[Federal Register Volume 61, Number 155 (Friday, August 9, 1996)]
[Rules and Regulations]
[Pages 41496-41498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20332]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1


Publicizing of Broker Association Memberships

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') has 
adopted a new Regulation 156.4 which requires that contract markets 
make more readily available to the public the identity of members of 
broker associations at their respective exchanges.

EFFECTIVE DATE: October 8, 1996.

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, NW., Washington, DC 20581. 
Telephone: (202) 418-5481.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On May 3, 1996, the Commission published for public comment in the 
Federal Register a proposed new Regulation 156.4 which would require 
that contract markets make more readily available to the public the 
identity of members of broker associations at their respective 
exchanges.\1\
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    \1\ 61 FR 19869 (May 3, 1996). In that same Federal Register 
release, the Commission also published for public comment a proposed 
new Regulation 1.69 which would prohibit members of self-regulatory 
organization governing boards, disciplinary committees and oversight 
panels 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. Proposed 
Regulation 1.69 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''). Pub. L. No. 102-546, Sec. 217, 106 Stat. 3590 (1992). 
The Commission will consider that rulemaking at a future date.
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II. Comments Received

    The Commission received five letters from commenters which 
addressed the proposed rulemaking regarding the

[[Page 41497]]

publicizing of the identities of broker association members. The 
comments were submitted by three futures exchanges (the Coffee, Sugar & 
Cocoa Exchange, Inc. (``CSC''), the New York Cotton Exchange (``NYCE'') 
and the New York Mercantile Exchange (``NYMEX'')); a futures trade 
association (the Future Industry Association (``FIA'')); and, a 
business and financial news publisher (Dow Jones & Company, Inc. (``Dow 
Jones'')).
    The Commission has carefully reviewed the comments received and has 
decided to issue Regulation 156.4 as final with slight modifications 
from the rule as originally proposed. The comments and an explanation 
of the Commission's decision to adopt Regulation 156.4 are discussed 
below.

III. Regulation 156.4

A. Proposed Rulemaking

    As proposed, Regulation 156.4 required contract markets to post 
``in a location accessible to the public'' a list of all registered 
broker associations at the contract market 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.\2\ In discussing 
what type of location would be ``accessible to the public,'' the 
Commission explained in the preamble of the proposed rulemaking's 
Federal Register release that a 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.''\3\
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    \2\ The Commission adopted its part 156 Regulations in response 
to Section 102 of the FTPA which 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 adopted rules 
requiring exchange procedures and standards designed to prevent 
violations of the CEA attributable to broker association trading. 
The Part 156 Regulations establish requirements for contract market 
identification and surveillance of broker associations. See 58 FR 
31167 (June 1, 1993) for a full description of the Commission's Part 
156 Regulations.
    \3\ 61 FR 19869, 19876.
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    The Commission emphasized in its release, that the information 
which proposed Regulation 156.4 would require contract markets to post 
already was being maintained by the contract markets pursuant to 
Commission Regulation 156.2(b) which requires the members of such 
associations to be registered.\4\
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    \4\ Id. Among other things, Commission Regulation 156.2(b) 
requires that each contract market maintain registration records for 
each of its broker associations indicating the ``name of each person 
who is a member or otherwise has a direct beneficial interest in the 
association.''
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B. Comments Received

    The CSC commented that under the proposed rulemaking most of the 
trading public would not have access to a broker association membership 
list posted in the lobby or common access area of an exchange. The CSC 
further indicated its belief that floor traders would be the only group 
of market users who would have ready access to such a list, but that 
they already would be aware of such information because of their 
presence on the trading floor. Accordingly, the CSC concluded that a 
broker association membership list only would serve to ``stigmatize'' 
broker association members by implying that membership in a broker 
association was ``relevant to the quality of the execution that (could) 
be expected.''
    NYMEX commented that it did not believe that a posting requirement 
would provide any measurable benefit to the public. NYMEX indicated 
that its offices and trading floor are not currently accessible to the 
public and that it did not believe that members of the public would 
visit NYMEX for the purpose of reviewing such a posting.
    The NYCE did not address the merits of the proposed rulemaking 
directly, but instead suggested that the Commission defer consideration 
of the proposal until the Division of Trading and Markets concluded and 
publicized its current rule enforcement review of broker association 
oversight at the various futures exchanges.
    FIA generally supported the Commission's proposal but commented 
that if broker association membership information was made available 
upon request, it might not be necessary to require that such 
information be physically posted.
    Dow Jones commented that the Commission's proposal would enhance 
each exchange's ability to enforce its broker association trading 
restrictions because if members of the public had knowledge of broker 
association memberships they would be able to alert the exchanges about 
possible violative conduct involving such associations. Dow Jones also 
commented that the publicizing of broker association memberships would 
enable the trading public to choose for themselves whether to execute 
futures transactions through broker association members.
    Dow Jones indicated its belief that the information from broker 
association membership lists would enable it to provide more 
information to its readers for their trading decisions. Dow Jones also 
believed that the proposal would further the press' attention to broker 
association trading activities and that such attention would promote 
the exchanges' oversight of broker associations.

C. Final Rulemaking

    The Commission has carefully considered the comments received and 
has determined to adopt Regulation 156.4 with slight modifications from 
the rule as originally proposed.
    The Commission believes that the identities of broker associations 
and their members are useful information, comparable to other 
information which is currently made available to the public about the 
capacity in which various industry participants are licensed and the 
relationships between registrants.
    Contrary to the CSC's suggestion, Commission Regulation 156.4 is 
not intended to imply any judgment of or to ``stigmatize'' broker 
association members or their activities. Rather, the Commission 
believes that Commission Regulation 156.4 will provide useful 
information to market users about relationships among members who 
handle customer orders. In this connection, the Commission notes that 
the Division of Trading and Markets (``Division'') released a study of 
broker associations in January 1990 based upon interviews with broker 
association members and representatives of other market participants 
which used the services of broker associations, such as futures 
commission merchants.\5\ In that study, the Division found that some 
market users ascribed certain benefits to the use of broker 
associations, including specialized order execution expertise, better 
capitalization from increased financial resources and uninterrupted 
customer service.\6\ The broker association study, however, reported 
concerns of other participants that relationships between broker 
association members could increase the potential for trading abuses, 
such as providing increased incentives for accommodation trades between 
members due to their associations' profit- or loss-sharing 
arrangements.\7\ Moreover, the FTPA required the Commission to 
particularly address the activities of such associations and determine 
whether to further restrict their activities.\8\ Given these 
perceptions among sophisticated market participants and the 
Congressional mandate, the Commission believes that the type of 
information which would be

[[Page 41498]]

disseminated pursuant to Regulation 156.4 may be of use to the general 
population of market participants when evaluating the execution of 
their orders.
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    \5\ See Division of Trading and Markets, Study on Broker 
Associations (January 4, 1990) (``broker association study''). 
Copies of this study are available to the public.
    \6\ Broker Association Study at 53-54.
    \7\ Id. at 60.
    \8\ See CEA Section 4j(d)(2).
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    Similarly, the NYCE's recommendation that the Commission defer 
adoption of Regulation 156.4 until the Division of Trading and Markets 
concludes its current rule enforcement review of broker association 
oversight presumes that Regulation 156.4 addresses some trade practice 
concern which may or may not be validated by that review. As indicated 
above, however, Commission Regulation 156.4 is not intended to imply 
any judgment on broker association members or their activities. The 
registration of such associations' members was originally undertaken to 
facilitate surveillance of their activities by the relevant self-
regulatory organization. The publication of such relationships as 
required by this rulemaking is intended to assure that those 
relationships are not abused. Accordingly, the Commission does not 
believe there is any reason to defer the adoption of Regulation 156.4 
until the conclusion of the Division's rule enforcement review.
    Under the proposed version of Commission Regulation 156.4, contract 
markets would have been required to post their broker association 
membership lists ``in a location accessible to the public.'' As 
indicated in the preamble of the proposed rulemaking's Federal Register 
release, such a location could have included ``an exchange's lobby or 
other common access area.''\9\ The CSC and NYMEX both commented that 
posting information in an exchange lobby may not be an effective means 
of dissemination. While the Commission believes that postings in these 
areas could effectively disseminate information to market users,\10\ 
the Commission never intended that such postings be the exclusive 
manner of compliance with Regulation 156.4. The primary purpose of this 
rulemaking always has been to make clear the Commission's view that 
such information is public information and should be readily accessible 
to market users.
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    \9\ 61 FR 19869, 19876.
    \10\ For instance, the Commission notes that Regulation 9.13, 
already requires exchanges to post Regulation 9.11 disciplinary 
notices ``in a conspicuous place on (exchange) premises to which its 
members and the public regularly have access.''
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    In order to eliminate any confusion created by proposed Regulation 
156.4's reference to posting broker association membership information, 
the Commission has determined to revise proposed Regulation 156.4 to 
require that such information be made ``available to the public 
generally.'' The Commission believes that this approach should provide 
exchanges with more flexibility in deciding how to make broker 
association membership information available. As examples of ways to 
publicize such information, the Commission notes that certain exchanges 
already publicize information about exchange matters by maintaining 
home pages on the Internet or widely distributing their newsletters.
    In addition to requiring that broker association membership 
information be made ``available to the public generally,'' final 
Commission Regulation 156.4 also makes clear that exchanges must make 
this information available ``upon request.'' Accordingly, no matter how 
broadly an exchange publicizes its broker associations' memberships in 
conformance with Regulation 156.4, it also must make the same 
information available upon particular request by any member of the 
public.
    The Commission may further report on how broker association 
membership information is made available in the report it is currently 
undertaking.

IV. Conclusion

    The Commission has determined to adopt Regulation 156.4 with slight 
modifications from the original proposed rulemaking. Upon Regulation 
156.4's effective date, the Commission may request that the exchanges 
inform the Commission of how they intend to comply with Regulation 
156.4.

V. 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. Regulation 156.4 will affect 
contract markets. 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). Therefore, the Acting Chairman, on behalf of the Commission, 
hereby certifies, pursuant to Section 3(a) of the RFA, 5 U.S.C. 605(b), 
that the action taken herein will not have a significant economic 
impact on a substantial number of small entities.

VI. Paperwork Reduction Act

    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. As 
indicated in the Commission's proposed rulemaking, Regulation 156.4 
will require contract markets to post a listing of the broker 
association membership information which they are already required to 
compile pursuant to Regulation 156.2(b). 61 FR 19869, 19876. 
Accordingly, Commission Regulation 156.4 will not impose any additional 
information collection responsibilities.

List of Subjects in 17 CFR Part 156

    Broker associations, Commodity futures, Contract markets, Members 
of contract markets, Registration requirements.

    In consideration of the foregoing, and based on the authority 
contained in the Commodity Exchange Act and, in particular, sections 
4b, 4c, 4j(d), 5a(b), and 8a(5) thereof, 7 U.S.C. 6b, 6c, 6j(d), 7a(b) 
and 12a(5), the Commission hereby amends chapter I of title 17 of the 
Code of Federal Regulations as follows:

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 is added to read as follows:


Sec. 156.4  Disclosure of Broker Association Membership.

    Each contract market shall make available to the public generally 
and upon request 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, DC, on August 2, 1996, by the Commission.
Catherine D. Dixon,
Assistant to the Secretary.
[FR Doc. 96-20332 Filed 8-8-96; 8:45 am]
BILLING CODE 6351-01-P