[Federal Register Volume 64, Number 248 (Tuesday, December 28, 1999)]
[Proposed Rules]
[Pages 72587-72590]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33305]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AB35
Proposed Rulemaking Concerning Amendments to Insider Trading
Regulation
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rulemaking.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'')
proposes to amend Commission Regulation 1.59 which addresses various
trading prohibitions imposed on persons associated with self-regulatory
organizations (``SROs''). Regulation 1.59 presently requires SROs to
adopt rules prohibiting employees, governing board members, and members
of committees from certain trading activities and from disclosing
material, non-public information. The Commission proposes to amend
Regulation 1.59 so that governing board members, and individuals
serving as the ``functional equivalent'' of governing board members,
would be clearly excluded from the definition of ``employee'' for
Regulation 1.59 purposes. The Commission also seeks to clarify the
[[Page 72588]]
meaning of Regulation 1.59(b)(1)(i) regarding the scope of the SRO
employee trading prohibition, as its current punctuation may create
some confusion. Finally, the Commission is requesting public comment
regarding the application of Regulation 1.59 to non-paid advisors and
paid consultants.
DATES: Comments must be submitted by January 27, 2000.
FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Associate
Director, or Joshua R. Marlow, 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
Commission Regulation 1.59 generally requires SROs to adopt rules
prohibiting employees, governing board members, and committee members
from trading commodity interests on the basis of material, non-public
information obtained in the course of their official duties
(hereinafter referred to as ``material, non-public information''). The
Commission is proposing to amend Regulation 1.59 to provide greater
clarity by resolving certain ambiguities in the current provision. The
following sections of this release analyze the Commission's proposed
rulemaking. Each section describes a provision of the Commission's
proposed rulemaking and the Commission's rationale for proposing the
amendment. The release also poses certain questions as to other aspects
of the regulation in order to encourage comment from industry
participants.
II. Proposed Rulemaking
A. Background
Currently, there are two categories of individuals subject to
Regulation 1.59:
(1) SRO employees, including those employed by the SRO on a
salaried or contract basis; and (2) SRO governing board and/or
committee members. Under Regulation 1.59, SRO employees are subject to
stricter prohibitions against trading than SRO governing board or
committee members.
Specifically, employees are absolutely prohibited from trading any
commodity interest traded on or cleared by the employing contract
market or clearing organization, or any related commodity interest.
Additionally, employees having access to material, non-public
information concerning a commodity interest are prohibited from trading
in any such commodity interest that is traded on or cleared by contract
markets or clearing organizations other than the employing self-
regulatory organization, or traded on or cleared by a linked exchange.
Governing board and committee members, on the other hand, are
prohibited from using material, non-public information for any purpose
other than the performance of their official duties. The possession of
material, non-public information, therefore, does not bar these
individuals from trading commodity interests. Rather, under Regulation
1.59(c), governing board and committee members are prohibited from
trading for their own account, or for or on behalf of any other
account, based on this material, non-public information.
B. Technical Amendments
1. Definition of ``Employee''
a. Governing Board Members. Current Regulation 1.59(a)(2) defines
``employee'' as ``any person hired or otherwise employed on a salaried
or contract basis by a self-regulatory organization.'' In 1986, when
this definition was originally adopted, members of governing boards
generally were not salaried. Since that time, the industry trend has
been to give stipends or payments to governing board members for their
service. As such, the Commission believes there may be a need to
clarify the ``employee'' definition since salaried governing board
members are potentially subject to two inconsistent insider trading
restrictions: one for governing board members and another for
employees.
The Commission believes that including salaried governing board
members in the definition of ``employee'' might create disincentives
for those individuals to serve in this capacity, thus preventing SROs
from taking advantage of their expertise. The Commission therefore
proposes to amend the definition of ``employee'' to exclude explicitly
governing board members. This would make clear that persons who receive
a salary from the SRO solely for their governing board activities would
be excluded from the ``employee'' restrictions against trading.
Accordingly, under Regulation 1.59(c), all governing board members,
regardless of a salary received solely for their governing board
activities, would be prohibited only from using material, non-public
information for any purpose other than the performance of their
official duties.
b. Individuals Serving as the Functional Equivalent of Governing
Board Members. There are certain types of individuals salaried by SROs
that work closely with governing boards but are not technically
governing board members. Specifically, some exchange governing boards
permit ex officio or emeritus members to participate in board
deliberations. The Commission understands that such individuals can
provide valuable assistance and counsel. Under current Regulation 1.59,
such individuals are technically ``employees'' since they are
compensated by the exchange and are not bona fide governing board
members. However, because ex officio and emeritus members are paid
solely for their governing board activities, the Commission believes
they are more analogous to governing board members than to SRO
employees and should be treated as such for purposes of Regulation
1.59. As current Regulation 1.59 does not define ``governing board
member,'' the Commission proposes to amend it by defining the term
specifically to include individuals who solely perform the functions of
governing board members, even if they are not technically members of
the exchange's governing board. The definition would therefore include
those individuals serving the ``functional equivalent'' of governing
board members.
2. Clarification That SRO Employees With Access to Material, Non-Public
Information are Prohibited From Trading in any Commodity Interest
Traded on or Cleared by: (1) Contract Markets or Clearing Organizations
Other Than the Employing SRO; or (2) Linked Exchanges
Regulation 1.59(b) establishes four types of trading prohibitions
for SRO employees. This paragraph, however, does not distinctly
enumerate each trading prohibition. It merely provides a list,
separating each prohibition with a comma. Specifically, the paragraph
requires SROs to maintain in effect rules which, at a minimum, prohibit
employees from trading in the following four scenarios:
In any commodity interest traded on or cleared by the employing
contract market or clearing organization, in any related commodity
interest, in any commodity interest traded on or cleared by contract
markets or clearing organizations other than the employing self-
regulatory organization, and in any commodity interest traded on or
cleared by a linked exchange where the employee has access to
material nonpublic information concerning such commodity interest;
Regulation 1.59(b)(1)(i) (emphasis added).
The Commission believes that the present structure of this
paragraph may
[[Page 72589]]
create confusion as to which trading prohibitions the underlined clause
modifies. In particular, because no punctuation precedes the clause
``where the employee has access to material nonpublic information
concerning such commodity interest'' (hereinafter referred to as the
``access clause''), this precondition for the application of the
trading restriction would appear to apply to only one trading
scenario--the trading scenario that immediately precedes it. However,
an examination of this provision as it existed prior to the 1993
amendments to Regulation 1.59 (``1993 Amendments'') and of the Federal
Register releases promulgating those amendments confirms that the
``access clause'' should also apply to the prohibition on trading ``in
any commodity interest traded on or cleared by contract markets or
clearing organizations other than the employing self-regulatory
organization.''\1\
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\1\ See 58 FR 44470 (Aug. 23, 1993); 58 FR 54966 (Oct. 25,
1993). The 1993 Amendments were made in order to, among other
things, implement the felony standard of Section 214 of the Futures
Trading Practices Act of 1992 and to update the definitions of
``linked exchange'' and ``material information'' due to certain
industry developments since Regulation 1.59 was revised last.
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Prior to the 1993 Amendments, the insider trading regulation for
employees required SROs to adopt rules which, at a minimum, prohibited
employees from trading in the following three scenarios:
In any commodity interest traded on or cleared by the employing
contract market or clearing organization, in any related commodity
interest, and in any commodity interest traded on or cleared by
contract markets or clearing organizations other than the employing
self-regulatory organization where the employee has access to
material nonpublic information concerning such commodity interest.
51 FR 44866, 44869 (Dec. 12, 1986) (emphasis added).
In that release, the three scenarios were individually numbered at
one point in the narrative,\2\ rather than merely separated by commas
as done in the text of the regulation, and thus made clear that the
``access clause'' applied only to the last trading scenario.
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\2\ 51 FR 44866, 44867 (Dec. 12, 1986).
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In 1993, the fourth prohibited trading scenario relating to ``any
commodity interest traded on or cleared by a linked exchange''
(hereinafter referred to as the ``linked exchange prohibition'') was
added immediately before the ``access clause.'' \3\ The Federal
Register release proposing the addition stated it ``would make clear
that SRO rules must prohibit SRO employees from trading in commodity
interests traded on or cleared by linked exchanges where the employee
has access to material, non-public information.''\4\ As a result of
inserting this fourth trading scenario, without further altering the
paragraph in any other way, the ``access clause'' reads as applying
only to the ``linked exchange prohibition.'' Notably, neither the
proposing release nor the adopting release of the 1993 Amendments
indicated that a change of policy was intended with respect to the
treatment of trading a commodity interest ``traded on or cleared by
contract markets or clearing organizations other than the employing
self-regulatory organization.''
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\3\ 58 FR 54966, 54971, 54974 (Oct. 25, 1993).
\4\ 58 FR 44470, 44472 (Aug. 23, 1993).
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In order to correct this, the Commission proposes to amend
Regulation 1.59(b)(1)(i) by subdividing each prohibition into a
separate subparagraph.\5\ The Commission believes that these proposed
amendments to paragraph (b)(1)(i) would clearly distinguish the
situations in which employees of SROs are absolutely prohibited from
trading commodity interests from the situations in which they are
prohibited from trading only if they have access to material, non-
public information.
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\5\ As proposed, Regulations 1.59(b)(1)(i)(A), (B), (C) and (D)
would each be styled to prohibit an employee ``from trading,
directly or indirectly,'' certain commodity contracts in various
circumstances.
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C. Clarification of the Treatment of ``Consultants''
The Commission is aware that SROs employ consultants in a variety
of capacities. Furthermore, Commission staff understands that, in
general, consultants are mostly used in the field of information
technology. Depending on the nature of work being done, a consultant
may or may not have access to material, non-public information.
Regulation 1.59 provides that consultants are SRO ``employees''
since Regulation 1.59(a)(2) defines an employee as ``any person hired
or otherwise employed on a salaried or contract basis by a self-
regulatory organization.'' Indeed, the Commission specifically
indicated its intention that such consultants be considered
``employees'' for Regulation 1.59 purposes when it originally
promulgated the regulation in 1986.\6\ Nonetheless, Commission staff
has learned that some exchanges may retain consultants that they do not
consider ``employees.'' The Commission requests comment on whether
Regulation 1.59 should be amended in any way in order to clarify the
treatment of these consultants.
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\6\ 51 FR 44866, 44867 at note 6 (Dec. 12, 1986). ``It should be
noted that consultants and independent contractors employed by the
self-regulatory organization would be included within the definition
of `employee' under [R]egulation 1.59 and, therefore, would be
subject to the same restrictions applicable to all other exchange
employees.''
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D. Request for Comments on Use of Non-Paid Advisors by Governing Boards
and Committees
The Commission also seeks comment concerning the application of
Regulation 1.59 to non-paid advisors of SRO governing boards and
committees. Presently, these individuals are not subject to Regulation
1.59 requirements as they are neither ``employees''--since they are not
compensated--nor actual members of an SRO governing board or committee.
The Commission believes that such advisors may merit special treatment
under Regulation 1.59. Towards that end, the Commission requests
comment on the extent to which such individuals are utilized by SRO
governing boards and committees and their level of participation in
these bodies' deliberations. In particular, the Commission seeks
comment on whether these individuals are merely solicited for their
opinions or integrally involved in various matters being addressed by
the SRO governing board or committees.
E. Conclusion
The Commission believes that the proposed amendments to Regulation
1.59 would clarify existing ambiguities as well as adapt, as
appropriate, to changes in the industry since the regulation was last
amended.
III. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \7\ requires that
agencies, in promulgating rules, consider the impact of those rules on
small businesses. The Commission previously has 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.\8\ Furthermore, the Acting Chairman
of the Commission previously has certified on behalf of the Commission
that comparable rule proposals affecting registered futures
associations, if adopted, would not have a significant economic impact
on a substantial number of small entities.\9\
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\7\ 5 U.S.C. 601 et seq. (1994).
\8\ 47 FR 18618, 18619 (Apr. 30, 1982).
\9\ See 58 FR 13565, 13569 (Mar. 12, 1993).
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This proposed rulemaking would impact SROs, both contract markets
and registered futures associations, and their employees, governing
board members and committee members. The
[[Page 72590]]
Commission has previously determined that the establishment of
Regulation 1.59, as well as subsequent amendments to the regulation,
have not created significant economic impact for affected entities or
persons.\10\
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\10\ See 47 FR 18618 (Apr. 30, 1982); 50 FR 24533 (June 11,
1985); 51 FR 44866 (Dec. 12, 1986); 52 FR 32568 (Aug. 28, 1987); 52
FR 48974 (Dec. 29, 1987); 58 FR 44470 (Aug. 23, 1993); 58 FR 54966
(Oct. 25, 1993).
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The Commission does not believe that the proposed amendments would
have a significant economic impact on SROs or employees, governing
board members and committee members. The proposed amendments merely
clarify the existing rule. The obligations and prohibitions which would
be established by the proposed amendments are essentially the same
obligations and prohibitions that are created by SRO rules promulgated
pursuant to existing Regulation 1.59.
Therefore, the Chairman, on behalf of the Commission, hereby
certifies, pursuant to Section 3(a) of the RFA,\11\ that the proposed
rulemaking, if adopted, would not have a significant economic impact on
a substantial number of small entities.
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\11\ 5 U.S.C. 605(b) (1994).
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B. Agency Information Activities: Proposed Collection; Comment Request
The Paperwork Reduction Act of 1980 (``PRA'') \12\ 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. The Commission believes the proposed
amendments to Regulation 1.59 would not impose a paperwork burden on
self-regulatory organizations.
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\12\ 44 U.S.C. 3501 et seq. (1988).
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Copies of the information collection submission to the Office of
Management and Budget are available from Stacy Dean Yochum, Clearance
Officer, Commodity Futures Trading Commission, Three Lafayette Centre,
1155 21st Street, N.W., Washington, D.C. 20581. Telephone: (202) 418-
5157.
List of Subjects in 17 CFR Part 1
Commodity futures, Contract markets, Clearing organizations,
Members of contract markets.
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 proposes
to amend 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 1.59 would be amended as follows:
A. Paragraphs (a)(3) through (a)(8) are redesignated as paragraphs
(a)(4) through (a)(9).
B. Paragraph (a)(2)is redesignated as paragraph (a)(3) and revised
and new paragraph (a)(2) is added;
C. Paragraph (b)(1) introductory text and paragraph (b(1)(i) are
revised to read as follows:
Sec. 1.59 Activities of self-regulatory organization employees and
governing members who possess material, non-public information.
(a) Definitions. For purposes of this section:
* * * * *
(2) Governing board member means a member, or functional equivalent
thereof, of the board of governors of a self-regulatory organization.
(3) Employee means any person hired or otherwise employed on a
salaried or contract basis by a self-regulatory organization, but does
not include any governing board member compensated by the exchange
solely for governing board activities.
* * * * *
(b) Employees of self-regulatory organizations: Self-regulatory
organization rules.
(1) Each self-regulatory organization must maintain in effect rules
which have been submitted to the Commission pursuant to section
5a(a)(12)(A) of the Act and Commission regulation 1.41 (or, pursuant to
section 17(j) of the Act in the case of a registered futures
association) that, at a minimum, prohibit:
(i) Employees of the self-regulatory organization:
(A) From trading, directly or indirectly, in any commodity interest
traded on or cleared by the employing contract market or clearing
organization;
(B) From trading, directly or indirectly, in any related commodity
interest;
(C) From trading, directly or indirectly, in any commodity interest
traded on or cleared by contract markets or clearing organizations
other than the employing self-regulatory organization where the
employee has access to material, nonpublic information concerning such
commodity interest; and
(D) From trading, directly or indirectly, in any commodity interest
traded on or cleared by a linked exchange where the employee has access
to material, nonpublic information concerning such commodity interest;
and
* * * * *
Issued in Washington, DC on December 15, 1999, by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 99-33305 Filed 12-27-99; 8:45 am]
BILLING CODE 6351-01-P