[Federal Register: October 25, 2004 (Volume 69, Number 205)]
[Proposed Rules]
[Page 62226-62228]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



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: Notice of proposed rulemaking.


SUMMARY: The Commodity Futures Trading Commission ("Commission" or
"CFTC") proposes to amend 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 proposes to make a
technical amendment to add the NFA's Hearing Committee to the list of
committees covered by that section. This will conform Rule 171.1(b)(4)
to changes in NFA's committee structure since part 171 was first
adopted in October 1990. Secondly, the Commission proposes to add a new
provision to exclude from Commission review any appeal concerning NFA
suspension of a member for failing to pay a settlement or arbitration
award ("award suspension cases"), unless there are extraordinary
circumstances that would otherwise warrant Commission review.

DATES: Submit comments on or before November 24, 2004.

ADDRESSES: Comments should be sent to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581, attention: Office of the Secretariat. Comments may be sent by
facsimile to (202) 418-5521, or by e-mail to [email protected].
Reference should be made to "NFA Decisions Review." Comments may also
be submitted to the Federal eRulemaking Portal: http://www.regulations.gov.

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)


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\

    \1\ August 31, 1990 NFA Letter ("NFA Letter").

    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

[[Page 62227]]

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:

    \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 the 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

    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
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 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 has routinely rejected such appeals, the NFA
proposes 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.
    The Commission has reviewed its case history in this area and
reached the following conclusions: (a) Such appeals are very
infrequent; and (b) and 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 proposes to exclude these routine matters from appellate
review. The Commission would exercise its appellate jurisdiction in the
extraordinary case where an appeal based on an award suspension
involves "something more than a ministerial application of a
predetermined sanction." The amendment would be effected by adding a
new section (5) to Rule 171.1(b) ("Matters excluded"). The proposed
rule incorporates the Commission's language used in Machin and

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
proposes 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 that propose rules to consider the impact those rules
will have on small businesses. With respect to persons seeking
Commission reviews of NFA adjudicatory decisions, the proposed
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 proposed
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
proposed amendments will not have a significant economic impact on a
substantial number of small businesses.

[[Page 62228]]

B. Paperwork Reduction Act

    The proposed 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 proposed amendments to part 171 will not create any significant
change in the Commission's appellate process. In fact, the proposed
amendments should enhance the protection of market participants and the
public by excluding from the Commission's review matters that represent
routine enforcement of an NFA pre-determined sanction, freeing both the
Commission's and NFA's resources. In addition, since the proposed
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-regulated organizations will not be compromised.
    After considering these factors, the Commission has determined to
propose the amendments to part 171, as set forth below.

List of Subjects in 17 CFR Part 171

    Administrative practice and procedure, Commodity exchanges,
Commodity futures.

    In consideration of the following, the Commission proposes to amend
chapter I of title 17 of the Code of Federal Regulations as follows:


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

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

    2. Section 171.1 is amended in paragraph (b)(4) to add ", 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 NFA has acted
* * * * *

    Issued in Washington, DC on the 19th of October 2004, by the
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 04-23828 Filed 10-22-04; 8:45 am]