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News Facts Actions - Spring 2006

In this issue:



Proposed arbitration rule amendments will enhance program's efficiencies

At their meeting on February 16, NFA's Board of Directors approved amendments to NFA's Code of Arbitration and Member Arbitration Rules designed to keep NFA's arbitration program running efficiently and expeditiously. The amendments, currently being reviewed by the CFTC, include:

  • Codifying NFA's policy that the parties must submit all subpoena requests to the arbitrators;
  • Assessing the parties a fee for filing certain pre-hearing motions and compensating the arbitrators for deciding those motions; and
  • Allowing NFA arbitrators to order evidence depositions in extraordinary circumstances.

"These amendments are the result of issues we have encountered in our arbitration program," says Arbitration Manager Elizabeth Sheridan. "We also monitor rule proposals from similar forums to see if they would be beneficial to our program."

The first proposed rule amendment addresses the issue of subpoena requests.

Parties in an NFA arbitration case occasionally find that they need documents or other written information that they can only obtain from a non-party. Usually, the requesting party will contact the non-party and ask for the desired information. If the non-party refuses to comply with the request and is not an NFA Member or Associate, the requesting party can ask the arbitrators to issue a subpoena requiring the non-party to produce the requested documents. If the arbitrators issue the subpoena, the courts can enforce it.

The law in certain states, however, allows attorneys to subpoena non-parties directly. For example, a respondent's attorney may subpoena the claimant's account records from a bank, or the claimant's attorney may subpoena the respondent's phone records from a telephone company.

"We believe that the arbitrators in NFA arbitration hearings should decide whether to issue a subpoena instead of attorneys issuing subpoenas on their own," says Sheridan. "The rule amendment will codify our policy that the parties must submit all subpoena requests to the arbitrators."

Another proposed rule amendment relates to pre-hearing motions. NFA rules specify the type of motions that NFA prohibits, as well as the types of motions NFA permits and the time for filing them. The arbitrators hold pre-hearing conferences to resolve discovery disputes, set deadlines for filing other motions and select hearing dates.

"Even though these procedures work well, the parties often file motions after the pre-hearing conference is over," says Sheridan. "Therefore, the arbitrators still devote a lot of time and energy to deciding pre-hearing motions."

The rule amendment will allow NFA to assess a motion fee. In cases involving one arbitrator, the fee will be $125 for each motion filed more than 80 days after the last pleading is due. In cases involving three arbitrators, the fee will be $425 for each motion filed more than 100 days after the last pleading is due ($125 for each arbitrator and an additional $50 honorarium to the chairperson).

"Although we will initially collect the motion fee from the party filing the motion, the arbitrators can waive the fee at their discretion or assess it against the party who actually caused the filing of the motion," says Sheridan.

One other proposed rule amendment addresses evidence depositions. Under NFA's discovery procedures, the parties may mutually agree to depositions and may offer depositions, or portions of them, as evidence at the hearing. However, NFA arbitrators may not order depositions.

"There are two types of depositions: discovery and evidence," says Sheridan. "NFA believes that there are circumstances when it may be appropriate for the arbitrators to order evidence depositions. For example, it may be proper to take an evidence deposition of a witness who is unable to attend the hearing because the person is ill or cannot be otherwise required to attend the hearing."

The proposed rule amendment will allow the arbitrators to order evidence depositions in extraordinary circumstances. The amendment will not authorize arbitrators to order discovery depositions.

"We discussed these amendments with NFA's various Advisory Committees prior to submitting them to the Executive Committee and Board of Directors," says Sheridan. "Their approval and support are a vital component of our rule-making process."

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Board Actions

NFA's Board of Directors took the following actions during the Board meeting on February 16, 2006 in Chicago, Illinois:

Because NFA received no petitions for additional candidates in any of the membership categories on the Board and Nominating Committee, all of the candidates selected by the 2005 Nominating Committee have been declared winners of this year's election. The Directors, whose terms will expire in 2008, and the new members of the 2006 Nominating Committee are as follows:

Board of Directors

  • Futures Commission Merchants (Top Ten): Thomas A. Kloet, senior vice president and chief operating officer, Fimat USA Inc.; Michael R. Schaefer, managing director, Citigroup Global Markets Inc.
  • Futures Commission Merchants (Other): Gerald F. Corcoran, chief executive officer, R.J. O'Brien & Associates Inc.; Scott Cordes, president, Country Hedging Inc.
  • Introducing Brokers: Paul J. Georgy, president, Allendale Inc.
  • Commodity Pool Operators and Commodity Trading Advisors: James R. Klingler, senior vice president, Eclipse Capital Management Inc.; Robert E. Murray, chief operating officer, Graham Capital Management LP

Nominating Committee

  • Futures Commission Merchants: Michael A. Manning, president and chief executive officer, Rand Financial Services Inc.
  • Introducing Brokers: John C. Jensen, president, Heritage West Financial Inc.
  • Commodity Pool Operators and Commodity Trading Advisors: David M. Kavanagh, president, Dearborn Capital Management LLC

The Board reelected Michael R. Schaefer to serve a one-year term as chairman and elected W. Robert Felker, chairman of J.P. Morgan Futures Inc., for a one-year term as vice-chairman.

The Board elected the following individuals to serve two-year terms as public directors: Douglas E. Harris, managing director, Promontory Financial Group LLC; Todd E. Petzel, managing director and chief investment officer, Azimuth Trust Company LLC; and Susan M. Phillips, dean of the School of Business at George Washington University.

The Board elected the following individuals to serve one-year terms on NFA's Executive Committee: Bruce Cleland, Campbell and Company; George E. Crapple, The Millburn Corporation; W. Robert Felker; Christopher Hehmeyer, Goldenberg Hehmeyer and Co.; Douglas O. Kitchen, Rosenthal Collins Group LLC; Joseph J. O'Neill, New York Board of Trade; Todd E. Petzel; and John F. Sandner, Chicago Mercantile Exchange. Mr. Schaefer and NFA President Dan Roth also serve on the Executive Committee.

The Board made the following committee appointments with terms set to expire in January 2008:

  • Appeals Committee: Paul J. Georgy
  • Membership Committee: Scott A. Cordes, James A. Gary, James R. Klingler and Frederick G. Uhlmann

The Board made the following committee appointments with terms set to expire in January 2009:

  • Business Conduct Committee: Christopher Barry, Mary Bender, Calogero B. Carcione, Thomas L. Casey and William D. Grossman
  • Hearing Committee: T. Michael Billings, Hugh J. Cadden, Terrence B. Clarke, Sherri Hughes, John C. Jensen, Eric L. Kunkes, Arthur McCoy, Edward P. Seibert, Joy Pava Shulruff, Scott W. Stewart, Michael A. Turro and Jan R. Waye
  • FCM Advisory Committee: David M. Battan, Maureen C. Downs and Donald Levine
  • CPO/CTA Advisory Committee: Jeffrey F. Chandor and John Allen Como, Jr.
  • IB Advisory Committee: John L. Ramirez, Stephen D. Reece, Richard C. Schlabs and Michael T. Sherzan
  • Education/Testing Advisory Committee: DeBorah Lenchard and Anne S. Polaski

The Board approved a new Financial Requirements Section 13 requiring Forex Dealer Members to file weekly electronic reports showing liabilities to customer and other financial information required by NFA. Forex Dealer Members who do not file their reports by the due date will be fined $200 for each business day it is late.

The Board approved an amendment to NFA Interpretive Notice, "Forex Transactions with Forex Dealer Members," requiring Forex Dealer Members to affirmatively disclose that customer funds used for off-exchange forex trading may not be protected in a bankruptcy proceeding.

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CFTC approves increases to minimum capital requirements

The CFTC recently notified NFA that the Commission has approved NFA's proposed increases to minimum capital requirements for FCMs and IBs. NFA has not yet determined when the new requirements will be effective.

"It has been a decade since NFA raised the minimum capital requirements," says NFA's Vice President of Compliance Regina Thoele. "We believe the new requirements will provide the level of customer protection necessary in today's business environment."

The new minimum capital requirements will be as follows:

  • $45,000 for Independent IBs;
  • $500,000 for FCMs;
  • $1 million for Forex Dealer Members;
  • $5 million for FCMs that are counterparties to off-exchange forex options transactions with retail customers; and
  • $7.5 million for FCMs with an affiliate described in section 2(c)2(B)(ii)(III) of the Commodity Exchange Act that engages in off-exchange forex transactions with retail customers and that is authorized to engage in those transactions solely by virtue of its affiliation with a registered FCM.

"The need for adequate capital is particularly acute for firms engaged in retail off-exchange forex, because of the dealer nature of these activities," says Thoele.

NFA will send a Notice to Members when the effective date is finalized.

The complete text of the rule amendments is available on NFA's Web site.

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CFTC requests new enforcement/compliance contact information requirement

In response to a request from the CFTC, NFA is modifying the Online Registration System (ORS) to require each firm applying to be registered or that is already registered to provide information for an Enforcement/Compliance Contact (ECC), including an e-mail address.

"This new requirement applies not only to NFA Members but also to all CFTC registered firms," says Greg Prusik, vice-president of Registration and Membership. "Based on our conversations with the CFTC, we understand that the Commission plans to e-mail communications to registered firms using this contact information."

To accommodate the new requirement, NFA has created a new Enforcement/Compliance Contact Information page in the ORS firm application. The contact person's name, street address, city, state, telephone number and e-mail address will be required fields. A firm may have more than one ECC, but the required information for each must be provided.

"For NFA Members and currently registered firms, we will create a separate ECC for each e-mail address for NFA Members that we currently maintain in our Compliance Department Database," says Prusik. "These e-mail addresses will be defaulted into the firms' ECCs' e-mail fields. Firms will still need to provide the remainder of the required information for these contacts."

A preliminary design of the page is shown below. NFA will have the final version of the page available on ORS on July 1, at which time firms should begin providing the appropriate contact information.

Online Registration System

Individuals who would like additional information regarding the new requirement should contact NFA's Information Center by phone 1-800-621-3570 or by email at information@nfa.futures.org.

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News Briefs

NFA is looking for Chicago arbitrators
NFA is currently recruiting arbitrators, especially those in the Chicago area, for its popular dispute resolution program.

"The success of NFA's arbitration program is directly tied to the quality of the individuals who serve as arbitrators," says Arbitration Manager Elizabeth Sheridan. "Our arbitrators come from various professions and walks of life, but the skills they share are integrity, impartiality and sound judgment."

If you are interested in serving as an NFA arbitrator or have any colleagues or friends you think would make good arbitrators, please e-mail Senior Arbitrator Coordinator Judy Jenks at jjenks@nfa.futures.org. You can also download and complete the Arbitrator Profile located in the Dispute Resolution section of NFA's Web site. Then either mail the profile to NFA, Attn: Arbitration Dept., 200 W. Madison, Chicago 60606 or fax it to NFA's Arbitration Department at 312-781-1467.

NFA signs Regulatory Services Agreement with CBOE Futures Exchange
On March 15, NFA and the CBOE Futures Exchange (CFE) announced that they had entered into an agreement for NFA to provide regulatory services for CFE. The services will include trade practice and market surveillance activities.

"The CBOE Futures Exchange takes its regulatory responsibility seriously and is pleased to enlist NFA, the leading expert in regulatory services for the futures industry, to provide these services," said CFE Managing Director Patrick Fay.

NFA officially began its regulatory activities for the CFE on April 10.

NFA announces Issues and Answers meeting in New York
NFA will hold the next in its series of Issues and Answers meetings for Members and other industry professionals on Wednesday, May 17, from 2:00 pm to 4:00 pm at the Embassy Suites, 102 North End Avenue in New York. NFA Executive Vice-President and COO Dan Driscoll will lead a panel of NFA staff members in a question and answer session covering a variety of regulatory issues, including anti-money laundering, forex, supervision requirements, promotional material and recordkeeping.

There is no charge to attend the meeting; however, advance registration is encouraged. Individuals can register to attend at NFA's Web site (www.nfa.futures.org).

NFA will spread investor education message at Traders Expo
NFA is sponsoring an information booth at the Traders Expo, scheduled for June 7-10 in Ft. Lauderdale, Florida. NFA staff will distribute copies of NFA's investor education materials and demonstrate how to conduct a background check of a futures firm or individual using NFA's Web-based Background Affiliation Status Information Center (BASIC).

The Expo offers educational seminars and workshops as well as an exhibit hall featuring trading software providers, futures and options exchanges and other vendors. Individuals wishing to learn more about the Expo can visit the Expo's Web site at http://www.tradersexpo.com/.

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NFA amends Interpretive Notice relating to enhanced supervisory requirements

NFA has amended Compliance Rule 2-9's Interpretive Notice relating to enhanced supervisory requirements to expand the criteria by which an Associated Person (AP) can be exempt from being counted as an AP from a Disciplined Firm. The amendments became effective on April 15, 2006.

The Notice, originally adopted in 1993, requires a Member to undertake certain enhanced supervisory procedures if its sales force includes a specified number of APs who have worked at Disciplined Firms. Member firms triggering the enhanced supervisory procedures must tape record all telephone conversations between a Member's APs and both existing and potential customers, submit all promotional material at least 10 days prior to first use, adopt written supervisory procedures and either operate under a guarantee agreement or maintain at least $250,000 in adjusted net capital. Affected Members may petition the Telemarketing Procedures Waiver Committee for relief from the obligations of the enhanced supervisory requirements.

Disciplined Firms include firms that have been formally charged by either the CFTC or NFA with using deceptive sales practices and have been permanently barred from the industry as a result of those charges.

Over the years, NFA's Board of Directors has periodically amended the Notice's numerically-based triggering mechanism to provide relief to certain APs who, based upon their history, do not seem to pose a risk to the public.

For example, in 2003, the Board amended the Notice to exclude APs who had worked at Disciplined Firms for less than sixty days more than ten years ago from the calculations used to determine whether or not a Member is required to adopt the enhanced supervisory requirements. That provision was further amended in August 2005, reducing the required time away from a Disciplined Firm from ten years to five years, while retaining the requirement that the individual worked at such a firm for less than sixty days.

Under the new amendment, individuals may be exempt from being counted as an AP from a Disciplined Firm if they meet the following narrow criteria to these exemptions:

  • That the AP has only worked for one Disciplined Firm;
  • That the AP has not worked for a Disciplined Firm in more than ten years;
  • That the AP has not worked for a Member that has been subject to a sales practice action by NFA or the CFTC since leaving the Disciplined Firm;
  • That the AP has not been personally subject to a disciplinary action by NFA or the CFTC; and
  • That the AP has been an NFA Member or Associate Member for at least eight of the preceding ten years.

The complete text of the amended Interpretive Notice can be found on NFA's Web site (www.nfa.futures.org).

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