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.''

[[Page 17]]

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)

[[Page 18]]

``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

[[Page 19]]

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

[[Page 20]]

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