Release: #4440-00
For Release:     September 5, 2000

United States Court of Appeals Upholds CFTC Order Holding a Futures Commission
Merchant Liable, Under a Voluntarily-Undertaken Guarantee Agreement,
for a Commodity Exchange Act Violation Committed by Its Guaranteed
Introducing Broker

On August 18, 2000, the United States Court of Appeals for the District of Columbia Circuit upheld the Commodity Futures Trading Commission's order holding a futures commission merchant liable, under a voluntarily-undertaken Guarantee Agreement, for a Commodity Exchange Act violation committed by its guaranteed introducing broker against a customer.

In First American Discount Corporation v. CFTC, Docket Number 99-1098, the guaranteeing FCM, First American, and the FCM Coalition for Regulatory Fairness, as amicus curiae, contended that the regulation, which imposes liability on an FCM who agrees to be liable for the obligations of its guaranteed IB under the Commodity Exchange Act, was invalid as contrary to Congressional intent. The court also upheld the regulation against the charge that it was invalid for lack of published notice under the Administrative Procedure Act because the guarantee option was not included in the Commission's original proposed rules. Additionally, the appellate court agreed with the Commission's interpretation that the liability of an FCM under a Guarantee Agreement could not be waived in a standardized Customer Agreement.

The court noted that "First American had no obligation to make the guarantee, but did so in exchange for the financial benefits both [it and the IB] expected to reap from their joint arrangement. Having received those benefits, First American will not now be heard to attack the regulation that was their source."

The court also observed that it "cannot help but note the irony in [First American's] claim that [the customer]--a retired postal worker--'voluntarily' entered into the boilerplate waiver agreement with First American, while First American itself--a large brokerage firm--was simultaneously 'compelled' to enter into a guarantee agreement with [the IB]."