Proposed Rule
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As currently constituted, the Membership Committee is composed of five members of the Board of Directors and four non-Directors. Recent amendments to NFA Bylaws 301 and 701, and Registration Rule 505 require that at least one non-Member of NFA be a member of the Membership Committee and each of its designated Subcommittees.1 A public Director and one non-Member currently sit on the Membership Committee.
The current amendments increase the number of non-Members on the Membership Committee to one-third of the Committee by expanding it to include five Directors and six non-Directors, with at least one Director being a public Director and three of the non-Directors being non-Members. For purposes of these requirements, employees of a Member are considered Members. This approach provides the experience and continuity of membership that the Membership Committee has identified as uniquely valuable in performing its tasks. It will also ensure that there are enough non-Members available to sit on designated Subcommittees without it being overly burdensome.2
The Board also adopted changes to the process for adjudicating adverse membership cases. Membership actions themselves, which determine eligibility for membership rather than registration, are so rare as to be virtually non-existent. NFA has not initiated a membership action since the Commission delegated the responsibility to NFA for taking adverse registration actions.3 This is because no one, other than a contract market, can be an NFA Member or Associate without being registered. Consequently, when the Membership Committee adjudicates a registration action, it also resolves any membership issues. Nonetheless, adverse membership actions standing alone remain possible.
NFA's disciplinary actions, which are adjudicated by NFA's Hearing Committee Panels, can also affect a respondent's membership.4 Those decisions are subject to review by NFA's Appeals Committee. In the event a membership action is instituted, a designated Subcommittee of the Membership Committee would adjudicate the case. However, Bylaw 301, which governs membership actions, does not currently provide for any further internal NFA review of membership decisions. Such a review would be appropriate, and the Appeals Committee should have the authority to review decisions in membership cases as well as disciplinary actions. This will ensure that all decisions directly impacting membership status, whether the result of the disciplinary or membership process, are subject to final approval by the Appeals Committee.
Unlike a registration action in which NFA operates pursuant to the Commission's delegated authority, in adjudicating a membership action, the Membership Committee may be performing a corporate function. Delaware general corporate law, which governs NFA's corporate activities, requires that any Committee exercising the corporate authority of the Board be comprised entirely of members of the Board of Directors. NFA's Appeals Committee meets this composition requirement. Because the Membership Committee is comprised of both Directors and non-Directors and because membership actions will rarely if ever be instituted, the Board has determined, out of an abundance of caution, that decisions made by the designated Subcommittee in membership actions be subject to review by the Appeals Committee, which is solely comprised of Directors.
Finally, the Registration Rules currently provide that the Vice President of Compliance is authorized to perform a number of registration-related functions. These include issuing proficiency test waivers; serving withdrawal letters, disclosing evidence and witnesses that NFA intends to present in registration cases; and filing NFA's responses to Notices of Intent in registration cases. These duties are either already functionally performed by the Vice President of Registration and Membership or are ministerial in nature. Therefore, references to the Vice President of Compliance in the Registration Rules have been replaced with the Vice President of Registration and Membership.
As mentioned earlier, NFA is invoking the "ten-day" provision of Section 17(j) of the Commodity Exchange Act and will make the proposals contained herein effective ten days after receipt of this submission by the Commission unless the Commission notifies NFA that the Commission has determined to review the proposals for approval.
1 Designated Subcommittees adjudicate registration and membership actions. They are analogous to Hearing Panels that adjudicate disciplinary actions.
2 In order to ensure that an ample number of non-Members is available to sit on designated Subcommittees, the Board could appoint more than three non-Members to fill the six non-Directors seats. If a matter involves a floor broker or floor trader, the two floor community representatives, who will most likely be non-Members, on the five-person designated Subcommittee will satisfy the one-third non-Member requirement.
3 NFA last took a membership action in 1986 against First Commodity Corp of Boston.
4 The Business Conduct Committee, under appropriate circumstances, can also issue a decision based on a settlement offer.