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Proposed Rule

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EXPLANATION OF PROPOSED AMENDMENTS

Amendments Regarding Discovery
Amendments Regarding Motions
Amendments Regarding Hearing Plans
Amendments Regarding Hearing Fees
Amendments Regarding the Liability of Guarantor FCMs
Other Miscellaneous Amendments

Over the past few years, NFA has seen an increase in the size and complexity of the claims that have been filed with NFA's Arbitration Department. For example, the average claim amount has increased from approximately $63,000 in 1991 to almost $115,000 in 1995, and the volume of claims filed for $100,000 or more has increased from 9 percent of our caseload in 1991 to 18 percent in 1995.

Most of NFA's problem cases in the past few years have been the claims of $100,000 or more. While these large cases make up less than 20 percent of our caseload, they involve some of the most complex claims which are filed at NFA and they consume a disproportionate share of NFA's resources. For instance, the average turnaround time for cases with claims of $100,000 or more that closed between January 1, 1994 and July 1, 1996 was approximately 12 months compared to just over seven months for cases with claim amounts of under $100,000. An average of 4.5 motions were filed in the large claims which closed during the same period, while an average of just one motion was filed in the smaller claims. Since 1994, NFA commenced oral hearings in 31 cases with claims of $100,000 or more and twelve of those cases required three or more hearing days. Furthermore, the parties and their attorneys in the large cases seem to be more contentious than those in the cases with smaller claim amounts, and some arbitrators have complained to NFA about the tactics employed by the attorneys in these cases, both before and during the hearing.

In response to these developments, NFA issued a Notice to Members asking for comments on proposed changes to NFA's Arbitration Rules. The Notice was also sent to arbitrators and to customers, or attorneys for customers, recently involved in NFA proceedings. NFA received almost 70 comments which overwhelmingly supported NFA's efforts to keep the arbitration process efficient, expeditious and free of abuses by parties or their counsel.

NFA staff reviewed the comments and suggestions received with NFA's Advisory Committees as well as with an Arbitration Discussion Group which consisted of attorneys and arbitrators who were involved with some of NFA's most problematic cases. They agreed with many of our recommendations and offered other suggestions to address the problems we are having.

After considering all of the comments received, as well as the recommendations of NFA's Advisory Committees and the Arbitration Discussion Group, NFA's Board of Directors determined to amend NFA's Arbitration Rules as proposed herein. Detailed explanations of the proposed amendments are as follows:

Amendments Regarding Discovery

To address problems with discovery -- where the parties refuse to produce requested documents and information, file last-minute discovery requests or extensive discovery motions, or refuse to comply with the arbitrators' discovery orders -- the proposed amendments provide for a procedure for the early automatic exchange of routine documents. Under the procedure, NFA staff would identify the standard documents that are routinely relevant for the causes of action alleged in a particular case from a list of documents approved by NFA's Board of Directors. NFA would then notify the parties that they must automatically exchange the documents with each other no later than 15 days after the last pleading is due. The parties may ask for documents and information not subject to the automatic exchange rule according to NFA's current discovery deadlines.

Although NFA's proposal calls for the standard documents to be automatically exchanged by the parties no later than 15 days after the last pleading is due, as a practical matter, the parties should have ample time to comply with this deadline. Under this procedure, NFA will identify the standard documents for the parties at the time we accept the claimant's Demand and serve it on the respondents. An Answer is not due from the respondents until 45 days after that, and the parties would have an additional 15 days from the Answer due date to exchange the standard documents. That means the parties would essentially have 60 days to locate, assemble and exchange the standard documents, which should be a sufficient amount of time. Furthermore, it is likely that the Members and Associates will be gathering and reviewing many of these documents anyway in preparing their Answer.

The Board also revised the arbitration rules related to the pre-hearing stage of the arbitration process. One amendment makes it clear that the arbitrators have the authority to schedule a conference with the parties, in person or by telephone, to decide any outstanding discovery issues. The Board also amended the arbitration rules to allow one or more of the arbitrators, with the consent of the other Panel members, to decide any pre-hearing motion or to conduct pre-hearing conferences with the parties. This procedure should conserve the arbitrators' time.

Late requests to compel discovery are also a problem. The proposed amendments provide that NFA will not allow late motions to compel except for good cause shown. Finally, to further encourage the parties to cooperate with each other to resolve discovery disputes, the proposed amendments require the party filing a request to compel to include a certification with the request. The certification will state that the party filing the motion, or its representative, has made a good faith effort to resolve the matters forming the basis for the motion through either a telephone conversation or an in-person meeting with the other party or its representative.

Amendments Regarding Motions

Arbitrators complain to NFA about the high number of pre-hearing motions the parties file. They are also concerned that many of the motions are unnecessary and frivolous. To address these concerns, the proposed amendments prohibit the parties from filing only one type of motion: motions to dismiss for failing to state a claim. This restriction would also apply to any motion which staff determines is really a motion to dismiss for failing to state a claim, even if the party filing it calls it something different.

NFA would allow the parties to file a motion to dismiss on other grounds but would require the parties to include the motion in a timely filed Answer or Reply. For example, a respondent will be able to ask the arbitrators to consider whether to dismiss a claim because it was not filed within NFA's two-year time limit or because it is barred by the doctrine of res judicata. However, the request must be included in a timely filed pleading so that the arbitrators may consider it early on in the process. NFA will allow the parties to also file motions for summary judgment in cases where there really are no disputed facts. The rules will also clarify that the parties may raise motions for a directed verdict at the hearing.

Amendments Regarding Hearing Plans

The hearing plan is an important tool that is unique to NFA arbitration. The purpose of the plan is to provide a road map to help the hearing run smoothly and efficiently. NFA requires a hearing plan for all cases with oral hearings, except Member cases where it is within the arbitrators' discretion to require a plan. Many members of the Arbitration Discussion Group, however, had experiences where the parties' hearing plan was useless or they did not even prepare one. In some cases, the parties submitted the plan late or they refused to cooperate with NFA staff in preparing the plan.

Currently, NFA requires the parties to serve a hearing plan on NFA no later than 10 days before the hearing begins. However, the proposed amendments require the parties to submit a joint hearing plan, or separate plans if the parties cannot agree on a joint one, 30 days before the hearing begins. The amendments also allow the arbitrators to hold a hearing plan conference with the parties to modify the plan, if needed. Furthermore, the Board believed that more can be done to educate the parties and their representatives about what the hearing plan involves and what it should accomplish and, therefore, it determined to define the hearing plan in the arbitration rules.

The Board also decided that the arbitration rules should require a hearing plan in all cases that involve an oral hearing. The Code of Arbitration already includes this requirement, but the Member Rules do not. Therefore, the Member Rules were amended to make a hearing plan mandatory in Member cases with an oral hearing.

Amendments Regarding Hearing Fees

Another hearing-related problem is the high number of hearing sessions. NFA staff and members of the Arbitration Discussion Group felt that in many cases the parties needlessly extend the hearing.

Our statistics show that the oral hearings in cases with claims less than $500,000 generally conclude after one or two days. On the other hand, it appears that claims of $500,000 or more involve four or more hearing sessions. Right now, parties who file claims over $500,000 deposit $1,450 in hearing fees, which will compensate three arbitrators for two full-day hearing sessions. This means that NFA invariably has to collect additional hearing fees from the parties in the case. The proposed amendments raise the hearing fee deposit for claims of $500,000 or more to $2,900, which will cover four full-day sessions.

The Board also amended the arbitration rules to increase the daily hearing fee to be the standard fee if the hearing continues for more than four days, regardless of the claim amount. Under this approach, the daily hearing fee will increase from $725 to $1450 for the fifth hearing day and all subsequent hearing days. These higher fees should discourage the parties from engaging in dilatory tactics during the hearing. However, the Board determined to give the arbitrators the option of keeping the fees at the standard amount if, for example, the excess days are due to case complexity rather than the parties' tactics.

Amendments Regarding the Liability of Guarantor FCMs

The Board amended Section 10(g) of the arbitration rules to clarify that a guarantor FCM is required to pay an arbitration award or settlement agreement whenever its guaranteed IB ("GIB") does not, even if there is no award against or settlement agreement with the guarantor FCM. Under the proposal, NFA will notify the FCM that guaranteed the introducing broker during the relevant time that its GIB has failed to comply with an award or settlement agreement. The guarantor FCM will then have 30 days from the date it receives actual notice of the unpaid award or settlement agreement to pay the award or settlement agreement. If the FCM does not pay within that time, NFA will follow its normal procedures to suspend the guarantor.

Another change relating to Section 10(g) of the arbitration rules clarifies that the summary suspension of a Member or Associate is not the same as disciplinary action under NFA's Compliance Rules. NFA can, however, take an action under the Compliance Rules if it believes that the summary suspension procedure is not adequate in a particular case.

Other Miscellaneous Amendments

The Board amended the arbitration rules to clarify that a party's right to counsel and the confidentiality of communications between the parties during mediation apply to the entire mediation process, rather than just specific mediation conferences. In addition, the Board amended Section 9 of the arbitration rules to address requests to reopen the record. Currently, the Panel may reopen the record any time before the award is issued (i.e., before it is served on the parties). The amendment to this section makes it clear that the record may not be reopened once the arbitrators have reached their decision, regardless of whether the award has been mailed to the parties.

Finally, the Board amended the arbitration rules to conform them to NFA's actual practice concerning the duties performed by the President, Secretary, and staff of NFA. In reality, the Arbitration staff carries out most responsibilities under the arbitration rules, except for certain matters handled by an NFA attorney who is designated by the Secretary to act for him or the President. Therefore, the arbitration rules were modified to meet with NFA's actual practice.

NFA respectfully requests that the Commission review and approve the proposals contained in this submission and requests that they be declared effective upon Commission approval.

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