Proposed Rule

Expansion of Mandatory Member-to-Member Arbitration

After reviewing the results of an NFA membership survey and comments received from Member firms, and with the full support of NFA's Advisory Committees and Executive Committee, the Board determined to make NFA's Member Arbitration Program fully mandatory. Under a fully mandatory program, NFA arbitration will be mandatory for both parties, not just the party the claim is against. The Member Arbitration Rules ("Arbitration Rules") will continue to exempt disputes that are subject to mandatory arbitration at another self-regulatory organization or where the parties have previously agreed to resolve disputes in some other forum. In addition, the Board felt that the fully mandatory program should not result in Members having to litigate related cases (i.e., a third-party claim, cross-claim) in different forums. Therefore, the Board adopted an additional exemption under Section 2 of the Arbitration Rules to avoid subjecting Members to duplicative litigation. The amendments under Section 2 require all Members to bring their claims to NFA arbitration unless one of the exemptions applies. The fully mandatory program will not, however, apply to Associates. ¹

Emergency Relief

Under the current rules, Members cannot obtain emergency relief (e.g., temporary restraining orders, preliminary injunctions) that they can obtain in court. The fully mandatory arbitration program will prohibit Members from filing these emergency requests in court. Therefore, the Board adopted Section 7(e) of the Arbitration Rules to give Members the ability to obtain emergency relief in arbitration to deal with issues associated with the dispute when those issues need immediate attention. For example, if a Member firm files a claim alleging another Member firm is raiding its employees, the Member filing the claim may want an interim order for relief until the arbitration case is decided. The emergency request procedures under Section 7(e) apply to cases between Members, cases between Members and Associates, and cases between Associates.

Section 7(e) and amended Section 3(a) allow for one arbitrator to decide a request for emergency relief, unless NFA or the arbitrator believes three arbitrators should decide the request. NFA would select the arbitrator or arbitrators from special pools of highly qualified NFA arbitrators that NFA will establish in several geographic locations. Section 7(e) also requires any party filing a request for emergency relief to pay an additional $500 fee when filing the request, though the arbitrators may assess the fee against the Respondent in any subsequent award. In addition, NFA would also assess separate hearing fees to cover the time the arbitrator or arbitrators spend hearing the request. Section 7(e) provides that any interim order issued concerning a request for emergency relief would remain in effect until NFA serves the final award, unless the interim order specifies otherwise.

Section 7(e) would 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 arbitrator will have 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 Arbitration Rules. Section 7(e) would provide that any interim order issued concerning a request for emergency relief would remain in effect until NFA serves the final award, unless the arbitrator decides to modify the order. Finally, the Board amended Section 10(g) of the Arbitration Rules to allow NFA to suspend any Member or Associate who fails to comply with an interim order.

FCM Intervention

Last year NFA amended the arbitration rules to clarify that a guarantor FCM will be liable for the failure of its guaranteed IB to pay an award or settlement agreement when the GIB fails to comply with the award or settlement. To ensure that guarantor FCMs are made aware of arbitration cases naming one of their guaranteed IBs, NFA notifies the guarantor FCM when the case is originally filed at NFA. NFA allows the FCM to intervene in the case if it chooses to.

While NFA gives the guarantor FCM the opportunity to intervene in the arbitration, our rules do not specifically provide for this procedure. Because it is common for claimants to name a GIB but not the guarantor FCM, the Board determined to amend Section 6 of NFA's Code of Arbitration ("the Code") and Section 5 of the Arbitration Rules to make it clear that NFA will allow a guarantor FCM to intervene in an arbitration proceeding naming its GIB.

Majority Decisions by the Arbitration Panel

NFA adopted an amendment last year to conserve the arbitrators' time. One or more of the arbitrators, with the consent of the other Panel members, are now allowed to decide pre-hearing motions or to conduct pre-hearing conferences with the parties. A majority decision, however, is required for motions to postpone a hearing or impose sanctions.

NFA also encourages the full panel, by majority decision, to decide motions to dismiss a party or dismiss all or any portion of a claim, even though the rules do not contain this requirement. Since these decisions are outcome determinative, the Board determined to amend Section 8 of the Code and Section 7 of the Arbitration Rules to require a majority decision for motions to dismiss a party or dismiss all or any portion of a claim.

Modification Requests

Section 10(c) of the Code and Arbitration Rules outlines the steps a party has to take if it asks for modification of the arbitration award. Before March 1992, NFA arbitrators could modify an award if they deemed modification necessary in the interests of justice. However, this broad "interests of justice" standard was problematic because the parties frequently asked the arbitrators to change their decision on the merits - a result that was inconsistent with the statutory standards for modification. Although the arbitrators rarely granted these requests, processing them wasted time for the parties, the arbitrators, and NFA.

Therefore, NFA amended Section 10(c) in 1992 to specify standards for modifying an award. NFA modeled these standards after the language contained in the United States Arbitration Act (9 U.S.C. §11) and the Uniform Arbitration Act. These standards are clerical in nature and allow for modification:

• where there is a material miscalculation of the award amount;

• where there is a material mistake in the description of any person, thing or property in the award;

• where the arbitrators have rendered an award on a matter not submitted to them; or

• where the award contains other clerical errors not affecting the merits of the controversy.

The arbitrators will decide whether to modify an award. However, it has been NFA's policy since 1992 for staff to review the request to see if it meets the standards under Section 10(c) before NFA will forward the modification request to the arbitrators. The reason the rule was amended in 1992 was to avoid wasting the arbitrators' and NFA's time processing modification requests that ask the arbitrators to change their decision on the merits. Therefore, any request that does not meet these standards will not be forwarded to the arbitrators.

This longstanding policy, however, is not contained in the rules, which has occasionally resulted in parties objecting when staff does not forward a request to the Panel. Furthermore, there was a situation last year where a Member sued NFA for not sending its modification request to the arbitrators. NFA followed the court's order and sent the request to the Panel, who ultimately denied it. However, the Board felt that situations like this could be avoided in the future by amending Section 10(c) of the Code and the Arbitration Rules to codify our policy of not forwarding a modification request to the arbitrators unless it is based on one of the grounds for modification under Section 10(c).

Staff's Authority to Interpret the Arbitration Rules

In order to ensure uniformity and make the process more efficient, NFA staff has always had the authority to interpret the Code of Arbitration and the Member Arbitration Rules. The problem staff is experiencing with modification requests is just one example of the parties questioning staff's authority to interpret these rules. Other examples include how NFA defines the term "customer" and the phrase "involving futures" under the Code of Arbitration.

As with the proposal to clarify NFA's authority concerning modification requests, NFA also believes that the number of challenges to staff's authority in other situations can be reduced by codifying staff's authority to interpret the arbitration rule provisions. The adoption of Section 19 of the Code and the Arbitration Rules is proposed for this purpose. Doing so will not have any impact on the arbitrators' authority to determine factual issues or any other legal issues that arise.