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Proposed Rule

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Explanation of Proposals

A) Explanation of Proposed Amendments to NFA's Code of Arbitration and Member Arbitration Rules

Who May Represent a Party in NFA Arbitration

Section 7 of the Code of Arbitration and Section 6 of the Member Arbitration Rules allow a party in an NFA arbitration proceeding to be represented by an attorney or other representative. In addition to having an attorney, the rule was designed to allow a firm to be represented by one of its employees or an individual to be represented by a family member or friend. The rule was never intended to allow someone to engage in the unauthorized practice of law. However, it appears that is what is happening.

Specifically, the rule's broad language is allowing persons whom NFA did not intend the rule to cover to represent parties for a fee. To illustrate, an individual who was expelled from NFA membership is representing customers in NFA arbitration even though he is not a lawyer. While NFA has received complaints from Members or their attorneys about this person representing parties in NFA arbitration, nothing in the rules prohibits this individual from doing so. However, NFA is concerned that situations like this call into question the arbitration program's integrity.

This is an issue that the securities industry has been struggling with over the last few years. The NASD, for example, allows a party to be represented by any individual as long as the representation is in accordance with state statutes and regulations. Under the NASD's approach, staff is responsible for looking at the statutes and regulations in each state where it holds proceedings. NFA staff tries to keep up with state law developments and adjust its representation policies on a state-by-state basis when necessary, and staff will continue to do so when parties are represented by attorneys. However, the Board felt that the best way to deal with non-attorney representation is by simply making the rule's true intent crystal clear. Therefore, the Board amended Section 7 of the Code and Section 6 of the Rules to specifically state that a party may be represented by an attorney-at-law authorized to practice law in the highest court of any state, or by a family member or other person who is representing the party without compensation, or by an officer, partner or employee of the party.

Arbitration Hearing Fee Increases

In 1992, NFA began compensating its arbitrators for reviewing a summary proceeding or attending an oral hearing. The fees NFA pays the arbitrators are comparable to the fees paid to arbitrators at other forums (e.g., the NASD, NYSE). However, in February, the SEC approved a proposal by the NASD to increase its arbitrator honoraria. Since many of NFA's arbitrators also serve for the NASD, the Board felt that NFA's arbitrator fees should be consistent with the NASD's. Therefore, the Board determined to increase its arbitrator payment schedule.

Currently, NFA pays its arbitrators according to the following schedule: $50 for a summary, $150 for a half-day oral hearing (four hours or less) and $225 for a full-day oral hearing. NFA also provides an additional $50 honorarium to the chairperson of a panel. In light of the NASD's new payment plan, the Board approved the following payment schedule: $125 for a summary proceeding; $200 for a half-day oral hearing (four hours or less) and $400 for a full-day oral hearing, with an additional $75 per day for the chairperson of the panel.1

NFA passes through to the parties the entire cost of paying the arbitrators by initially assessing a hearing fee to the party filing a claim. Consequently, the Board amended Section 11 of both the Code and the Rules to adjust the hearing fees charged when a party files a claim at NFA. Since most of NFA's claims are filed by customers, customers would initially be subjected to the increased cost for arbitration, although arbitrators can, and often do, order Members to reimburse customers for the hearing fees. However, even with the increase, NFA arbitration is still a relatively low cost alternative for resolving disputes.

Fees Charged Under the Code for Cross-Claims Between Members and Associates

Under NFA's arbitration rules, a respondent in an NFA arbitration proceeding may assert a cross-claim against any other respondent named in the proceeding. To illustrate, if a customer brings an action against an FCM and a non-guaranteed IB, the FCM may wish to assert a cross-claim against the IB, seeking to indemnify the FCM for any amount the arbitrators would award the customer against it. This procedure allows the FCM to avoid having to file a separate claim for indemnification against the IB. However, if a Member or Associate asserts a cross-claim in a customer case, the Member must pay the higher filing fee required for Member-to-Member disputes. The Board, therefore, amended Section 18 of the Code to lower the filing fee for such cross-claims.

The Code requires the Member or Associate filing the cross-claim to pay the fees under the Member Rules because of concerns that these claims might lengthen the arbitration proceeding and consume more resources to process. However, NFA's experience over the last few years is otherwise. It seems that the issues involved in cross-claims are usually closely intertwined with the issues that form the basis for the original claim. Since the arbitrators are required to hear essentially the same evidence in order to determine what should be awarded on the original claim, cross-claims have no substantial effect on the cost of the arbitration process.

Furthermore, one of the main purposes for allowing cross-claims in the first place was to increase the efficiency of NFA arbitration. Lowering the fees for cross-claims accomplishes this objective by encouraging Members and Associates to resolve related claims in a single proceeding. Therefore, the Board amended Section 18 of the Code to apply the Code's filing fee schedule to cross-claims asserted by Members and Associates against other Members and Associates in cases covered by the Code (i.e., cases involving customers).

B) Explanation of Resubmitted Amendments to NFA Financial Requirements

NFA Financial Requirements ("Requirements") spell out the minimum financial, reporting and early warning requirements for FCMs and IBs. Most of the Requirements were adopted from CFTC Regulations 1.10, 1.12, 1.16, 1.17 and 1.20 through 1.30. To simplify NFA's rulebook and eliminate the need to amend the Requirements whenever the Commission amends its rules, the Requirements have been amended to incorporate the relevant CFTC rules by reference. These amendments include the deletion of Schedules A through E of the Requirements, as these Schedules were nearly identical to a large portion of CFTC Regulation 1.17. NFA's intent in amending the Financial Requirements is not to change those requirements in any way but merely to change the form in which they are presented.


1 While NFA's proposed payment plan is consistent with the NASD's schedule, they are not exactly the same. Under its new schedule, the NASD will pay an arbitrator $200 for each four-hour hearing session, while our proposal calls for capping the fee at $400 per day for each session that lasts longer than four hours. Thus, if a hearing session lasts 9 hours, the NASD would pay each arbitrator $600 ($200 x 3 sessions), with the chairperson receiving an additional $75 per day. On the other hand, NFA would pay each arbitrator $400 for the full day, with the chairperson receiving an additional $75 per day.
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