[Federal Register: January 13, 2005 (Volume 70, Number 9)]
[Rules and Regulations]
[Page 2350-2352]
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: Final rule.


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)


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 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 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

[[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
    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

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.

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


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

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

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
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 05-709 Filed 1-12-05; 8:45 am]