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Notice I-99-11

July 15, 1999

Expansion of NFA's Member Arbitration Program

Introduction

On June 25, 1999, the Commodity Futures Trading Commission approved changes to NFA's Member Arbitration Rules (Rules) expanding NFA's Member arbitration program. The rule changes will become effective on September 1, 1999 and apply to cases filed on or after that date. This Notice to Members explains the rule changes. A copy of the amended sections of the Rules is attached at the end of the Notice.

Background

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. 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.

NFA arbitration has proven effective at resolving Member disputes. To further increase the futures industry's access to NFA's arbitration forum, NFA has expanded the Member arbitration program. At the Executive Committee's suggestion, the FCM, IB, and CPO/CTA Advisory Committees considered whether NFA should make the Member Arbitration program fully mandatory. After reviewing the results of an NFA membership survey and comments received from Member firms, each Advisory Committee, the Executive Committee, and the Board of Directors, representing every category of membership, unanimously endorsed NFA adopting a mandatory arbitration program for disputes between Members. They also endorsed expedited procedures for obtaining emergency relief.

Explanation of the Rule Changes

a. Mandatory Arbitration

Disputes solely between Members will be subject to fully mandatory arbitration, which means Members will be required to file their claims at NFA. NFA will apply this approach only to disputes between and among FCMs, IBs, CPOs, and CTAs. Fully mandatory arbitration will not, however, apply to claims by or against APs, where the claimant will still be able to choose the forum.

Under the expanded program, all Members will be required to bring their claims to NFA arbitration unless one of the following exemptions applies:

    (i) the parties, by valid and binding agreement, have committed themselves to resolving the dispute in a forum other than NFA;

    (ii) the parties to a 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 that has jurisdiction over the dispute; or

    (iv) one of the parties to the dispute is a party to a dispute pending in another forum and files a cross-claim or third-party claim in that forum. The cross-claim or third-party claim must arise out of an act or transaction that is the subject of the claim pending in that forum.

b. Requests for Emergency Relief

NFA has adopted expedited procedures for obtaining emergency relief. NFA adopted these procedures because, under the current Rules, Members cannot obtain emergency relief (e.g., temporary restraining orders and preliminary injunctions) that they can obtain in court. Since the fully mandatory program will prohibit Members from filing these emergency requests in court, Section 7(e) of the amended Rules gives Members the ability to obtain emergency relief in arbitration to deal with issues associated with the dispute when those issues need immediate attention. These emergency request procedures will apply to cases between Members, cases between Members and Associates, and cases between Associates.

Under the amended rules, one arbitrator will decide a request for emergency relief, unless NFA or the arbitrator believes three arbitrators should decide the request. NFA will select the arbitrator or arbitrators from special pools of highly qualified NFA arbitrators that NFA will establish in several geographic locations. The rules require any party filing a request for emergency relief to pay an additional $500 fee when filing the request. NFA will also assess separate hearing fees to cover the time the arbitrator or arbitrators spend hearing the request.

The rules also allow a party to file a written response to a request for emergency relief up to and including the time of the hearing on the motion for emergency relief. NFA will schedule a hearing on the motion no later than five business days after the motion is received by NFA. The rules also give the arbitrator the authority to expedite a hearing on the merits by setting deadlines for filing pleadings, conducting discovery, preparing the hearing plan, and scheduling the hearing that are shorter than the deadlines established under the rules. The rules provide that any interim order issued concerning a request for emergency relief will remain in effect until NFA serves the final award, unless the arbitrator decides to modify the order. Finally, the rules allow NFA to suspend any Member or Associate who fails to comply with an interim order.

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If you have any questions regarding this Notice or the changes to the Member Rules, please contact NFA's Arbitration Department at (800) 621-3570.

MEMBER ARBITRATION RULES

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SECTION 2. ARBITRABLE DISPUTES

(a) 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:

    (1) the parties, by valid and binding agreement, have committed themselves to the resolution of such dispute in a forum other than NFA;

    (2) 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;

    (3) all parties to the dispute are members of a contract market which has jurisdiction over the dispute; or

    (4) one of the parties to the dispute is a party to a dispute pending in another forum and files a cross-claim or third-party claim in that forum. The cross-claim or third-party claim must arise out of an act or transaction that is the subject of the claim pending in that forum.

(b) 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:

    (1) the parties, by valid and binding agreement, have committed themselves to the resolution of such dispute in a forum other than NFA;

    (2) 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

    (3) all parties to the dispute are members of a contract market which has jurisdiction over the dispute.

Once a claim is filed, arbitration is mandatory for the Member or Associate the claim is against.

(c) Counterclaims, Cross-claims and Third-party Claims. Except as provided in Sections 4 and 5 of these Rules with respect to timeliness requirements, a counterclaim, cross-claim or third-party claim must be asserted in an arbitration brought under paragraph (a) above and may be asserted in an arbitration brought under paragraph (b) above if the counterclaim, cross-claim or third-party claim arises out of an act or transaction that is the subject of the Demand for Arbitration.

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SECTION 3. ARBITRATION PANEL

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(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.

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SECTION 7. PRE-HEARING.

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(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. NFA shall schedule a hearing on the motion no later than five business days after the motion is received by NFA. A party against whom relief is sought may serve a written response on NFA and the other party at or before the hearing. Service under this section must be accomplished by hand delivery or by use of a generally recognized overnight delivery service.

    (3) 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. The arbitrator or arbitrators may modify the order for good cause shown.

    (6) If an order is issued granting emergency relief, the arbitrator or arbitrators may expedite the hearing by setting deadlines for filing pleadings, conducting discovery, exchanging exhibits, preparing the hearing plan, and scheduling the hearing that are shorter than those established under the Rules.

(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.

(g) Pre-Hearing Decisions by the Arbitrators.

With the consent of the other Panel members, one or more of the arbitrators may act on behalf of the Panel to decide any pre-hearing motions from the parties or to conduct any discovery or hearing plan conference with the parties. However, the panel may not postpone the hearing, impose sanctions, dismiss a party, or dismiss all or any portion of a claim without a majority decision.

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SECTION 10. AWARD, SETTLEMENT AND WITHDRAWAL

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(b) Relief.

The award may grant or deny any of the relief requested and may include an assessment of interest, costs or fees (See Sections 7, 11 and 12). A request for declaratory relief will only be heard by the arbitrators if the Respondent agrees to have the arbitrators hear the claim.

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(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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