UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|GREGORY PAUL VIOLETTE||CFTC Docket No. 97-R020|
|FIRST AMERICAN DISCOUNT CORPORATION|
First American Discount Corporation ("FADC"), a futures commission merchant, appealed from a Judgment Officer's initial decision finding that Scott Allen Wolf and Wolf Futures Group (collectively, "Wolf"), a guaranteed introducing brokerof FADC, traded Gregory Paul Violette's account without written authorization in violation of Commission Regulation 166.2, 17 C.F.R. § 166.2. The Judgment Officer found FADC jointly liable for the damages to Violette by virtue of Wolf's status as a guaranteed introducing broker of FADC.1 Our review of the record establishes that the findings and conclusions of the presiding officer with respect to respondent's liability are supported by the record. Accordingly, we affirm the initial decision.2
Before the Commission, FADC challenged both the validity of the Commission's rules relating to guaranteed introducing brokers ("GIBs") and the rulemaking proceedings leading to their adoption. FADC further claimed that it cannot be held liable for the acts of its GIB where, as here, the customer has signed an agreement waiving FADC's liability for all such acts.3 We believe that these issues merit brief discussion.
The Futures Trading Practices Act of 1982 ("1982 Act") created IBs as a new class of registrant under the Act. IBs generally were independent entities that solicited and accepted customer orders but used the services of FCMs for clearing, recordkeeping and retaining customer funds. The 1982 Act specifically authorized the Commission to promulgate regulations concerning financial and recordkeeping requirements for IBs. Accordingly, in April 1983 the Commission published for comment proposed rules and rule amendments prescribing, inter alia, financial reporting requirements for IBs (17 C.F.R. § 1.10) and net capital and financial requirements for IBs (17 C.F.R. §§ 1.12, 1.17 and 1.18).4
On August 3, 1983, the Commission announced the adoption of final rules.5 In response to industry commentators' concern that the majority of brokers required to register as IBs would be unable to meet a net capital requirement and consistent with Congress' express intent that IBs remain economically viable, the Commission included in its final rules a provision permitting any IB to satisfy its capital requirement by entering into a "guarantee agreement" with an FCM. Under such an agreement, the guaranteeing FCM undertakes to guarantee performance by the GIB of its obligations under the Act. It is the addition of this provision that is challenged by FADC.
1. Scope of the Commission's Rulemaking Authority
While an agency cannot promulgate a rule that contravenes an Act of Congress or that exceeds the scope of rulemaking authority delegated by Congress, an agency's construction of its statutory authority may not be disturbed if it reflects a plausible construction of the plain language of the statute and does not otherwise conflict with Congress' expressed intent. Rust v. Sullivan, 500 U.S. 173, 184 (1991); Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984). FADC has failed to establish that the challenged rules are contrary to Congressional intent or violate any provision of the Act. Section 4f(b), as amended by the 1982 Act, requires IBs to meet "such minimum financial requirements as the Commission may by regulation prescribe as necessary" to meet their obligations as registrants. While the legislative history of the 1982 Act reflects Congress' intent that clearing FCMs should not be liable for IBs that operate independently of them, it also reflects Congress' mandate that the Commission "establish financial requirements which will enable this new class of registrant to remain economically viable. . . ." H.R. Rep. 964, 97th Cong., 2d Sess. 41. Thus, the Commission's rules, which distinguish independent IBs from GIBs and establish different standards for each, respond to Congress' mandate. Independent IBs must meet their own net capital requirement, while GIBs-who by their nature do not operate independently of the firms that guarantee them-may satisfy the financial requirements by entering into a guarantee agreement with an FCM.
2. Compliance With the Administrative Procedure Act
FADC's challenge to the integrity of the Commission's 1993 rulemaking proceeding also fails. The relevant provisions of the Administrative Procedure Act, 5 U.S.C. § 553 ("APA"), provide that an agency may adopt or repeal regulations only after notice of the terms or substance of the proposed rules and opportunity for comment by interested persons. The APA does not require that the notice "identify every precise proposal which the agency may ultimately adopt; notice is adequate if it apprises interested parties of the issues to be addressed in the rulemaking proceeding with sufficient clarity" to permit meaningful and informed participation in the rulemaking. American Medical Association v. United States, 887 F.2d 760, 767 (7th Cir. 1989); Sierra Club v. Costle, 657 F.2d 298, 352 (D.C. Cir. 1981).
In response to public comment expressing concern that a majority of persons who would be required to register as IBs would be unable to meet the financial requirements and continue in business, the Commission added the "gurantee agreement" to its final rules as an alternative method of compliance with the financial requirements. This modification to the proposed rules was generally consistent with the tenor of the Commission's original proposals and, accordingly, did not warrant republication for comment. American Medical Association, 887 F.2d 767; International Harvester Co. v. Ruckelshaus, 478 F.2d 615, 632 and n. 51 (D.C. Cir. 1973). A contrary conclusion would "lead to the absurdity that in rulemaking under the APA the agency can learn from [comments on its proposals] only at the peril of starting a new procedural round of commentary." International Harvester Co. v. Ruckelshaus, 478 F.2d at 632.
3. The Exculpatory Provisions of the Customer Account Agreement
Violette executed a customer account agreement with FADC in which he waived any claim against FADC based on FADC's guarantee of Wolf's obligations under the Act or Commission regulations. FADC argues that, by virtue of this exculpatory language, it may avoid liability for damages to Violette based on Wolf's violation of Regulation 166.2.
A guarantor FCM may not permit customers to sign a customer agreement to waive its liabilities arising under its guarantee agreement. Such an agreement undermines the protections provided by the guarantee agreement and violates Commission Regulation 1.10(j). An indemnification agreement that seeks to vitiate the FCM's obligations as a guarantor under Rule 1.10(j) is contrary to public policy, void and unenforceable. Clemons v. McCabe, et al., CFTC Docket No. 97-R053 (CFTC January 29, 1999).
By entering into a guarantee agreement with Wolf, FADC undertook to "guarantee performance by the introducing broker of, and . . . be jointly and severally liable for, all obligations of the introducing broker under the Act and the rules, regulations and orders promulgated thereunder." Form 1-FR Part B. A GIB's violation of Commission Regulation 166.2 constitutes an obligation for the FCM "under the plain language of the guarantee agreement." In re Paragon Futures Association, et al., [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,266 at 38,851 (CFTC April 1, 1992).
IT IS SO ORDERED.
By the Commission (Chairperson BORN and Commissioners HOLUM, TULL, SPEARS and NEWSOME).
Jean A. Webb
Secretary of the Commission
Commodity Futures Trading Commission
Dated: February 24, 1999
1 Pursuant to Commission Regulation 1.10(j), 17 C.F.R. § 1.10(j), and Form 1-FR Part B, FADC and Wolf entered into a guarantee agreement pursuant to which FADC, the futures commission merchant, agreed that it would be jointly and severally liable for all of Wolf's obligations as an introducing broker under the Commodity Exchange Act and rules and regulations promulgated thereunder.
2 Under Sections 6(c) and 14(e) of the Commodity Exchange Act, 7 U.S.C. §§ 9 and 18(e) (1994), a party may appeal a reparation order of the Commission to the United States Court of Appeals for only the circuit in which a hearing was held; if no hearing was held, the appeal may be filed in any circuit in which the appellee is located. The statute also provides that such an appeal must be filed within 15 days after notice of the order and that any appeal is not effective unless, within 30 days of the date of the Commission order, the appealing party files with the court a bond equal to double the amount of any reparation award. A party who receives a reparation award may sue to enforce the award if payment is not made within 15 days of the date the order is served by the Proceedings Clerk. Pursuant to Section 14(d) of the Act, 7 U.S.C. § 18(d) (1994), such an action must be filed in United States district court. See also 17 C.F.R. § 12.407 (1997).
Pursuant to Section 14(f) of the Act, 7 U.S.C. § 18(f) (1994), a party against whom a reparation award has been made must provide to the Commission, within 15 days of the expiration of the period for compliance with the award, satisfactory evidence that (1) an appeal has been taken to the United States Court of Appeals pursuant to Sections 6(c) and 14(e) of the Act; or (2) payment has been made of the full amount of the award (or any agreed settlement thereof). If the Commission does not receive satisfactory evidence within the prescribed period, such party automatically shall be suspended from registration under the Act and prohibited from trading on all contract markets. Such prohibition and suspension shall remain in effect until such party provides the Commission with satisfactory evidence that payment has been made of the full amount of the award plus interest thereon to the date of payment.
3 Violette executed a customer account agreement with FADC in which he agreed that FADC is not responsible or liable for any violations by Wolf and waived any claim based on FADC's guarantee of its GIB's obligations under the Act or Commission regulations.
4 48 FR 14,993 (April 3, 1983).
5 48 FR 35,248.