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September 21, 2009
Proposed Amendments to NFA's Articles of Incorporation for Changes to the Structure of NFA's Board of Directors and Executive Committee
Important: Ballot Enclosed INTRODUCTION
On August 20, 2009, NFA's Board of Directors ("Board") unanimously ratified a proposal to amend NFA's Articles of Incorporation ("Articles") to increase public director representation on NFA's Board and Executive Committee ("Committee") to 35%. Specifically, the proposed Articles amendments would:
change the structure of the Board by increasing its size from 23 Directors to 28 Directors with the addition of five Public Directors and by decreasing the allowable maximum number of Contract Market Representatives on the Board from five to four; and
change the structure of the Committee by providing that NFA's President/CEO shall be a non-voting, ex officio member of the Committee, by providing that NFA's Chairman shall sit on the Committee as a representative of the category that he or she represents on the Board, and by adding three Public Directors to the Committee, thereby increasing the size of the Committee from nine Directors to 11 Directors.
In February 2007, the Commodity Futures Trading Commission ("CFTC") adopted final acceptable practices ("APs") for minimizing conflicts of interest in decision making by designated contract markets, pursuant to Core Principle 15 of the Commodity Exchange Act. Among other things, the CFTC's board composition AP - which is designed to offer exchanges a safe harbor by which they can comply with Core Principle 15 of the Commodity Exchange Act - requires that at least 35% of an exchange's board and executive committee be public directors. The Commission subsequently announced that all contract markets must demonstrate full compliance with Core Principle 15 by April 27, 2010.
Although the CFTC has not formally applied the 35% public representative board composition AP to NFA, the Board felt that NFA, even in the absence of a formal CFTC requirement, should apply the AP's 35% public director requirement to NFA's Board and Committee. The Board noted that if NFA did not adhere to the AP's 35% requirement, then after April 2010 NFA would be the only self-regulatory organization in the futures and securities industries with less than 35% public director representation on its Board. In the Board's view, therefore, public policy warrants greater public director representation on the Board and Committee.
PROPOSED CHANGES TO THE BOARD
Pursuant to Article VII, NFA's Board can have a maximum of 24 Directors. Currently, however, since there are only four contract market Members of NFA, NFA has 23 positions on the Board, and the public representatives constitute just over 20% of the Board.
NFA would need to structurally realign its Board to have public directors constitute 35% of the Board. In realigning the Board, the Board was committed to maintaining its effectiveness as a governing body. The Board considered several alternatives and concluded that reducing the number of Member directors would dilute the specialized knowledge, expertise and experience in the futures industry that Member directors bring to the Board, attributes that the Board believes to be essential for the proper governance of NFA. Therefore, the Board's proposal recommends maintaining the same number of Member directors and adding five public directors thereby increasing the Board's size to 28 directors.
The Board acknowledged that immediately identifying five new public directors with appropriate backgrounds and qualifications and who are willing to serve could be difficult. The Board therefore recommends that the increase in public directors occur in two steps over two years, which will also lessen the budgetary impact of this change during the first year. To accomplish this, the Board recommends electing two additional public directors in February 2010 and electing three additional public directors in February 2011.
Restructuring the Board in this manner also assumes that no more than four contract market Member directors will sit on the Board. Given the continued consolidation of futures exchanges, the Board believed that the number of contract market Board representatives should be reduced from a maximum of five to a maximum of four. This change will have no practical effect at the present since there only four contract market Members of NFA. The Board further proposes that if there are more than four exchange Members of NFA, then (a) each exchange Member ranked in the top three Member exchanges based on volume would have one representative; and (b) one additional exchange Member having volume in excess of 1,000,000 but not ranked among the top three shall be elected by exchange Members not ranked in the top three.
PROPOSED CHANGES TO THE EXECUTIVE COMMITTEE
The Board also proposes that NFA's Executive Committee be structurally realigned to be comprised of 35% public representatives. The Committee currently has ten members-NFA's Chairman, NFA's President, two exchanges, three FCMs/IBs, two CPOs/CTAs, and one public representative.
Again, the Board placed high value on this Committee's Member directors' expertise and considered the addition of public directors preferable to reducing the number of Member directors on the Committee. However, the Board was also concerned that simply adding four public directors and increasing the Committee from 10 to 14 members may result in a Committee unwieldy in size. Thus, the Board determined that two additional changes to the Committee's structure should be made, which would result in meeting the 35% public director requirement without significantly altering the Committee's size and Member composition.
First, the Board proposes that NFA's President be designated as a non-voting, ex officio member of the Committee, which would make a position available for an additional public director. Second, currently Article VIII, Section 3 provides that NFA's Chairperson has a separate position allocated to him/her on the Executive Committee by virtue of being the Chairperson. The Board determined that since the Chairperson is drawn from a Member or public director category, it is appropriate that the Chairperson have a seat on the Committee as a representative of his/her respective category. The Board recognizes that this change eliminates a position but permits, if adopted, the election of another public director to the Committee without expanding its overall size.
Implementing the two changes described above would allow NFA to elect three additional public representatives to the Committee to meet the 35% requirement but only increase the Committee's overall size by one. The result would be an eleven-member Committee comprised of seven Member directors and four public directors. NFA's President would serve on the Committee in an ex officio non-voting capacity.
Additionally, with regard to timing, the Board recommends that the changes to the Committee run parallel to the changes to the Board and be phased in over two years. Specifically, in February 2010, NFA's President/CEO would become a non-voting, ex officio member of the Committee and one public director would be elected; and in February 2011, NFA's Chairman will sit on the Committee as a representative of the category that he or she represents on the Board and two public directors would be elected.
PROPOSED ARTICLES AMENDMENTS
The proposed amendments to Articles VII, VIII and XVIII are set forth below and incorporate the governance proposals approved by NFA's Board, as discussed above. Amendments to NFA's Articles require the affirmative vote of a majority of those Members actually voting in each Member category - Contract Market, FCM/LTM/IB, and CPO/CTA.
Please use the enclosed ballot to vote and fax it to NFA by October 21, 2009. Should you have any questions, please contact Tom Sexton, NFA's General Counsel, at (312) 781-1413 or at email@example.com.
SO PLEASE GIVE THIS MATTER YOUR ATTENTION
YOUR BALLOT MUST BE FAXED TO NFA NO LATER THAN
OCTOBER 21, 2009 OR IT WILL NOT BE COUNTED
ARTICLE VII: BOARD OF DIRECTORS
* * *
The Board of Directors shall be comprised as follows:
- (a) Contract Market Representatives.
- (i) In the event that there are
(ii) In the event that there are more
than five (5) four (4) contract market Members with annual transaction volume during the prior calendar year of more than 1,000,000:
- (a) One representative of each contract market Member ranked in the top three (3) contract market Members based on annual transaction volume during the prior calendar year.
Two (2) One (1) elected representatives of contract market Members with annual transaction volume during the prior calendar year of more than 1,000,000 that are not included in Section 2(a)(ii)(a) above. Only contract market Members not represented in accordance with Section 2(a)(ii)(a) shall be eligible to vote for the representatives elected in accordance with this Section 2(a)(ii)(b).
- (c) Commodity Pool Operator
- (i) Four (4) elected representatives of registered commodity pool operators (hereinafter "CPOs") and registered commodity trading advisors (hereinafter "CTAs") that are NFA Members, including at least two (2) representatives of CPOs or CTAs that rank within the top 20 percent of CPOs or CTAs with funds under management allocated to futures (as defined in Article XVIII(k)).
(ii) Five (5) individuals who are not officers, directors, partners, employees or beneficial owners of more than 10 percent of the equity stock of any Member of NFA (hereinafter "Public Representatives").
i) No CPO or CTA may have more than one representative on the Board at any one time. For purposes of this limitation, a person shall be deemed a representative of an CPO or CTA if the person is an officer, director, partner, employee or beneficial owner of more than 10 percent of the equity stock of the CPO or CTA, and the person is not a contract market representative.
(d) Public Representatives
- (a) Effective as of the 2010 annual meeting of the Board, seven (7) individuals who are Public Representatives (see Article XVIII(r);
(b) Effective as of the 2011 annual meeting of the Board, ten (10) Public Representatives (see Article XVIII(r).
ARTICLE VIII: EXECUTIVE COMMITTEE
* * *
Section 3: Composition.
The Executive Committee shall comprise the following:
- (a) NFA's President, who shall be an ex officio, non-voting member; and
(b) (i) Effective as of the 2010 annual meeting of the Board,
Nine (9) Ten (10) Directors as follows:
(ii) Eight (8) Nine (9) other Directors, as follows:
(2)(b) One (1) representative of a contract market other than a contract market described in clause (1) above: Provided, however, if no contract market described in clause (1) above is represented on the Board, there shall be two Directors on the Committee from contract markets represented on the Board;
(C)(3) Two (2) Directors representing CPOs and CTAs; and (D)(4) One (1) Two (2) Directors who is a are Public Representatives (see Article XVIII(r).
- (A) Two (2) Directors representing contract markets:
- (1) One (1) representative of a contract market that had transaction volume of more than 20 percent of aggregate contract market transaction volume during the prior calendar year. A specific contract market's transaction volume shall be the number of commodity futures contracts entered into on the contract market. The aggregate contract market transaction volume shall be the number of such contracts entered into on all U.S. contract markets. The number of contracts entered into on a contract market shall be adjusted where necessary because of differences in sizes of contracts (e.g., one 5,000 oz. contract for a particular commodity would equal five 1,000 oz. contracts for that commodity for purposes of the computation); and
(2) One (1) representative of a contract market other than a contract market described in clause (1) above: Provided, however, if no contract market described in clause (1) above is represented on the Board, there shall be two Directors on the Committee from contract markets represented on the Board;
(C) Two (2) Directors representing CPOs and CTAs; and
(D) Four (4) Directors who are Public Representatives (see Article XVIII(r).
The elected members of the Executive Committee shall be chosen by the Board at the regular annual meeting as follows: The Directors representing contract markets that had transaction volume of more than 20 percent of aggregate contract market transaction volume during the prior calendar year shall elect the Committee member in category (b)(i)(B)(1)(a) above at the 2010 annual meeting and (b)(ii)(A)(1) above thereafter; the Directors representing all other contract markets shall elect the Committee member in category (b)(i)(B)(1)(b) at the 2010 annual meeting and (b)(ii)(A)(2) above thereafter; the Directors representing FCMs, LTMS, and IBs shall elect the Committee members in category (b)(i)(B)(2) above at the 2010 annual meeting and (b)(ii)(B) above thereafter; the Directors representing CPOs and CTAs shall elect the Committee members in category (b)(i)(B)(3) above at the 2010 annual meeting and (b)(ii)(C) above thereafter; and the Public Representative Directors shall be elected by the Board. A vacancy that occurs on the Executive Committee shall be filled in like manner. Tie votes may be resolved by the Board by random draw.
ARTICLE XVIII: DEFINITIONS
(r) "Public Representative"-refers to those members of NFA's Board of Directors who
are not employed by any NFA Member, as described in paragraph 2(cd)(ii) of Article VII are public directors as that term is defined in Section (b)(2) of Appendix B to Part 38 of the CFTC's Regulations.
Please Fax This Ballot to NFA
(Fax Number 312-781-1467)
No Later Than October 21, 2009
Article VII: Board of Directors
Article VIII: Executive Committee
Article XVIII: Definitions
Please Check Your Member Category:
_____Contract Market Member