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Proposed Rule

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EXPLANATION OF PROPOSED AMENDMENTS

From time to time, current or former Members or Associates sue NFA alleging that NFA has in one way or another violated their rights. The lawsuits usually arise in the context of arbitration actions and disciplinary cases and often proceed as far as the appellate courts. Some lawsuits seek monetary damages and others seek injunctive relief. In all of them, the one common thread is that NFA expends funds for legal fees to defend the cases. Most recently, an Associate who was the subject of a pending NFA disciplinary case sued NFA in California federal court, claiming that NFA owed him over $250,000. He based his lawsuit on legal principles relating to commercial paper, negotiable instruments and contracts and alleged that NFA, by not responding to his demand that NFA dismiss the disciplinary action, had entered into a contract to pay him $250,000. Despite the ludicrous nature of the lawsuit, NFA spent almost $15,000 in attorney's fees to get the case dismissed.

A number of exchanges have adopted provisions to deter and address the financial impact of this type of lawsuit. For example, the Articles of Incorporation of the Board of Trade of the City of Chicago ("CBOT") provide that any member or member firm who fails to prevail in a lawsuit or other legal proceeding against the CBOT must pay the CBOT's costs to defend the lawsuit, including reasonable attorney's fees. The New York Mercantile Exchange ("NYMEX") has a similar provision in its rules. NYMEX's rules provide that if an individual or entity is or was subject to NYMEX's jurisdiction and institutes a lawsuit or other proceeding against NYMEX and fails to prevail, then they must pay NYMEX's reasonable expenses and disbursements, including attorney's fees1.


1 See CBOT Bylaws, Article I, and NYMEX Rule 2.43. In the case of NYMEX, this provision is part of a much broader NYMEX rule that provides, among other things, that except as the result of NYMEX's willful misconduct, gross negligence, bad faith, fraud or criminal acts, NYMEX shall have no liability for any loss or damages, including punitive damages.

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