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Notice I-98-03

January 29, 1998

Request for comments on proposed changes to NFA's Member Arbitration Program

Introduction

NFA's Member Arbitration Rules have been in effect since March 1, 1992. Under the Member Rules, a Member or Associate with a claim against another Member or Associate has the option of filing that claim at NFA or in another forum (e.g., court). Once the Member or Associate files the claim at NFA, the other party is required to arbitrate here (with several exceptions). This makes NFA arbitration mandatory for the person the claim is against but not for the party filing it.

The Executive Committee recently suggested that NFA study making NFA's Member Arbitration program fully mandatory. Under a fully mandatory program, NFA arbitration would be mandatory for both parties, not just the party the claim is against. At the Executive Committee's direction, staff discussed this matter with the FCM, IB and CPO/CTA Advisory Committees. The Advisory Committees recommended that NFA conduct a survey to determine whether Members want to expand the Member program1. Therefore, NFA sent a survey to a random sample of the membership on October 31, 1997 to determine whether Members favor making the Member arbitration program fully mandatory for disputes between Members.

NFA chose the membership sample on a random basis from each membership category. Of the 540 Members surveyed, 139 (26%) Members responded. The results indicate that a majority of the Members responding to the survey (57%) support expanding the Member program. That support is consistent through all membership categories, including broker-dealer and non-broker-dealer firms, except in the CPO category where just one-third of the responding CPOs favored the change.

Staff discussed the survey results with the Advisory Committees in December, and the Advisory Committees support a fully mandatory arbitration program. However, the Committees believe that the entire membership should have the opportunity to comment on the proposal since the change is significant and the support from the responding Members, while more than a majority, was not overwhelming. Therefore, the Advisory Committees are requesting comments on the proposal discussed below.

Explanation of the Proposed Rule Changes

a. Mandatory Arbitration

NFA has drafted rule changes that would make NFA arbitration mandatory for Members. Those rule changes are included at the end of this Notice. Under the proposed rules, NFA arbitration would be mandatory for both parties, not just the party the claim is against. However, the proposed rules will continue to exempt disputes that are subject to mandatory arbitration at another SRO or where the parties have previously agreed to resolve disputes through some other forum. All Members would be required to bring their claims to NFA arbitration unless one of the exemptions applies.

NFA is asking the membership to comment on whether NFA should expand the Member arbitration program to require Members to file their claims at NFA. We are interested in knowing why you favor or do not favor this change, and we would appreciate your comments on the specific language in the proposed rules.

b. Requests for Emergency Relief

If NFA adopts a fully mandatory program, Members will not be able to obtain emergency relief (e.g., temporary restraining orders, preliminary injunctions) that they can now obtain in court. Therefore, the Advisory Committees want Members to have the ability to obtain emergency relief to deal with issues associated with the dispute that need immediate attention. For example, if a Member firm files a claim alleging another Member firm is raiding its employees, the Member filing the claim may want an interim order for relief until the arbitration case is decided. Therefore, the proposed rule changes include provisions for obtaining emergency relief. The emergency relief provision would not, however, be restricted to disputes between Members. This procedure would also be available for disputes between Members and Associates and between Associates.

Under the proposed rules, one arbitrator would decide a request for emergency relief, unless NFA or the arbitrator believes three arbitrators should decide the request. NFA would select the arbitrator or arbitrators from special pools of highly qualified NFA arbitrators that NFA will establish in several geographic locations. The rules would require any party filing a request for emergency relief to pay an additional $500 fee when filing the request. NFA would also assess separate hearing fees to cover the time the arbitrator or arbitrators spend hearing the request. The rules would provide that any interim order issued concerning a request for emergency relief would remain in effect until NFA serves the final award, unless the interim order specifies otherwise. Finally, the rules would allow NFA to suspend any Member or Associate who fails to comply with an interim order.

NFA is asking the membership to comment on the proposed rules for obtaining emergency relief. NFA is interested in your comments on the need for expedited procedures to grant emergency relief and the specific procedures NFA proposes. We are also interested in your input on whether NFA should charge a fee for filing an emergency relief request, including what fee level is appropriate. Finally, we would appreciate your comments on whether these procedures should be adopted regardless of whether arbitration between Members becomes mandatory and whether they should also apply to cases between Members and Associates and between Associates.

Conclusion

NFA is asking the membership to comment on proposed rule changes to expand the Member arbitration program and handle requests for emergency relief. NFA will review the comments and suggestions we receive with the Advisory Committees and then make final recommendations to the Executive Committee and the Board of Directors. We would appreciate receiving your comments by February 27, 1998. Comments should be directed to:

Cynthia Cain
National Futures Association
200 West Madison Street
Suite 1600
Chicago, Illinois 60606-3447
Phone: (312) 781-1490
Fax: (312) 781-1467
Email: ccain@nfa.futures.org


1
   The Executive and Advisory Committees believe that requiring Associates to bring their claims to NFA arbitration could present a number of problems, particularly with employment discrimination claims. Therefore, Associates were not surveyed and would not be included in any mandatory Member v. Member rule. Back

MEMBER ARBITRATION RULES

SECTION 2. ARBITRABLE DISPUTES

(a) Mandatory Arbitration

    (1) Claims between Members. Except as provided in Sections 4 and 5 of these Rules with respect to timeliness requirements, disputes between Members shall be arbitrated under these Rules unless:
      (i) the parties, by valid and binding agreement, have committed themselves to the resolution of such dispute in a forum other than NFA;
      (ii) the parties to such dispute are all required by the rules of another self-regulatory organization to submit the controversy to the settlement procedures of that self-regulatory organization; or
      (iii) all parties to the dispute are members of a contract market which has jurisdiction over the dispute.

    (2) Claims between Members and Associates. Except as provided in Sections 4 and 5 of these Rules with respect to timeliness requirements, disputes between Members and Associates and between Associates shall be arbitrated under these Rules, at the election of the person filing the claim, unless:

      (i) the parties, by valid and binding agreement, have committed themselves to the resolution of such dispute in a forum other than NFA;
      (ii) the parties to such dispute are all required by the rules of another self-regulatory organization to submit the controversy to the settlement procedures of that self-regulatory organization; or
      (iii) all parties to the dispute are members of a contract market which has jurisdiction over the dispute.

      Once a claim under Section 2(a)(2) of the Rules is filed, arbitration is mandatory for the Member or Associate the claim is against.

    SECTION 3. ARBITRATION PANEL

(a) Appointment of Panel.

    Except as provided under Section 7(e) of the Rules, all arbitration proceedings under these Rules shall be conducted before an arbitration panel consisting of three NFA Members or individuals connected therewith (one such Member or individual designated as Panel Chairman) appointed by the Secretary, except that where the aggregate amount of the claims (exclusive of interest and costs) do not exceed $20,000, the Panel shall consist of one such person unless the Secretary directs otherwise.

    SECTION 7. PRE-HEARING.

(e) Motions for Emergency Relief.

    (1) A motion for emergency relief may be filed with a Demand for Arbitration or at any time after a Demand is filed. The motion should include a statement explaining why emergency relief is needed and indicate the party or parties against whom the relief is sought. The party filing the motion shall pay a non-refundable fee of $500 and a hearing fee of $150 when filing the motion.

    (2) The party filing the motion shall concurrently serve a copy of the motion on the party against whom relief is sought. A party against whom relief is sought has two business days after the motion is received in which to serve a written response on NFA and the other party. Service under this Section must be accomplished by hand delivery or by use of a generally recognized overnight delivery service.

    (3) NFA shall schedule a hearing on the motion no later than five business days after the motion is received by NFA. One arbitrator will decide a motion for emergency relief unless NFA or the arbitrator directs otherwise. The arbitrator or arbitrators deciding the motion for emergency relief may be different from the arbitrator or arbitrators who are assigned to hear the Demand for Arbitration.

    (4) When the hearing fee paid under Section 7(e)(1) above is not enough to cover the standard preset hearing fees to be paid by NFA to the arbitrator or arbitrators for the time spent hearing the motion, NFA shall collect additional fees to cover the fees to be paid to the arbitrator or arbitrators.

    (5) Any order granting emergency relief shall remain in effect until NFA serves the award under Section 10 of these Rules unless the order directs otherwise.

(f) Other Pre-Hearing Motions.

    (1) Motions to dismiss for failing to state a claim will not be heard by the Panel. Other motions to dismiss must be included in a timely filed Answer or Reply. Motions for summary judgment may be raised at any time. Motions for directed verdict may be raised at the hearing.

    (2) Except as provided in Section 7(a)(4) and Section 7(e) above, a party has 10 days from the date a pre-hearing motion is received in which to serve a written response on NFA and all other parties. However, where a motion is received less than 20 days in advance of the date the hearing or summary proceeding is scheduled to commence, NFA may, in its discretion, require a written response within less than 10 days. No written replies to a party's response to a motion will be allowed except in the Panel's discretion.

SECTION 10. AWARD, SETTLEMENT AND WITHDRAWAL

(g) Failure to Comply

    (1) When any Member or Associate fails to comply with an award within 30 days from the date of service of the award by NFA or fails to comply with a settlement agreement within 30 days after NFA terminates the arbitration proceeding pursuant to Section 10(h) or such other period as specified in the award or settlement agreement, or fails to pay any fee assessed within the time so ordered by the Panel, and unless there is pending a request to modify the award under Section 10(c) or an application to vacate, modify or correct the award in a court of competent jurisdiction, that Member or Associate may, on 30 days written notice, be summarily suspended by the President until such award, settlement agreement, or order of the Panel has been satisfied. Any Member or Associate subject to a summary suspension may, within 30 days of the date of service of the Notice of Suspension, appeal the suspension to the Commission and may, within 10 days of service of the Notice of Suspension, petition the Commission for a stay of the suspension.

    (2) A Member which guaranteed an introducing broker during the relevant time may, on 30 days written notice, be summarily suspended by the President if the guarantor fails to pay an award issued against the introducing broker under Section 10(c) or a settlement agreement entered into by the introducing broker under Section 10(h) within 30 days after the guarantor has received actual notice that the introducing broker has failed to comply with the award or settlement agreement. The suspension shall be lifted if the award or settlement agreement is satisfied.

    (3) When any Member or Associate fails to comply with any interim order issued under Section 7(e) above, that Member or Associate may be summarily suspended by the President until the Member or Associate complies with the order. Any Member or Associate subject to a summary suspension may, within 30 days of the date of service of the Notice of Suspension, appeal the suspension to the Commission and may, within 10 days of service of the Notice of Suspension, petition the Commission for a stay of the suspension.

    (4) In lieu of or in addition to suspending any Member or Associate for failing to comply with an award, settlement agreement or Panel order, NFA may initiate disciplinary action under its Compliance Rules for the failure of any Member or Associate to comply with the award, settlement agreement or Panel's order.

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