[Federal Register Volume 70, Number 9 (Thursday, January 13, 2005)]
[Rules and Regulations]
[Pages 2350-2352]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-709]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 171

RIN 3038-AC12


Rules Relating to Review of National Futures Association 
Decisions in Disciplinary, Membership Denial, Registration and Member 
Responsibility Actions

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') hereby amends its rules relating to the scope of Commission 
review of National Futures Association (``NFA'') decisions in 
disciplinary, membership denial, registration and member responsibility 
actions. First, the Commission makes a technical amendment to add the 
NFA's Hearing Committee to the list of committees covered by that 
section. This change conforms Rule 171.1(b)(4) to changes in NFA's 
committee structure since part 171 was first adopted in October 1990. 
Secondly, the Commission adds a new provision to exclude from 
Commission review any appeal concerning NFA suspension of a member for 
failing to pay settlement or arbitration award (``award suspension 
cases'') unless there are extraordinary circumstances that would 
otherwise warrant Commission review.

DATES: Effective January 13, 2005.

FOR FURTHER INFORMATION CONTACT: Thuy Dinh or Gail Scott, Office of the 
General Counsel, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 
418-5120.

SUPPLEMENTARY INFORMATION:

I. Scope of Commission Review

    On June 15, 1990, the Commission published proposed rules 
establishing standards and procedures for its review of decisions of 
registered futures associations such as NFA in disciplinary actions, 
membership denial actions, registration actions and member 
responsibility actions. 55 FR 24254. Under the proposed rules, two 
categories of decisions were excluded from Commission review: (a) 
Disciplinary decisions in which the aggrieved party failed to pursue 
his or her appeal rights to the NFA Appeals Committee and no 
extraordinary circumstances warranted Commission review; and (b) 
decisions in arbitration actions. See 171.1(b)(1) and 171.1(b)(2), 
respectively. Two comment letters were received in response to the 
request for public comment. Of particular interest to the Commission 
was a letter it received from the NFA.\1\
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    \1\ August 31, 1990 NFA Letter (``NFA Letter'').
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    In its letter, the NFA proposed that the Commission exclude any 
appeal arising from NFA suspension of an association member based 
solely on that member's failure to pay NFA dues or arbitration 
awards.\2\ In its final rules published on October 9, 1990, the 
Commission agreed that the suspension for non-payment of dues should 
not generally be considered a disciplinary action subject to Commission 
review and accordingly amended the proposed rules by adding 171.1(b)(3) 
under ``Matters excluded'' in the publication of its final rules. See 
55 FR 41061. However, the Commission specifically rejected NFA's 
request to exclude from Commission review the suspension of a member 
for failing to pay arbitration awards, stating:
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    \2\ The NFA presumed that ``actions in these areas would not be 
deemed disciplinary actions'' within Commission review under Part 
171. NFA Letter at 7. Section 10(g) of NFA's Code of Arbitration 
(Code) and Section 10(g) of NFA's Member Arbitration Rules (Member 
Rules) authorize NFA to summarily suspend an NFA member or associate 
if such member or associate fails to pay an NFA award or settlement 
reached in an NFA arbitration or mediation proceeding within 30 
days. Members and associates receive a 30-day written notice before 
the suspension becomes effective, giving them a minimum of 60 days 
to satisfy the award or settlement. Once the suspension becomes 
effective, a member or associate can get it lifted at any time by 
paying the amount due. A member or associate can also file a motion 
to vacate the award. A timely motion to vacate an award stays the 
suspension while the motion is pending in a court of competent 
jurisdiction.

The Commission is reluctant at this time * * * to exclude suspension 
of a member for failing to pay arbitration awards. When the 
Commission has excluded NFA arbitration decisions themselves from 
its review, one of the reasons it has done so is that these 
decisions can be reversed in the court system. In contrast, 
membership suspension raises somewhat different issues which 
generally go to the core of the Commission's role in reviewing NFA 
actions affecting membership status. Pending additional experience 
on the issue the Commission has determined not to exclude such NFA 
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action from its appellate jurisdiction.

Id. at 41064.
    From 1990 to the present, the Commission has received a total of 
five appeals related to the suspension of a member for failing to pay 
an arbitration award. The Commission first considered this issue in 
1991, shortly after Part 171 was adopted. In the initial case, the 
respondent asked the Commission to stay the suspension while he worked 
out a payment schedule. In rejecting the petition, the Commission 
stated, ``NFA's ministerial imposition of a pre-determined sanction for 
a member's failure to perform an undisputed duty of membership [to pay 
an arbitration award] is not, without more, a proper subject for 
Commission review.'' Machin v. NFA, [1990-1992 Transfer Binder] Comm. 
Fut. L. Rep. (CCH) ] 25,041 at 37,893 (CFTC Apr. 25, 1991).
    There were no other appeals of this nature until 1997, when the 
Commission dismissed an appeal from an award suspension where the 
appeal was predicated on alleged procedural and substantive errors in 
the underlying arbitration. The Commission stated, ``it would be 
inappropriate to consider either procedural or substantive errors in 
NFA's resolution of the issues raised in the arbitration.'' Indelicato 
v. NFA,  [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 27,130 
at 45,287 (CFTC Aug. 7, 1997). Citing Machin, the Commission further 
noted, ``the imposition of a suspension for failing to pay an 
arbitration award might be reviewable upon a showing that NFA acted 
arbitrarily in imposing the suspension. Here, however, as in Machin, 
petitioners have failed to establish such arbitrariness.'' Id.
    The Commission's denials of review in three recent cases, from 
March 2003 to February 2004, have followed Machin and Indelicato, i.e., 
declining to accept any appeal from this type of suspension unless it 
``involves something more than the ministerial application of a pre-
determined sanction.'' See Howell v. NFA, [Current Transfer Binder] 
Comm. Fut. L. Rep. (CCH) ] 29,702 at 55,993 (CFTC Feb. 27, 2004); 
Mawhorr v. NFA, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 
29,633 at 55,717 (CFTC Nov. 28, 2003); Bunyard v. NFA, CRAA 03-01 (CFTC 
Mar. 5, 2003). In Bunyard, the Commission stated, ``[only] an appeal 
raising a colorable claim that the NFA acted arbitrarily--or a similar 
claim that goes to the core of the Commission's role in ensuring the 
reliability of NFA's membership

[[Page 2351]]

process--would fall within our jurisdiction.'' Id. at 2.
    Against this backdrop, the NFA this year again proposed that the 
Commission exclude from its jurisdiction membership suspension cases 
based solely on the members' failure to pay arbitration awards. See 
April 15, 2004 NFA Letter at 5. The NFA discussed the Commission's 
disposition of these types of appeals during the last 14 years. Noting 
that the Commission had routinely rejected such appeals, the NFA 
proposed that the Part 171 Rules be amended to reflect the Commission's 
actual practice, which is to limit review to cases presenting 
``extraordinary circumstances.'' Id. at 4.
    In its notice of proposed rulemaking, the Commission noted that it 
had reviewed its case history in this area and reached the following 
conclusions: (a) Such appeals are very infrequent; and (b) the few 
cases that have reached the Commission did not raise a colorable 
challenge to the fundamental fairness of the proceeding, and fell 
squarely into the ``ministerial'' category that would not warrant 
Commission review. Based on this experience, the Commission proposed to 
exclude these routine matters from appellate review. The Commission 
proposed to exercise its appellate jurisdiction in the extraordinary 
case where an appeal based on an award suspension involved ``something 
more than a ministerial application of a predetermined sanction.'' The 
proposed rule incorporated the Commission's language used in Machin and 
Indelicato.
    The notice for the proposed rule was published in the Federal 
Register on October 25, 2004, providing a thirty-day comment period. On 
November 17, 2004, Mr. Thomas Sexton, NFA Vice President and General 
Counsel, wrote to the Commission endorsing the proposed amendment. 
Reviewing NFA arbitration cases of the past 14 years, the letter noted 
the following statistics:

Since November 1, 1990, when Part 171 became effective, NFA has 
closed approximately 2750 arbitration cases. Approximately 450 of 
these cases have resulted in awards against Members and Associates. 
Approximately 1150 more of these cases settled since June 1, 1993, 
when we added unpaid settlements to the suspension rules. These 1600 
cases generated only 61 suspensions, and only five of those have 
been appealed to the Commission. The Commission denied review in 
each of these five cases, ruling that the ministerial imposition of 
a predetermined sanction is not a proper subject for Commission 
review. Nonetheless, in each one of these cases the Commission and 
NFA--as well as the suspended Member or Associate--expended 
significant resources on the appeal.

Sexton Letter at 1.
    The letter concluded that the Commission's amendments will not 
eliminate existing rights, but ``will clarify the current practice * * 
* and conserve resources * * * that * * * would otherwise [be] waste[d] 
on appeals that will not be accepted for review.'' Id. at 2. The letter 
further acknowledged that the Commission amendments, in choosing to 
review only cases in which an NFA Member or Associate has a colorable 
claim that NFA acted arbitrarily or if other extraordinary 
circumstances exist, provide Members and Associates with an adequate 
remedy against unreasonable suspensions. Id. In essence, the letter 
reiterated the Commission's objectives for instituting the amendments.
    The Commissioner received no other comment from the public. The 
comment period ended on November 24, 2004.

II. Technical Amendment

    Commission Rule 1.63 bars persons with certain disciplinary 
histories from serving on ``a disciplinary committee'' or in other 
leadership positions of any self-regulatory organization. Rule 
171.1(b)(4) provides that NFA decisions made pursuant to Rule 1.63 are 
excluded from Commission review. As currently written, it forecloses 
appeals by an NFA member who is disqualified from service on NFA's 
``Board of Directors, Business Conduct Committees or arbitration 
panels.'' Since Rule 171.1(b)(4) was promulgated, NFA has established a 
Hearing Committee as part of its disciplinary function. The Commission 
is making a technical amendment to Rule 171.1(b)(4) to add the Hearing 
Committee to the list of committees covered by the rule.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq., 
requires agencies with rulemaking authority to consider the impact 
those rules will have on small businesses. With respect to persons 
seeking Commission reviews of NFA adjudicatory decisions, the 
amendments would impose no additional regulatory burden. Commission 
review of NFA disciplinary and membership denial actions has been 
carried out pursuant to 17 CFR Part 171 since 1990. These amendments do 
not present any significant changes and would in fact ease the 
regulatory burden to some extent by providing greater certainty and 
predictability concerning the standards and procedures governing such 
review. Accordingly, the Acting Chairman, on behalf of the Commission, 
hereby certifies, pursuant to 5 U.S.C. 605(b), that the amendments will 
not have a significant economic impact on a substantial number of small 
businesses.

B. Paperwork Reduction Act

    The amendments to Part 171 rules do not impose a burden within the 
meaning and intent of the Paperwork Reduction Act of 1980, 44 U.S.C. 
3501, et seq.

C. Cost-Benefit Analysis

    Section 15(a) of the Commodity Exchange Act, 7 U.S.C. 19(a), 
requires the Commission to consider the costs and benefits of its 
action before issuing a new regulation. The Commission understands 
that, by its terms, Section 15(a) does not require the Commission to 
quantify the costs and benefits of a new regulation or to determine 
whether the benefits of the proposed regulation outweigh its costs. Nor 
does it require that each proposed rule be analyzed in isolation when 
that rule is a component of a larger package of rules or rule 
revisions. Rather, section 15(a) simply requires the Commission to 
``consider the costs and benefits'' of its action.
    Section 15(a) further specifies that costs and benefits shall be 
evaluated in light of five broad areas of market and public concern: 
(1) Protection of market participants and the public; (2) efficiency, 
competitiveness, and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. Accordingly, the Commission can, in its 
discretion, give greater weight to any one of the five enumerated areas 
of concern and can, in its discretion, determine that notwithstanding 
its costs, a particular rule is necessary or appropriate to protect the 
public interest or to effectuate any of the provisions, or accomplish 
any of the purposes, of the Commodity Exchange Act.
    The amendments to Part 171 will not create any significant change 
in the Commission's appellate process. In fact, the amendments should 
enhance the protection of market participants and the public by 
excluding from the Commission's review matters that represent routine 
enforcement of a NFA pre-determined sanction, freeing both the 
Commission's and NFA's resources. In addition, since the amendments 
retain the Commission's ability to consider appeals that present 
``extraordinary circumstances,'' public interest considerations for 
fundamental fairness and the Commission's supervisory authority 
regarding self-

[[Page 2352]]

regulated organizations will not be compromised.
    After considering these factors, the Commission has determined to 
amend Part 171, as set forth below.

List of Subjects in 17 CFR Part 171

    Administrative practice and procedure, Commodity exchanges, 
Commodity futures.

0
In consideration of the following, the Commission hereby amends chapter 
I of title 17 of the Code of Federal Regulations as follows:

PART 171--RULES RELATING TO REVIEW OF NATIONAL FUTURES ASSOCIATION 
DECISIONS IN DISCIPLINARY, MEMBERSHIP DENIAL, REGISTRATION AND 
MEMBER RESPONSIBILITY ACTIONS

0
1. The authority citation for part 171 continues to read as follows:

    Authority: 7 U.S.C. 4a, 12a, and 21.

0
2. Section 171.1(b) is amended in paragraph (b)(4) by adding ``, 
Hearing Committee'' between ``Business Conduct Committees'' and ``or 
arbitration panels''; and replacing ``.'' with ``;'' at the end of 
(b)(4); and by adding new paragraph (b)(5):


Sec.  171.1  Scope of rules.

* * * * *
    (b) * * *
    (5) Suspension of a member or a person associated with a member 
based solely on that person's failure to pay an arbitration award or a 
settlement agreement resulting from an arbitration action brought 
pursuant to section 17(b)(10) of the Act or rules and regulations of 
the National Futures Association, or a settlement agreement resulting 
from a mediation proceeding sponsored by the National Futures 
Association, unless there are extraordinary circumstances that involve 
something more than the ministerial application of a predetermined 
sanction, or raise a colorable claim that the National Futures 
Assocaition has acted arbitrarily.
* * * * *

    Issued in Washington, DC on the 10th day of January 2005, by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 05-709 Filed 1-12-05; 8:45 am]
BILLING CODE 6351-01-M