[Federal Register Volume 67, Number 27 (Friday, February 8, 2002)]
[Rules and Regulations]
[Pages 5938-5942]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-2935]


=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 140

RIN 3038-AB85


Regulation Concerning Conduct of Members and Employees and Former 
Members and Employees of the Commission

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Commodity Futures Trading Commission is revising certain 
provisions of its regulations on the ethical conduct of employees 
relating to business and financial transactions and interests. This 
action relates solely to the Commission's organization, procedure, and 
practice.

EFFECTIVE DATE: February 8, 2002.

FOR FURTHER INFORMATION CONTACT: Susan Nathan, Assistant General 
Counsel, Commodity Futures Trading Commission, Three Lafayette Centre, 
1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 418-5000; 
e-mail: [email protected].

SUPPLEMENTARY INFORMATION: The Commodity Futures Trading Commission is 
today adopting amendments to subpart C of part 140, 17 CFR part 140, 
under the Commodity Exchange Act, as amended, 7 U.S.C. 4a(f) and (j), 
12a(5) and 13. The amendments to Sec. 140.735-2 remove certain 
restrictions on business and financial transactions by and interests 
held by or on behalf of a Commission member or employee where the 
interest was obtained prior to the commencement of employment, or 
acquired by inheritance, gift, merger, acquisition or other change in 
corporate ownership, or acquired by a spouse or minor child as part of 
an employee compensation package. In addition, the rule would retain 
the 10 percent limitation on an employee's financial interest in any 
person required to file reports under the Commodity Exchange Act or 
rules and regulations promulgated thereunder, but would eliminate from 
the definition of ``significant ownership'' the $25,000 total 
investment in the entity. The amendments do not eliminate the current 
reporting and disqualification requirements prescribed by the Part 140 
rules or by the Standards of Ethical Conduct for Employees of the 
Executive Branch, 5 CFR part 2635; OGE Standard Forms 278 and 450; the 
restrictions in sections 2(a)(7) and 9 of the CEA; and the statutory 
prohibition against participating in matters affecting an employee's 
own financial interests, 18 U.S.C. 208.
    The amendments to Sec. 140.735-8(b)(3) clarify the duties of the 
General Counsel as ethics counsel as well as the process by which 
actual or apparent conflicts of interests are to be resolved.
    The Commission has determined that the exceptions to the 
prohibitions against financial interests created by these amendments 
are neither contrary to the public interest nor otherwise inconsistent 
with the purposes of section 9(c) of the CEA, which generally makes it 
a felony for a Commissioner or Commission employee to participate, 
directly or indirectly, in commodity futures, option or leverage 
transactions or, with certain limited exceptions, in investment 
transactions in actual commodities.\1\
---------------------------------------------------------------------------

    \1\ The Futures Trading Act of 1986 amended section 9(c) to 
replace specific exceptions to that section's prohibitions with a 
grant of authority to the Commission to develop, by rule, 
appropriate exceptions to the absolute restrictions against 
participation in futures and options transactions where the 
Commission determines that such investments would pose no conflict 
of interest concerns. This amendment was designed to enable the 
Commission to administer section 9(c) flexibly and to obviate the 
need for further amendments to 9(c) as the commodities markets 
continue to expand into new areas. H.R. Rep. No. 99-624, 99th Cong., 
2d Session., at 11-12 (June 6, 1986).
---------------------------------------------------------------------------

    The Commission has determined that this rule relates solely to 
agency organization, procedure and practice. Accordingly, the 
provisions of the Administrative Procedure Act, 5 U.S.C. 553, which 
generally require notice of proposed rulemaking and opportunity for 
public participation, are not applicable. The Commission further finds 
that there is good cause to make

[[Page 5939]]

this rule effective upon publication in the Federal Register.

Related Matters

Cost-Benefit Analysis

    Section 15 of the CEA requires the Commission to consider the costs 
and benefits of its action before issuing a new regulation under the 
Act. The Commission understands that, by its terms, section 15 does not 
require the Commission to quantify the costs and benefits of a new 
regulation or to determine whether the benefits of the regulation 
outweigh its costs. Section 15 specifies that costs and benefits shall 
be evaluated in light of five broad areas of market and public concern: 
Protection of market participants and the public; efficiency, 
competitiveness and financial integrity of futures markets; price 
discovery; sound risk management practices; and other public interest 
considerations. Accordingly, the Commission could in its discretion 
give greater weight to any one of the five enumerated areas of concern 
and could in its discretion determine that, notwithstanding its costs, 
a particular rule was necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the Act.
    Because the amendments to part 140 relate solely to agency 
organization, procedure and practice, they do not directly implicate 
the specific areas of concern identified in section 15. The Commission 
has considered the costs and benefits of these amendments and has 
concluded that the rules are fully consistent with the public interest 
and with the requirements and prohibitions of the Commodity Exchange 
Act, as amended, 7 U.S.C. 4a(f) and (j), 12a(5), and 13.

Paperwork Reduction Act of 1995

    The Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et seq., 
imposes certain requirements on federal agencies in connection with 
conducting or sponsoring any collection of information as defined in 
the PRA. The Commission has determined that this rulemaking does not 
impose any information collection requirements as defined by the PRA.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., 
requires that federal agencies, in rules, consider the impact of those 
rules on small entities. The Commission has determined that the 
provisions of the RFA do not apply to the promulgation of these 
regulations since they relate solely to agency procedure and practice.

List of Subjects in 17 CFR Part 140

    Conflict of interests, Ethics, Organization and functions.

Text of Final Rule

    For the reasons set forth in the preamble, the Commission amends 
Title 17, part 140, of the Code of Federal Regulations as follows:

PART 140--[AMENDED]

Subpart C--Regulation Concerning Conduct of Members and Employees 
and Former Members and Employees of the Commission

    1. The authority citation for part 140, subpart C, is revised to 
read as follows:

    Authority: 7 U.S.C. 4a(f) and (j), 12a(5), and 13, as amended by 
the Commodity Futures Modernization Act of 2000, Appendix E of Pub. 
L. 106-554, 114 Stat. 2763 (2000).

    2. Section 140.735-1 is revised to read as follows:

Sec. 140.735-1  Authority and purpose.

    This subpart sets forth specific standards of conduct required of 
Commission members, employees of the Commission, and special government 
employees as well as regulations concerning former Commissioners, 
employees, and special government employees of the Commodity Futures 
Trading Commission. These rules are separate from and in addition to 
the Office of Government Ethics' conduct rules, Standards of Ethical 
Conduct for Employees of the Executive Branch, 5 CFR part 2635. In 
addition, this subpart contains references to various statutes 
governing employee conduct in order to aid Commission members, 
employees of the Commission and others in their understanding of 
statutory restrictions and requirements.\1\ Absent compelling 
countervailing reasons, all Commission members and employees are 
subject to all the terms of this section.
---------------------------------------------------------------------------

    \1\ These references, however, do not purport to cover all 
restrictions and requirements, and paraphrased restatements of 
statutory provisions are not intended to be, and should not be 
construed as, verbatim quotations of the law. Statutory text should 
be consulted in any situation in which it might apply.

    3. Section 140.735-2 is revised to read as follows:


Sec. 140.735-2  Prohibited transactions.

    (a) Application. This section applies to all transactions effected 
by or on behalf of a Commission member or employee of the Commission, 
including transactions for the account of other persons effected by the 
member or employee, directly or indirectly under a power of attorney or 
otherwise. A member or employee shall be deemed to have a sufficient 
interest in the transactions of his or her spouse, minor child, or 
other relative who is a resident of the immediate household of the 
member or employee so that such transactions must be reported and are 
subject to all the terms of this section.
    (b) Prohibitions. Except as otherwise provided in this subsection, 
no member or employee of the Commission shall:
    (1) Participate, directly or indirectly, in any transaction:
    (i) In commodity futures;
    (ii) Involving any commodity that is of the character of or which 
is commonly known to the trade as an option, privilege, indemnity, bid, 
offer, put, call, advance guaranty, or decline guaranty; or
    (iii) For the delivery of any commodity under a standardized 
contract commonly known to the trade as a margin account, margin 
contract, leverage account, or leverage contract, or under any 
contract, account, arrangement, scheme, or device that the Commission 
determines serves the same function or functions as such a standardized 
contract, or is marketed or managed in substantially the same manner as 
such a standardized contract;
    (2) Effect any purchase or sale of an option, futures contract, or 
option on a futures contract involving a security or group of 
securities;
    (3) Sell a security which he or she does not own or consummate a 
sale by the delivery of a security borrowed by or for his or her 
account;
    (4) Participate, directly or indirectly, in any investment 
transaction in an actual commodity if:
    (i) Nonpublic information is used in the investment transaction;
    (ii) It is prohibited by rule or regulation of the Commission; or
    (iii) It is effected by means of any instrument regulated by the 
Commission and is not otherwise permitted by an exception under this 
section;
    (5) Purchase or sell any securities of a company which, to his or 
her knowledge, is involved in any:
    (i) Pending investigation by the Commission;
    (ii) Proceeding before the Commission or to which the Commission is 
a party;
    (iii) Other matter under consideration by the Commission that could 
have a direct and predictable effect upon the company; or
    (6) Recommend or suggest to another person any transaction in which 
the

[[Page 5940]]

member or employee is not permitted to participate in any circumstance 
where the member or employee could reasonably expect to benefit or 
where the member or employee has or may have control or substantial 
influence over such person.
    (c) Exception for farming, ranching, and natural resource 
operations. The prohibitions in paragraphs (b)(1)(i) and (ii) of this 
section shall not apply to a transaction in connection with any 
farming, ranching, oil and gas, mineral rights, or other natural 
resource operation in which the member or employee has a financial 
interest, if he or she is not involved in the decision to engage in, 
and does not have prior knowledge of, the actual futures or options 
transaction and has previously notified the General Counsel \2\ in 
writing of the nature of the operation, the extent of the member's or 
employee's interest, the types of transactions in which the operation 
may engage, and the identity of the person or persons who will make 
trading decisions for the operation; \3\
---------------------------------------------------------------------------

    \2\ As used in this subpart, ``General Counsel'' refers to the 
General Counsel in his or her capacity as counselor for the 
Commission and designated agency ethics official for the Commission, 
and includes his or her designee and the alternate designated agency 
ethics official appointed by the agency head pursuant to 5 CFR 
2638.202.
    \3\ Although not required, if they choose to do so, members or 
employees may use powers of attorney or other arrangements in order 
to meet the notice requirements of, and to assure that they have no 
control or knowledge of, futures or options transactions permitted 
under paragraph (c) of this section. A member or employee 
considering such arrangements should consult with the Office of 
General Counsel in advance for approval. Should a member or employee 
gain knowledge of an actual futures or option transaction entered 
into by an operation described in paragraph (c) of this section that 
has already taken place and the market position represented by that 
transaction remains open, he or she should promptly report that fact 
and all other details to the General Counsel and seek advice as to 
what action, including recusal from any particular matter that will 
have a direct and predictable effect on the financial interest in 
question, may be appropriate.
---------------------------------------------------------------------------

    (d) Other exceptions. The prohibitions in paragraphs (b)(1), (2) 
and (3) of this section shall not apply to:
    (1) A transaction entered into by any publicly-available pooled 
investment vehicle (such as a mutual fund or exchange-traded fund) 
other than one operated by a person who is a commodity pool operator 
with respect to such entity if the direct or indirect ownership 
interest of the member or employee neither exercises control nor has 
the ability to exercise control over the transactions entered into by 
such vehicle; \4\
---------------------------------------------------------------------------

    \4\ Section 9(c) of the Commodity Exchange Act makes it a felony 
for any member or employee, or agent thereof, to participate, 
directly or indirectly in, inter alia, any transaction in commodity 
futures, option, leverage transaction, or other arrangement that the 
Commission determines serves the same function, unless authorized to 
do so by Commission rule or regulation. 17 CFR 4.5 excludes certain 
otherwise regulated persons from the definition of ``commodity pool 
operator'' with respect to operation of specific investment entities 
enumerated in the regulation.
---------------------------------------------------------------------------

    (2) The acceptance or exercise of any stock option or similar right 
granted by an employer as part of a compensation package to a spouse or 
minor child or other related member of the immediate household of a 
member or employee, or to the exercise of any stock option or similar 
right granted to the member or employee by a previous employer prior to 
commencement of the member's or employee's tenure with the Commission 
as part of such member's or employee's compensation package from such 
previous employer;
    (3) A transaction by any trust or estate of which the member or 
employee or the spouse, minor child, or other related member of the 
immediate household of the member or employee is solely a beneficiary, 
has no power to control, and does not in fact control or advise with 
respect to the investments of the trust or estate;
    (4) The exercise of any privilege to convert or exchange 
securities, of rights accruing unconditionally by virtue of ownership 
of other securities (as distinguished from a contingent right to 
acquire securities not subscribed for by others), or of rights in order 
to round out fractional shares in securities;
    (5) The acceptance of stock dividends on securities already owned, 
the reinvestment of cash dividends on a security already owned, or the 
participation in a periodic investment plan when the original purchase 
was otherwise consistent with this rule; or
    (6) Investment in any fund established pursuant to the Federal 
Employees Retirement System.
    (e) No prohibition on stocks or funds. Nothing in paragraph (b)(1) 
or (2) of this section shall prohibit a member or employee from 
purchasing, selling, or retaining any share that represents ownership 
of a publicly-owned corporation or interest in a publicly-available 
pooled investment vehicle containing any such shares (such as a mutual 
fund or exchange-traded fund) other than one operated by a person who 
is a commodity pool operator with respect to such pooled investment 
vehicle, regardless of whether any security futures product may at any 
time be or have been based upon shares of such corporation or pooled 
investment vehicle, and regardless of whether such pooled investment 
vehicle may, by design or effect, track or follow any group of 
securities that also underlies a futures contract.
    (f) Exception applicable to legally separated employees. This 
section shall not apply to transactions of a legally separated spouse 
of a member or employee, including transactions for the benefit of a 
minor child, if the member or employee has no power to control, and 
does not, in fact, advise or control with respect to such transactions. 
If the member or employee has actual or constructive knowledge of such 
transactions of a legally separated spouse or for the benefit of a 
minor child, the disqualification provisions of Sec. 140.735-
2a(d)(2)(i)-(iii) and 18 U.S.C. 208 are applicable.

    4. Section 140.735-2a is added to subpart C to read as follows:


Sec. 140.735-2a  Prohibited interests.

    (a) Application. This section applies to all financial interests of 
a Commission member or employee of the Commission, including financial 
interests held by the member or employee for the account of other 
persons. A member or employee shall be deemed to have a sufficient 
interest in the financial interests of his or her spouse, minor child, 
or other relative who is a resident of the immediate household of the 
member or employee, so that such financial interests must be reported 
and are subject to all the terms of this section.
    (b) Prohibitions. Except as otherwise provided in this subsection, 
no member or employee of the Commission shall:
    (1) Have a financial interest, through ownership of securities or 
otherwise, in any person\5\ registered with the Commission (including 
futures commission merchants, associated persons and agents of futures 
commission merchants, floor brokers, commodity trading advisors and 
commodity pool operators, and any other persons required to be 
registered in a fashion similar to any of the above under the Commodity 
Exchange Act or pursuant to any rule or regulation promulgated by the 
Commission), or any contract market, board of trade, or other trading 
facility, or any clearing organization subject to regulation or 
oversight by the Commission; \6\ or
---------------------------------------------------------------------------

    \5\ As defined in section 1a(16) of the Commodity Exchange Act 
and 17 CFR 1.3(u) thereunder, a ``person'' includes an individual, 
association, partnership, corporation and a trust.
    \6\ Attention is directed to 18 U.S.C. 208.
---------------------------------------------------------------------------

    (2) Own or control, through securities or otherwise, ten percent or 
more of the total ownership interests in any other person required to 
file reports under the Commodity Exchange Act, or pursuant

[[Page 5941]]

to any rule or regulation promulgated by the Commission.\7\
---------------------------------------------------------------------------

    \7\ The Division of Economic Analysis maintains information on 
persons whose commodity futures and options positions are or have 
been reportable under the Commission's large trader reporting 
system. Members and employees should consult with DEA to determine 
whether any of their financial interests involve entities subject to 
such reporting.
---------------------------------------------------------------------------

    (c) Exceptions. The prohibitions in paragraph (b) of this section 
shall not apply to:
    (1) A financial interest in any publicly-available pooled 
investment vehicle (such as a mutual fund or exchange-traded fund) 
other than one operated by a person who is a commodity pool operator 
with respect to such entity if such vehicle does not have invested, or 
indicate in its prospectus the intent to invest, ten percent or more of 
its assets in securities of persons described in paragraph (b) of this 
section and the member or employee neither exercises control nor has 
the ability to exercise control over the financial interests held in 
such vehicle;
    (2) A financial interest in any corporate parent or affiliate of a 
person described in paragraph (b)(1) of this section if the operations 
of such person provide less than ten percent of the gross revenues of 
the corporate parent or affiliate; \8\
---------------------------------------------------------------------------

    \8\ It is the member's or employee's responsibility to monitor 
his or her financial interests and those of a spouse or minor child 
or other related member of his or her immediate household, to 
promptly report relevant changes to the General Counsel in writing, 
and to seek the advice of the General Counsel as to what action may 
be appropriate. In this regard, attention is directed to 18 U.S.C. 
208, which bars an employee from participating in any particular 
matter that will have a direct and predictable effect on the 
financial interest in question.
---------------------------------------------------------------------------

    (3) A financial interest in any trust or estate of which the member 
or employee is solely a beneficiary, has no power to control, and does 
not in fact control or advise with respect to the investments of the 
trust or estate; except that such interest is subject to the provisions 
of paragraphs (d) and (f) of this section.
    (d) Retention or passive acquisition of prohibited financial 
interests. Nothing in this section shall prohibit a member or employee, 
or a spouse or minor child or other related member of the immediate 
household of the member or employee, from:
    (1) Retaining a financial interest that was permitted to be 
retained by the member or employee prior to the adoption of this 
regulation, was obtained prior to the commencement of employment with 
the Commission, or was acquired by a spouse prior to marriage to the 
member or employee; or
    (2) Acquiring, retaining, or controlling an otherwise prohibited 
financial interest, including but not limited to any security or option 
on a security (but not a security futures product), where the financial 
interest was acquired by inheritance, gift, stock split, involuntary 
stock dividend, merger, acquisition, or other change in corporate 
ownership, exercise of preemptive right, or otherwise without specific 
intent to acquire the financial interest, or by a spouse or minor child 
or other related member of the immediate household of the member or 
employee as part of an employment compensation package; provided, 
however, that retention of any interest allowed by paragraph (c)(3) or 
(d) of this section is permitted only where the employee:
    (i) Makes full disclosure of any such interest on his or her annual 
financial disclosure (Standard Form 278 or Standard Form 450);
    (ii) Makes full written disclosure to the General Counsel within 30 
days of commencing employment or, for incumbents, within twenty days of 
his or her receipt of actual or constructive notice that the interest 
has been acquired; \9\ and
---------------------------------------------------------------------------

    \9\ Changes in holdings, other than by purchase, which do not 
affect disqualification, such as those resulting from the automatic 
reinvestment of dividends, stock splits, stock dividends or 
reclassifications, may be reported on the annual statement, SF 278 
or SF 450, rather than when notification of the transaction is 
received. Acquisition by, for example, gifts, inheritance, or 
spinoffs, which may result in additional disqualifications pursuant 
to paragraph (d)(2)(iii) of this section and 18 U.S.C. 208 shall be 
reported to the General Counsel within 20 days of the receipt of 
actual or constructive notice thereof.
---------------------------------------------------------------------------

    (iii) Will be disqualified in accordance with 5 CFR part 2635, 
subpart D, and 18 U.S.C. 208 from participating in any particular 
matter that will have a direct and predictable effect on the financial 
interest in question. Any Commission member or employee affected by 
this section may, pursuant to 18 U.S.C. 208(b)(1) and 5 CFR 2640.301-
303, request a waiver of the disqualification requirement.

    Note: With respect to any financial interest retained under 
paragraph (c)(3) or (d) of this section, Commission members and 
employees are reminded of their obligations under 18 U.S.C. 208 and 
5 CFR part 2635, subpart D, to disqualify themselves from 
participating in any particular matter in which they, their spouses 
or minor children have a financial interest.

    (e) Exception applicable to legally separated employees. This 
section shall not apply to the financial interests of a legally 
separated spouse of a Commission member or employee, including 
transactions for the benefit of a minor child, if the member or 
employee has no power to control and does not, in fact, advise or 
control with respect to such transactions. If the member or employee 
has actual or constructive knowledge of such financial interests held 
by a legally separated spouse or for the benefit of a minor child, the 
disqualification provisions of paragraphs (d)(2)(i)-(iii) of this 
section and 18 U.S.C. 208 are applicable.
    (f) Divestiture. Based upon a determination of substantial conflict 
under 5 CFR 2635.403(b) and 18 U.S.C. 208, the Commission, or its 
designee, may require in writing that a member or employee, or the 
spouse or minor child or other related member of the immediate 
household of a member or employee, divest a financial interest that he 
or she is otherwise authorized to retain under this section.\10\
---------------------------------------------------------------------------

    \10\ Any evidence of a violation of 18 U.S.C. 208 must be 
reported by the General Counsel to the Commission, which may refer 
the matter to the Criminal Division of the Department of Justice and 
the United States Attorney in whose venue the violations lie. See 28 
U.S.C. 535.
---------------------------------------------------------------------------

    5. Section 140.735-8 is amended by republishing the introductory 
text of paragraph (b) and by revising paragraph (b)(3) to read as 
follows:


Sec. 140.735-8  Interpretative and advisory service.

* * * * *
    (b) Duties of the Counselor. The counselor shall:
    (3) Receive information on, and resolve or forward to the 
Commission for consideration, any conflict of interests or apparent 
conflict of interests which appears in the annual financial disclosure 
(Standard Form 278 or Standard Form 450), or is disclosed to the 
General Counsel by a member or employee pursuant to Sec. 140.735-2a(d) 
of this part, or otherwise is made known to the General Counsel.
    (i) A conflict of interests or apparent conflict of interests is 
considered resolved by the General Counsel when the affected member or 
employee has executed an ethics agreement pursuant to 5 CFR 2634.801 et 
seq. to undertake specific actions in order to resolve the actual or 
apparent conflict.
    (ii) If, after advice and guidance from the General Counsel, a 
member or employee does not execute an ethics agreement, the conflict 
of interests is considered unresolved and must be referred to the 
Commission for resolution or further action consistent with 18 U.S.C. 
208 and 28 U.S.C. 535.
    (iii) Where an unresolved conflict of interests or apparent 
conflict of interests is to be forwarded to the Commission by

[[Page 5942]]

the General Counsel, the General Counsel will promptly notify the 
affected member or employee in writing of his or her intent to forward 
the matter to the Commission. Any member or employee so affected will 
be afforded an opportunity to be heard by the Commission through 
written submission.
* * * * *

    By the Commission on February 1, 2002.
Jean A. Webb,
Secretary.
[FR Doc. 02-2935 Filed 2-7-02; 8:45 am]
BILLING CODE 6351-01-P