For Release: December 8, 1997
CFTC PROVIDES GUIDANCE TO NFA CONCERNING
FLOOR BROKER AND FLOOR TRADER
The Commodity Futures Trading Commission (Commission), by order
effective August 1, 1994, authorized the National Futures Association
(NFA) to deny, condition, suspend, modify, restrict or revoke the
registration of any floor broker (FB), floor trader (FT), or any FB or
FT applicant in accordance with the standards established by the
Commodity Exchange Act and rules promulgated thereunder. 59 Fed. Reg.
38957 (August 1, 1994). However, unlike NFA's authority with
respect to all other categories of registrants, the Commission also
directed that, until the Commission ordered otherwise, NFA forward to
the Commission for review any FB or FT case in which there was a
potential statutory disqualification but in which NFA nevertheless
decided not to take action.
On July 3, 1997, the Commission published an order revising its previous delegation to NFA concerning adverse FB and FT registration actions. 62 Fed. Reg. 36050 (July 3, 1997). The recent order eliminates the Commission review process established in the August 1994 order and thereby permits NFA to treat the FB and FT registration categories in the same manner as other categories of registrants with respect to statutory disqualification matters, i.e., NFA can now process cases where it determines that a statutory disqualification action is not appropriate without referring such cases to the Commission. As part of this further delegation, the Commission is providing interpretive guidance to NFA to help ensure that NFA exercises this delegated authority in a manner consistent with the Commission's policies and past practices.
A copy of the Commission's letter to NFA setting forth this guidance is attached.
U.S. COMMODITY FUTURES TRADING COMMISSION
Three Lafayette Centre
1155 21st Street, N.W., Washington, D.C 20581
Telephone: (202) 418-5100
Facsimile: (202) 418-5521
December 4, 1997
Robert K. Wilmouth
National Futures Association
200 West Madison Street
Chicago, IL 60606-3447
Re: Adverse Registration Actions with Respect to Floor Brokers, Floor Traders and Applicants for Registration
in Either Category
Dear Mr. Wilmouth:
As you know, the Commission on June 26, 1997, approved for publication
in the Federal Register a Notice and Order concerning
adverse registration actions by the National Futures Association
("NFA") with respect to registered floor brokers
("FBs"), registered floor traders ("FTs") and
applicants for registration in either category. 62 Fed. Reg. 36050
(July 3, 1997). The Notice and Order authorized NFA to grant or to
maintain, either with or without conditions or restrictions, FB or FT
registration where NFA previously would have forwarded the case to the
Commission for review of disciplinary history. The Commission has
worked with its staff to determine which of the pending matters could
efficiently be returned to NFA for handling, and such matters have
been forwarded to NFA. The Commission will continue to accept or to
act upon requests for exemption, and the Commission staff will
consider requests for "no-action" opinions with respect to
applicable registration requirements.
By this correspondence, the Commission is issuing guidance that provides NFA further direction on how it expects NFA to exercise its delegated power, based upon the experience of the Commission and the staff with the registration review process during the past three years. This guidance will help ensure that NFA exercises its delegated power in a manner consistent with Commission precedent.
In exercising its delegated authority, NFA, of course, needs to apply all of the provisions of Sections 8a(2) and (3) of the Commodity Exchange Act ("Act").(1) In that regard, NFA should consider the matters in which the Commission has taken action in the past and endeavor to seek similar registration restrictions, conditions, suspensions, denials, or revocations under similar circumstances.
One of the areas in which NFA appears to have had the most uncertainty is with regard to previous self-regulatory organization ("SRO") disciplinary actions. Commission Rule 1.63(2) provides clear guidelines for determining whether a person's history of "disciplinary offenses" should preclude service on SRO governing boards or committees.(3) In determining whether to grant or to maintain, either with or without conditions or restrictions, FB or FT registration, NFA should, as an initial matter, apply the Rule 1.63(a)(6) criteria to those registered FBs, registered FTs and applicants for registration in either category. However, NFA should be acting based upon any such offenses that occurred within the previous five years, rather than the three years provided for in Rule 1.63(c). NFA should consider disciplinary actions taken by an SRO as that term is defined in Section 3(a)(26) of the Securities Exchange Act of 1934 no differently from disciplinary actions taken by an SRO in the futures industry as defined in Rule 1.3(ee).(4) Application of the Rule 1.63 criteria, as modified, to these matters will aid NFA in making registration determinations that are reasonably consonant with Commission views.(5) NFA should focus on the nature of the underlying conduct rather than the sanction imposed by an SRO. Thus, if a disciplinary action would not come within the coverage of Rule 1.63 but for the imposition of a short suspension of trading privileges (such as for a matter involving fighting, use of profane language or minor recordkeeping violations), NFA could exercise discretion, as has the Commission, not to institute a statutory disqualification case. On the other hand, conduct that falls clearly within the terms of Rule 1.63, such as violations of rules involving potential harm to customers of the exchange, should not be exempt from review simply because the exchange imposed a relatively minor sanction.
The Commission has treated the registration process and the SRO disciplinary process as separate matters involving separate considerations. The fact that the Commission has not pursued its own enforcement case in a particular situation does not necessarily mean that the Commission considers the situation to be a minor matter for which no registration sanctions are appropriate. Further, the Commission believes that it and NFA, entities with industry-wide perspective and responsibilities, are the appropriate bodies, rather than any individual exchange, to decide issues relating to registration status, which can affect a person's ability to function in the industry well beyond the jurisdiction of a particular exchange. Thus, NFA's role is in no way related to review of exchange sanctions for particular conduct, but rather it is the entirely separate task of determining whether an FB's or FT's conduct should impact his or her registration.
NFA also should look to Commission precedent in selecting conditions or restrictions to be imposed, such as a dual trading ban where a person has been involved in disciplinary offenses involving customer abuse. Where conditions or restrictions are imposed, or agreed upon, NFA also should follow Commission precedent, under which such conditions or restrictions generally have been imposed for a two-year period.
The Commission has required sponsorship for conditioned FBs and FTs when their disciplinary offenses have involved noncompetitive trading and fraud irrespective of the level of sanctions imposed by an SRO. Indeed, but for a sponsorship requirement there would be no one routinely watching and responsible for the activities of these registrants. Absent sponsorship, such FBs and FTs would only be subject to routine Commission and exchange surveillance. The Commission's rules are premised upon the judgment that requiring FTs and FBs to have sponsors to ensure their compliance with conditions is both appropriate and useful. See Rule 3.60(b)(2)(i).
A question has arisen whether, if NFA is required to prove up the underlying facts of an SRO disciplinary action, the exchanges can provide information on exchange disciplinary proceedings directly to NFA. Although Section 8c(a)(2) of the Act states that an exchange shall not disclose the evidence for a disciplinary action except to the person disciplined and to the Commission, Section 8a(10) of the Act allows the Commission to authorize any person to perform any portion of the registration functions under the Act, notwithstanding any other provision of law. The effective discharge of the delegated registration function requires NFA to have access to the exchange evidence. Thus, the Commission believes that Section 8a(10) may reasonably be interpreted to allow the disclosure of information from exchange disciplinary proceedings directly to NFA despite the provisions of Section 8c(a)(2).
Nothing in the Notice and Order affects the Commission's authority to review the granting of a registration application by NFA in the performance of Commission registration functions, including review of the sufficiency of conditions or restrictions imposed by NFA, to review the determination by NFA not to take action to affect an existing registration, or to take its own action to address a statutory disqualification. Moreover, the Commission Order contemplates that to allow for appropriate Commission oversight of NFA's exercise of this delegated authority, NFA will provide for the Commission's review quarterly schedules of all applicants cleared for registration and all registrants whose registrations are maintained without adverse action by NFA's Registration, Compliance, Legal Committee despite potential statutory disqualifications.
The Commission will continue to monitor NFA activities through periodic rule enforcement reviews, and NFA remains subject to the present requirement that it monitor compliance with the conditions and restrictions imposed on conditioned and restricted registrants.
Jean A. Webb
Jean A. Webb
1. / 7 U.S.C. §§ 12a(2) and (3)(1994). The letter is intended to supplement, not to supersede, other guidance provided in the past to NFA. In this regard, the NFA should continue to follow other guidance provided by the Commission or its staff.
2. / Commission rules referred to herein are found at 17 C.F.R. Ch. I (1997).
3. / Rule 1.63(c) provides
that a person is ineligible from serving on an SRO's disciplinary
committees, arbitration panels, oversight panels or governing board
if, as provided in Rule 1.63(b), the person, inter alia:
(1) within the past three years has been found by a final decision of
an SRO, an administrative law judge, a court of competent jurisdiction
or the Commission to have committed a disciplinary offense; or (2)
within the past three years has entered into a settlement agreement in
which any of the findings or, in the absence of such findings, any of
the acts charged included a disciplinary offense.
Rule 1.63(a)(6) provides that a "disciplinary offense" includes: (i) any violation of the rules of an SRO except those rules related to (A) decorum or attire, (B) financial requirements, or (C) reporting or record-keeping unless resulting in fines aggregating more than $5,000 within any calendar year; (ii) any rule violation described in subparagraphs (A) through (C) above that involves fraud, deceit or conversion or results in a suspension or expulsion; (iii) any violation of the Act or the regulations promulgated thereunder; or (iv) any failure to exercise supervisory responsibility with respect to an act described in paragraphs (i) through (iii) above when such failure is itself a violation of either the rules of an SRO, the Act or the regulations promulgated thereunder.
4. / Thus, for example, a disciplinary action taken by the Chicago Board Options Exchange or the National Association of Securities Dealers, Inc. should be considered in a manner similar to a disciplinary action of the Chicago Board of Trade or NFA.
5. / In reviewing these matters, the NFA should bear in mind recent Commission precedent which allows for reliance on settled disciplinary proceedings in some circumstances. See In the Matter of Michael J. Clark, CFTC Docket No. SD 93-2, [Current Binder] Comm. Fut. L. Rep.(CCH) ¶27,032 (CFTC April 22, 1997) ("other good cause" under Section 8a(3)(M) of the Act exists based upon a pattern of exchange disciplinary actions resulting in significant sanctions for serious rule violations -- whether settlements or adjudications).