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NFA Registration Rule 504 governs the procedures used in registration cases. In cases against registrants based on a statutory disqualification found in Section 8a(2) of the Commodity Exchange Act ("Act"), Rule 504(d) establishes a two-stage process. The first or interim stage requires the panel to determine whether the person is in fact subject to a Section 8a(2) disqualification. The panel must make this determination solely based on written submissions by NFA and the registrant. If the panel finds that NFA's written submissions prove that the registrant is subject to the disqualification, the panel must suspend the registrant pending the second stage - completion of the case, which would involve an oral hearing to decide whether the person's registration should be revoked or conditioned despite the disqualification. If the panel determines that NFA has not met its burden of proof, the panel must withdraw the charge or it can amend the charge if NFA has proven the existence of a Section 8a(3) disqualification instead of a Section 8a(2) disqualification.
In a recent registration case, a panel was required to determine if the individual was subject to a Section 8a(2)(G) disqualification for willfully failing to disclose a criminal matter. As the Commission is aware, CFTC case law dictates that willfulness of the non-disclosure must be determined based on the credibility of the registrant's testimony and that issues of credibility are unsuited for resolution without oral testimony. The panel struggled with this particular case because, as currently written, Rule 504(d) does not provide for any type of oral proceeding at the interim stage and does not give the panel the discretion to delay making a determination until after the oral hearing in the second stage of the proceeding. Ultimately, based solely on the written submissions, the panel determined that NFA had not proven that the registrant's failure to disclose was willful and withdrew the charge.1
To address the limitation in Rule 504(d), the rule has been amended to give the panel four options at the interim stage. First, if there is enough evidence in the written record to support the disqualification, the panel could issue an order to suspend the registrant. Second, the panel could decide that, based on the written evidence, the registrant should not be disqualified and withdraw or amend the charge. Third, if the panel believes that the record is insufficient, it could defer making the determination until the oral hearing is held later in the case, in which event the person would remain registered while the matter was pending. Finally, the panel could order an oral hearing at the interim stage to determine whether the Section 8a(2) disqualification exists and, if so, suspend the person pending the outcome of the case or if not, withdraw or amend the charge.
NFA Registration Rule 509(b)(5)(E), as currently written, prohibits a firm from sponsoring an AP subject to a conditioned registration if the firm is subject to a pending NFA disciplinary action involving allegations of fraud or failure to supervise. However, it does not prohibit the firm from sponsoring the AP subject to conditions if the firm's principals, but not the firm itself, are subject to a pending NFA action. Situations have occurred in which NFA has brought an action against a firm and its principals only to have the firm withdraw and the principals form a new registrant. While it is usually possible to prevent the new firm's registration, occasionally it is not, and the new firm can sponsor conditioned APs. To rectify this, a new subsection (F) to Rule 509(b)(5) will preclude firms from sponsoring conditioned registrants when the firms' principals are subject to a pending adjudicatory proceeding brought by or before NFA alleging fraud or failure to supervise.
1 Amending the charge was not an option in this particular case because both the Section 8a(2) and Section 8a(3) disqualifications involving failures to disclose require a determination as to whether the non-disclosure was willful.