proposed Regulations 1.69(a)(7)(ii) and 1.69(b)(2)).
Prior to a committee's consideration of any such matter, proposed
Regulation 1.69(b)(3) would require the SRO's staff to make a
determination whether any member of the committee was subject to any of
the conflicts situations listed in Regulations 1.69(b) (1) and (2). In
determining whether a conflict existed under Regulation 1.69(b)(1), the
Commission would expect SRO staff to ascertain whether any committee
member had a relationship with the named party in interest based upon
its available records and questioning of the committee's members. In
the case of conflicts based upon a committee member's financial
interest in a committee's action under Regulation 1.69(b)(2), SRO staff
would be required to review the positions listed in Regulation
1.69(b)(2) for each committee member. In ascertaining this position
information, an SRO's staff would be permitted to rely upon:
(1) The most recent large trader reports and clearing records
available to the staff;
(2) Position information provided to the staff by committee members
pursuant to Regulation 1.69(c); 19 and,
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\19\ See proposed Commission Regulation 1.69(c) and related
Section II.F. of this release below for a description of each
committee member's position reporting responsibility.
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(3) Any other source of position information which was readily
available to the staff.20
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\20\ Proposed Commission Regulation 1.69(b)(3)(i)(A) (1) through
(3).
---------------------------------------------------------------------------
The Commission believes that by consulting this range of easily
accessible sources of position data, SRO staffs should be able to make
a well-informed decision as to whether any committee member has a
financial interest in a committee action.
Under proposed Regulations 1.69(b)(3)(i) (B) and (C), SRO staff
would be required to determine whether any committee member had a
conflict, under either Regulation 1.69(b)(1) or (2), and
[[Page 19874]]
to direct any committee member with such a conflict to abstain from
deliberations and voting on the matter.
Whenever SRO staff made an abstention determination pursuant to
proposed Regulation 1.69(b)(3)(i), proposed Commission Regulation
1.69(b)(3)(ii) would require the SRO committee considering the
underlying substantive matter to include certain information regarding
the abstention determination in the minutes of its meeting. Such a
record would be required to indicate, among other things, the committee
members who attended the meeting, the staff member(s) who reviewed the
committee members' positions, a listing of the position information
reviewed for each committee member, the names of any committee member
directed to abstain and the reasons thereof. The Commission believes
that these recordation requirements would enable SROs to demonstrate
the propriety of their abstention decisions should they be called into
question by either SRO members, the Commission or the public. In
addition, such records would be useful to the Commission in any future
evaluation of Regulation 1.69 and the SROs' implementing rules and
procedures.
In instances when a committee member was permitted to deliberate
but not vote on a matter pursuant to proposed Commission Regulation
1.69(b)(4), the committee's records would be required to include a full
description of the views expressed by such member during the
committee's deliberations on the underlying substantive matter. This
description should not be limited to a recital of the committee
member's presence at the meeting, but should detail the views and
supporting arguments offered by the member at such meeting. To ensure a
full description of the member's views, SRO committees should consider
making transcripts of the pertinent portions of such a meeting. The
Commission believes that this requirement should deter such a committee
member from offering strictly self-interested advice to an SRO
committee.
Under proposed Regulation 1.69(b)(3), the Commission would confer
the responsibility for making abstention determinations on SRO staff.
The Commission believes that this approach would best assure that the
process of making such determinations would not adversely impact the
SRO committee decisionmaking process.
The Commission understands that this provision's proposed approach
would closely follow the procedures which most SROs currently use when
handling committee member conflicts. Notably, a number of SRO staff
members indicated to Commission staff that SRO committee members rarely
resist their staffs' abstention recommendations based upon potential
conflicts.
The Commission invites comment on the efficiency of these proposed
procedures for handling abstention decisions, and particularly its
approach to having SRO staff gather position information. Would the
proposed procedures be administratively burdensome for SRO staffs or
should the Commission grant SRO staffs more discretion in this regard?
Would the specified range of position information to be gathered
provide a sufficient basis for making a fair assessment of a committee
member's potential conflict of interest with respect to any particular
committee matter?
Should the Commission's rulemaking include any provisions for
appealing abstention determinations by SRO staff? For instance, should
the rulemaking allow SRO committees to include ``conflicted'' members
in deliberations and voting on matters when the member's vote was
needed to obtain a quorum? 21
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\21\ Note that, as described in Section II.E. below, the
Commission's proposed rulemaking already would permit, in specified
circumstances, ``conflicted'' committee members to participate in
committee deliberations, but not voting, on certain matters.
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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.
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\22\ Under Regulation 1.69's proposed abstention determination
procedures, SRO staff would make the initial determination of
whether a committee member should be required to abstain from
deliberations and voting on any particular committee matter. For
reasons discussed in this section below, however, the Commission
proposes that only SRO committees, and not SRO staff, be able to
permit a committee member to participate in deliberations, but not
voting, on a committee matter.
---------------------------------------------------------------------------
While the conflicts restrictions established by Section 217 of the
FTPA further the fairness and integrity of the decisionmaking processes
of SRO committees, Section 217 also recognizes that in some instances a
committee member with a conflict with respect to a particular matter
might also have special knowledge or experience regarding that matter.
Accordingly, proposed Regulation 1.69(b)(4) would allow such members to
participate in deliberations only, but subject to qualifying criteria
limiting such participation to instances where the committee believed
that it had insufficient expertise to consider a matter and needed such
a member to participate.
In determining whether to permit a committee member to deliberate
on a matter, proposed Regulation 1.69(b)(4)(i) would require the
presiding committee to consider a number of factors including: (1)
Whether the member had special expertise in the matter involved which
few or no other members of the committee had; (2) whether the
committee's ability to meaningfully deliberate would be adversely
affected by the member's non-participation; and (3) whether the
member's participation in deliberations would be necessary for the
committee to obtain a quorum.23
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\23\ This factor presumes that an SRO's quorum requirement is
based upon the number of committee members who can deliberate on a
matter and not upon the number of committee members who can vote on
a matter. See Robert's Rules of Order Sec. 3 (Henry M. Roberts III
and William J. Evans, eds., 9th Ed. 1990). The Commission invites
comment from SROs on whether the proposed approach would be
consistent with their committees' quorum requirements.
---------------------------------------------------------------------------
Given the factors which must be considered, the Commission believes
that deliberation exception decisions should be made by the committee
involved, rather than SRO staff. For any particular matter to be
considered by an SRO committee, the committee members themselves would
be in a better position than SRO staff to assess their individual
levels of expertise in the matter and their need for input during
deliberations from the committee member who otherwise would be required
to abstain.
In order to help ensure that committees handle deliberation
exception decisions in an impartial manner, proposed Commission
Regulation 1.69(b)(4)(ii) would require that any such exception must be
approved by all ``public'' members of the presiding committee (i.e.,
committee members who are not members of the SRO) who were present when
the
[[Page 19875]]
committee made such a determination. This requirement would not apply
to those SRO governing boards, disciplinary committees or oversight
committees which do not normally have public members.24
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\24\ See Commission Regulations 1.64 (b) and (c) which
respectively require governing boards and certain disciplinary
committees to include non-SRO member representatives.
---------------------------------------------------------------------------
The Commission invites comment on its proposal to permit, in
certain circumstances, an SRO committee member, who otherwise would be
required to abstain from deliberations and voting on a matter because
of a conflict, to deliberate but not vote on the matter.
Notwithstanding the statute, should the possibility of allowing an
interested committee member to participate in deliberations be further
limited or even prohibited entirely? Would the proposed exception for
deliberations provide a person who could not vote on a matter with an
opportunity to unduly influence a committee's decision? Would the
proposed requirements strike a proper balance between ensuring that SRO
committees make well-informed decisions while minimizing the influence
of a committee member's potential bias or self-interest in the matter?
F. Proposed Regulation 1.69(c)--Disclosure Requirement
Under proposed Commission Regulation 1.69(c), whenever an SRO
committee considered a ``significant action which would not be
submitted to the Commission for its prior approval,'' as that term is
defined by proposed Regulation 1.69(a)(7), each member of the committee
would be required to disclose to the SRO's staff any position
information which was known or should have been known by the member
with respect to the positions listed in Regulation 1.69(b)(2) (i.e.,
positions held by the member, the member's family, the member's firm
and certain customers of the member's firm). Proposed Regulation
1.69(c) would make it a direct violation of the Regulation,
prosecutable by the Commission, for any committee member to fail to
report such information to the SRO's staff.
For the purposes of this provision, committee members would be
presumed to have knowledge of gross positions held in: (1) the member's
personal or controlled accounts (See proposed Regulation
1.69(b)(2)(i)); (2) accounts in which the member had a significant
financial interest (See proposed Regulation 1.69(b)(2)(ii)); (3)
proprietary accounts at the member's firm (See proposed Regulation
1.69(b)(2)(iii)); and, (4) the personal or controlled accounts of
persons in the member's immediate family (excepting family members who
were not dependents of the committee member and did not reside at the
member's residence) (See proposed Regulation 1.69(b)(2)(iv)). While it
would always be a question of fact as to what position information a
committee member knew at a particular point in time, the Commission
believes that a committee member usually should be aware of this type
of position information because it would be based on either his own
trading activity or the trading activity of parties with whom he would
have a close relationship. This presumption of knowledge would be
rebuttable, but the committee member involved would bear the burden of
providing evidence of his or her lack of knowledge.
The Commission believes that its proposed Regulation 1.69(c)
reporting requirement should help SRO staff and committees to better
determine whether committee members have conflicts which warrant
abstention from committee deliberations and voting. In addition, the
Commission believes that its enforcement powers under Regulation
1.69(c) should help ensure compliance with the conflicts restrictions.
Of course, each SRO would continue to have an independent
responsibility under Section 5a(8) of the CEA and Commission Regulation
1.51 to enforce any of its own rules implementing Regulation 1.69.
G. Proposed Regulation 1.69(d)--Violations of SRO Rules
Proposed Commission Regulation 1.69(d) would make it a violation
for an SRO to permit a committee member to participate in deliberations
or voting on a matter if such participation would violate any SRO rule
implementing the conflicts restrictions of Commission Regulations
1.69(b) (1) or (2). As with proposed Regulation 1.69(c), Regulation
1.69(d) would enable the Commission to enforce the conflicts
restriction requirements as implemented by SRO rules if necessary. The
Commission believes that this reservation of enforcement power would be
appropriate given Regulation 1.69's purpose of upholding the fairness
and integrity of the SRO decisionmaking process.
The Commission invites comment on the appropriate enforcement
mechanisms for implementing the FTPA's conflicts restrictions.
H. Proposed Regulation 1.69(e)--Liability to Other Parties
Under proposed Commission Regulation 1.69(e), SROs, SRO officials
and SRO staffs involved in reviewing committee member positions and
making abstention decisions, pursuant to Regulation 1.69(b)(3), would
be protected from liability to any party other than the Commission.
This limitation of liability is mandated by Section 217 of the FTPA.
I. Amendments to Current Commission Regulations Made Necessary by
Proposed New Commission Regulation 1.69
1. Proposed Regulation 1.3(tt)--Definition of Oversight Panel
As indicated in Section II. A. above, the Commission proposes to
establish a definition for oversight panels in the definitional section
of the Commission's regulations. The definition would be identical to
the definition of oversight panel in current Commission Regulation
1.63(a)(4). As part of its proposal, the Commission would delete
Regulation 1.63(a)(4) and make the new Regulation 1.3(tt)'s definition
of oversight panel applicable to both Regulation 1.63 and proposed
Regulation 1.69.
2. Proposed Regulation 1.41(f)--Voting on Temporary Emergency Rules
Section 213 of the FTPA amended Section 5a(a)(12)(B) of the CEA to
require that the Commission issue regulations establishing ``terms and
conditions'' under which contract markets may take temporary emergency
actions without prior Commission approval. Section 5a(a)(12)(B) and
Regulation 1.41(f), the Commission's implementing regulation, require
that any such temporary emergency action be adopted by a two-thirds
vote of a contract market's governing board. In recognition of the fact
that governing board members may be required to abstain from
deliberations and voting on such an action under contract market rules
implementing proposed Regulation 1.69,25 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.
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\25\ Contract market governing board members would be subject to
Regulation 1.69's conflict restrictions whenever they considered
such temporary emergency actions. See proposed Commission
Regulations 1.69(a)(7)(i) and 1.69(b)(2).
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[[Page 19876]]
J. Proposed Regulation 156.4--Disclosure of Broker Association
Membership
Section 102 of the FTPA amended Section 4j(d) of the CEA to
prohibit the knowing execution of a customer order by a floor broker
opposite any broker or trader with whom the floor broker has a
specified business relationship, unless the Commission has adopted
rules requiring exchange procedures and standards designed to prevent
violations of the CEA attributable to broker association trading. In
response to this provision, the Commission adopted Part 156 to its
regulations in order for contract markets to identify and enhance
surveillance of broker associations.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.''
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\26\ See 58 FR 31167 (June 1, 1993) for a full description of
the Commission's Part 156 rulemaking regarding broker associations.
---------------------------------------------------------------------------
As part of the current rulemaking, the Commission is proposing to
amend its Part 156 Regulations by adding a new Regulation 156.4 which
would require contract markets to post a listing of the broker
association membership information which they are currently required to
compile pursuant to Regulation 156.2(b). This posting should be made in
a place designed to ensure its availability to the general public such
as an exchange's lobby or other common access area. The Commission
believes that this requirement would serve the public interest by
enabling the public to take broker association relationships into
account when making trading decisions and assessing exchange actions
generally.
III. Conclusion
The Commission believes that the proposed new Regulation 1.69 and
the proposed amendments to Regulations 1.3, 1.41 and 1.63 meet the
statutory directive of Section 5a(a)(17) of the CEA as it was amended
by Section 217 of the FTPA. The proposal would establish guidelines and
factors to be considered in determining whether an SRO committee member
was subject to a conflict which could potentially impinge on his
ability to make fair and impartial decisions in a matter and, thus,
warrant abstention from participating in committee deliberations and
voting.
The Commission invites public comments on any aspect of this
proposed rulemaking, including whether it would fulfill the
implementation requirements of FTPA Section 217. The Commission also
invites comment on whether any other revisions should be made to ensure
greater fairness and impartiality in the decisionmaking processes of
SRO committees. For instance, would it be beneficial for the Commission
to amend current Commission Regulation 1.64 to provide a higher level
of representation for public, non-SRO members on SRO boards and
committees?
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.
(1988), requires that agencies, in proposing rules, consider the impact
of those rules on small businesses. The Commission has previously
determined that contract markets are not ``small entities'' for
purposes of the RFA, and that the Commission, therefore, need not
consider the effect of proposed rules on contract markets. 47 FR 18618,
18619 (April 30, 1982). Furthermore, the Chairman of the Commission
previously has certified on behalf of the Commission that comparable
rule proposals affecting clearing organizations and registered futures
associations, if adopted, would not have had a significant economic
impact on a substantial number of small entities. 51 FR 44866, 44868
(December 12, 1986).
The proposed rulemaking would affect individuals who serve on SRO
governing boards, disciplinary committees and oversight panels. The
Commission does not believe that its proposed rulemaking would have a
significant economic impact on these SRO committee members. The
proposed rulemaking would require these committee members to disclose
to their SROs certain position information which is known or should be
known to them at the time that their committees consider certain
significant actions which would not be submitted to the Commission for
approval. The Commission believes that this requirement would not have
any significant economic impact on such members because the information
which they would be required to provide should be readily available to
them and because the significant actions which would give rise to this
requirement should occur on an infrequent basis.
Accordingly, the Acting Chairman, on behalf of the Commission,
hereby certifies, pursuant to Section 3(a) of the RFA, 5 U.S.C.
Sec. 605(b), that the proposed rulemaking, if adopted, would not have a
significant economic impact on a substantial number of small entities.
B. Agency Information Activities: Proposed Collection; Comment Request
The Paperwork Reduction Act of 1980 (``PRA''), 44 U.S.C. 3501 et
seq. (1988), imposes certain requirements on federal agencies
(including the Commission) in connection with their conducting or
sponsoring any collection of information as defined by the PRA. In
compliance with the PRA, the Commission has submitted the proposed
rulemaking and its associated information collection requirements to
the Office of Management and Budget (``OMB''). The burden associated
with the entire collection, including this proposed regulation and
amendments, is as follows:
Average burden hours per response--3,546.26
Number of respondents--15,286.00
Frequency of response--On Occasion
The burden associated with the proposed regulation and amendments
is as follows:
Average burden hours per response--2.00
Number of respondents--20
Frequency of response--On Occasion
Persons wishing to comment on the information that would be
required by the proposed rulemaking should contact Jeff Hsu, OMB, Room
3228, NEOB, Washington, D.C. 20503, (202) 395-7340. Copies of the
information collection submission to OMB are available from Joe F.
Mink, Clearance Officer, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581.
Telephone: (202) 418-5170.
List of Subjects
17 CFR Part 1
Brokers, Commodity futures, Consumer protection, Reporting and
recordkeeping requirements.
17 CFR Part 156
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
In consideration of the foregoing, and based on the authority
contained in the Commodity Exchange Act, the Commission is proposing to
amend Title 17, Chapter I of the Code of Federal Regulations as
follows:
[[Page 19877]]
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for Part 1 continues to read as follows:
Authority: 7 USC 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g,
6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 8, 9, 12, 12a, 12c, 13a, 13a-
1, 16, 19, 21, 23, and 24, unless otherwise stated.
2. Section 1.3 would be proposed to be amended by adding paragraph
(tt) to read as follows:
Sec. 1.3 Definitions.
* * * * *
(tt) ``Oversight panel'' means any panel authorized by a self-
regulatory organization to review, recommend or establish policies or
procedures with respect to the self-regulatory organization's
surveillance, compliance, rule enforcement or disciplinary
responsibilities.
3. Section 1.41 would be proposed to be amended by adding paragraph
(f)(10) to read as follows:
Sec. 1.41 Contract market rules; submission of rules to the
Commission; exemption of certain rules.
* * * * *
(f) * * *
(10) Governing board members who abstain from voting on a temporary
emergency rule pursuant to Sec. 1.69, shall not be counted in
determining whether such a rule was approved by the two-thirds vote
required by this regulation.
4. Section 1.63(a)(2) would be proposed to be revised to read as
follows:
Sec. 1.63 Service on self-regulatory organization governing boards or
committees by persons with disciplinary histories.
(a) * * *
(2) ``Disciplinary committee'' means a committee of persons which
is authorized by a self-regulatory organization to conduct disciplinary
proceedings, to settle disciplinary charges, to impose sanctions, or to
hear appeals thereof.
* * * * *
5. Section 1.63(a)(4) would be proposed to be removed.
6. Section 1.63(a)(5) would be proposed to be redesignated as
Sec. 1.63(a)(4).
7. Section 1.63(a)(6) would be proposed to be redesignated as
Sec. 1.63(a)(5).
8. In redesignated Sec. 1.63(a)(5)(ii), the reference to
``subparagraphs (a)(6)(i) (A) through (C)'' would be proposed to be
amended to read ``paragraphs (a)(5)(i) (A) through (C)''.
9. In redesignated Sec. 1.63(a)(5)(iv), the reference to
``paragraphs (a)(6)(i) through (iii)'' would be proposed to be amended
to read ``paragraphs (a)(5)(i) through (iii)''.
10. Section 1.63(a)(7) would be proposed to be redesignated as
Sec. 1.63(a)(6).
11. In Section 1.63(d), the reference to ``paragraph (a)(6)(i)''
would be proposed to be amended to read ``paragraph (a)(5)(i)''.
12. Section 1.69 would be proposed to be added to read as follows:
Sec. 1.69 Voting by interested members of self-regulatory organization
governing boards and various committees.
(a) Definitions. For purposes of this section:
(1) ``Disciplinary committee'' means a committee of persons which
is authorized by a self-regulatory organization to conduct disciplinary
proceedings, to settle disciplinary charges, to impose sanctions, or to
hear appeals thereof.
(2) ``Governing board'' means a self-regulatory organization's
board of directors, board of governors, board of managers, or similar
body, or any subcommittee thereof, duly authorized, pursuant to a rule
of the self-regulatory organization that has been approved by the
Commission or has become effective pursuant to either Section 5a(a)
(12)(A) or 17(j) of the Act, to take action for and on behalf of the
self-regulatory organization with respect to a matter covered by this
section.
(3) A person's ``immediate family'' means the person's spouse,
parent, stepparent, child, stepchild, sibling, stepbrother, stepsister,
or in-law.
(4) ``Member's affiliated firm'' is a firm in which the member is a
``principal,'' as defined in Sec. 3.1(a), or an employee.
(5) ``Named party in interest'' means a party who is identified as
the subject of any matter being considered by a governing board,
disciplinary committee or oversight panel.
(6) ``Self-regulatory organization'' means a ``self-regulatory
organization'' as defined in Sec. 1.3(ee) and includes a ``clearing
organization'' as defined in Sec. 1.3(d).
(7) ``Significant action which would not be submitted to the
Commission for its prior approval'' includes, at a minimum, any of the
following types of self-regulatory organization actions or rule changes
which can be implemented without the Commission's prior approval:
(i) Any actions or rule changes which address an ``emergency'' as
defined in Sec. 1.41(a)(4); and,
(ii) Any changes in margin levels that are designed to respond to
extraordinary market conditions when such conditions are likely to have
a substantial effect on prices in any contract traded or cleared at
such self-regulatory organization.
(b) Self-Regulatory Organization Rules. Each self-regulatory
organization shall maintain in effect rules which have been submitted
to the Commission pursuant to Section 5a(a)(12)(A) of the Act and
Sec. 1.41 or, in the case of a registered futures association, pursuant
to Section 17(j) of the Act, which require, at a minimum, that:
(1) Relationship With Named Party in Interest. A member of a self-
regulatory organization's governing board, disciplinary committee or
oversight panel shall abstain from such body's deliberations and voting
on any matter where such member:
(i) Is the named party in interest;
(ii) Is an employer, employee or fellow employee of the named party
in interest;
(iii) Is associated with the named party in interest through a
``broker association'' as defined in Sec. 156.1;
(iv) Has any other significant, ongoing business relationship with
the named party in interest, including clearing relationships, but not
including relationships limited to executing futures or option contract
transactions with each other; or,
(v) Is in the immediate family of the named party in interest.
(2) Financial Interest in an Action. A member of a self-regulatory
organization's governing board, disciplinary committee or oversight
panel shall abstain from such body's deliberations and voting on any
significant action which would not be submitted to the Commission for
its prior approval if the member knowingly has a direct and substantial
financial interest in the result of the vote. In determining whether a
member has a direct and substantial financial interest in the result of
such a vote, among other things, a self-regulatory organization's rules
must consider with respect to any contract or product which the self-
regulatory organization reasonably expects could be affected by the
action:
(i) Gross positions held in the member's personal accounts or
``controlled accounts,'' as defined in Sec. 1.3(j);
(ii) Gross positions held in accounts in which the member has a
significant financial interest;
(iii) Gross positions held in proprietary accounts, as defined in
Sec. 1.17(b)(3), at the member's affiliated firm;
[[Page 19878]]
(iv) Gross positions held in the personal accounts or ``controlled
accounts,'' as defined in Sec. 1.3(j), of any person in the member's
immediate family, unless such person is not a dependent of the member
and does not reside at the member's residence;
(v) Net positions held in ``customer'' accounts, as defined in
Sec. 1.17(b)(2), at the member's affiliated firm; and,
(vi) Gross position of any customer who constitutes a significant
portion of business for the member or the member's affiliated firm.
(3) Abstention Decision.
(i) Prior to the start of any self-regulatory organization's
governing board, disciplinary committee or oversight panel
deliberations or voting on a matter, appropriate self-regulatory
organization staff shall:
(A) review the positions described in paragraph (b)(2) of this
section for each member of such body based upon:
(1) The most recent large trader reports and clearing records
available to the staff;
(2) Position information provided by the member to the staff
pursuant to Paragraph (c) of this section; and,
(3) Any other source of position information which is readily
available to the staff;
(B) Determine whether any such member is subject to any of the
conditions listed in paragraphs (b)(1) or (2) of this section; and,
(C) Direct any such member to abstain from deliberations and voting
on the matter.
(ii) Whenever the staff of a self-regulatory organization makes an
abstention determination pursuant to paragraph (b)(3)(i) of this
section, the appropriate governing board, disciplinary committee or
oversight panel shall include in the minutes or records of its
subsequent meeting the following information regarding any such
determination:
(A) The names of all members who attended the meeting in person or
who otherwise were present by electronic means;
(B) The name of any member who voluntarily recused himself from
deliberations and/or voting on a matter and the reason for the recusal,
if stated;
(C) The names of the individuals reviewing the positions described
in paragraph (b)(2) of this section;
(D) A list referencing the position information which was reviewed
for each member;
(E) The name of any member who was directed to abstain from any
deliberations and voting on a matter and the reason for the abstention;
(F) A description of the procedures followed in making any
determination on abstentions from deliberations and voting; and,
(G) In those instances when a committee member is permitted to
deliberate but not vote on a matter pursuant to this paragraph (b)(4)
of this section, a full description of the views expressed by such
member during deliberations.
(4) Participation in Deliberations.
(i) A self-regulatory organization governing board, disciplinary
committee or oversight panel may permit a member to participate in
deliberations prior to a vote on a matter for which he otherwise would
be required to abstain under the self-regulatory organization's rules
implementing the requirements of paragraph (b)(2) of this section. In
making such a determination, the presiding body should consider the
following factors:
(A) Whether the member has expertise, knowledge or experience in
the matter under consideration which few or no other members of the
presiding body have;
(B) Whether the ability of the presiding body to deliberate
meaningfully would be adversely affected by the non-participation of
the member; and,
(C) Whether the member's participation in deliberations is
necessary for the presiding body to achieve a quorum in the matter.
(ii) Any determination to so allow a member to participate in
deliberations on a matter shall be approved by each of those members of
the presiding body who are present and who are non-members of the self-
regulatory organization.
(c) Disclosure Requirement. Each member of a self-regulatory
organization governing board, disciplinary committee or oversight panel
which is to consider a matter referred to in paragraph (b)(2) of this
section shall disclose to the appropriate self-regulatory organization
staff prior to such consideration the position information referred to
in paragraph (b)(2) of this section which is known or should be known
to the member at that time. For these purposes, members shall be
presumed to have knowledge of those positions referred to in paragraphs
(b)(2) (i) through (iv) of this section.
(d) Violations of Self-Regulation Organization Rules. No self-
regulatory organization may permit a person to engage in deliberations
or voting on a matter if it would violate any rule adopted by the self-
regulatory organization in compliance with paragraphs (b) (1) or (2) of
this section.
(e)Liability to Other Parties. No self-regulatory organization or
self-regulatory organization official, employee or member, other than
the member whose position or positions are being reviewed, or delegee
or agent thereof, shall be subject to liability under this section,
except for liability in an action initiated by the Commission, in
connection with the review required by paragraph (b)(3) and any action
taken or required to be taken thereunder.
PART 156--BROKER ASSOCIATIONS
1. The authority citation for Part 156 continues to read as
follows:
Authority: 7 U.S.C. 6b, 6c, 6j(d), 7a(b) and 12a.
2. Section 156.4 would be proposed to be added to read as follows:
Sec. 156.4 Disclosure of Broker Association Membership
Each contract market shall post in a location accessible to the
public a list of all registered broker associations which identifies
for each such association the name of each person who is a member or
otherwise has a direct beneficial interest in the association. This
list shall be updated at least semi-annually.
Issued in Washington, D.C. on April 29, 1996, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 96-10936 Filed 5-2-96; 8:45 am]
BILLING CODE 6351-01-P
