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A) Explanation of Proposed Amendments to NFA Bylaw 1301 and NFA Registration Rule 203
Since NFA's inception, assessment fees have been the primary funding mechanism for NFA, accounting for 80% to 85% of NFA's total revenue every year. At its strategic planning meeting in January 2001, NFA's Executive Committee agreed that NFA should begin to reduce its reliance on the assessment fee as a revenue source.
Consequently, at its May 17, 2001 meeting, the Board approved a reduction in assessment fees from 18¢ to 14¢ per round-turn futures contract and from 9¢ to 7¢ per options transaction. When the Board approved the decrease in the assessment fees, it recognized that NFA would intentionally be operating at a deficit, resulting in a reduction to NFA's operating reserves. While the Board felt that the assessment fee reduction was appropriate, the Board also did not want to take any action that might impair NFA's ability to operate effectively.
Therefore, to partially offset the decrease in assessment fee revenue, the Board approved increases to NFA's membership dues and registration fees, which have remained unchanged since 1992. NFA recognizes that the membership dues and registration fees must not erect barriers to entering or remaining in the futures industry. NFA analyzed similar fees charged in the securities industry in determining the new levels. Even with the increases, NFA will still only recover a small portion of its costs for providing regulatory services and performing its registration function via revenue derived from membership dues and registration fees.
The decision to increase dues and fees was taken after a lengthy process that included a thorough review of all relevant issues not only by NFA's Board and Executive Committee, but also by the Finance Committee and NFA's three Advisory Committees (FCM, CPO/CTA and IB). The Board and these committees fully support the dues and fees increases.
The amendments to NFA Bylaw 1301 reflect the following changes in membership dues:
The amendments to NFA Registration Rule 203 reflect the following changes in registration application fees:
NFA would intend to make the changes to the assessement fees, membership dues and registration fees effective on July 1, 2001.
B) Explanation of Proposed Amendments to NFA Registration Rules 501, 502, 504, 505, 507, 508, 509, and 510.
NFA staff has completed a comprehensive review of the rules governing the procedural aspects of NFA registration cases and has concluded that they are unduly complicated. The proposed amendments to Rules 501, 502, 504, 505, 507, 508, 509 and 510 simplify and rationalize the procedural rules with regard to the following four aspects:
1. One Procedural Track for All Applicants and Registrants
In the current registration rules, there are essentially four procedural "tracks", i.e., four rules each for Notices of Intent, responses, defaults, and so on This is due to the fact that there is one set of rules governing firms and their APs and principals and another for floor brokers and floor traders. Each of these two sets of rules contains a separate "subset" of procedures for registrants subject to an 8a(2) disqualification. These rules are extremely difficult for applicants and registrants, and even their attorneys, to figure out. The amendments to Rules 501, 504 and 507 and the deletion of Rule 505 provide for one set of procedural rules and one procedural track applicable to all applicants and registrants, irrespective of registration category.
2. Streamlined Procedures for Suspending 8a(2) Registrants
The Commodity Exchange Act gives NFA the authority to suspend the registration of a registrant who is subject to an 8a(2) disqualification. However, the current procedure for this is a cumbersome, bifurcated process. The respondent is obligated to first admit or deny the allegations regarding the existence of the disqualification, but no oral, evidentiary hearing occurs, even if the respondent denies the allegation. If the Membership Committee determines that the 8(a)(2) disqualification does exist, it issues an Interim Order suspending the registrant and an Order to Show Cause why the registration should not be revoked. The respondent must then file a second response and may invoke his right to an oral hearing both to contest the existence of the statutory disqualification and to present evidence to support a conditioned registration. If the respondent does not file the initial response, NFA may not revoke the registrant but must first suspend the registrant and issue the Order to Show Cause. If he fails to respond at this stage, NFA may then revoke the registration.
NFA's proposed amendments to Rule 504 eliminate the "Order to Show Cause" step. The respondent will file only one response in which he will address the truth of allegations and assert his right to an oral hearing. The Membership Committee will still decide, without the oral hearing at this stage, if the disqualification exists, and if so, will issue an order suspending the registration. The revised rule also treats the 8a(2) registrant who fails to respond to the Notice of Intent like any other respondent who fails to respond: a Final Order revoking his registration.
3. Revised Pre-trial Procedures
The current rules provide for only one motion - a motion for summary judgment by NFA in lieu of an oral hearing. There is also no provision for the respondent to reply to such a motion. The rules have been amended to provide for a new Rule 505, entitled "Motions," which allows NFA to file a motion for summary judgment at any time and does not require NFA to choose that in lieu of a hearing. The new rule also allows respondents to file a limited number of procedural motions and to respond to motions filed by NFA.
The current rules require both NFA and respondents to file a list of their witnesses and evidence before a hearing date is set. The amendments to Rule 504 provide that the case will be set for hearing, and a chairperson of the Subcommittee that will hear the case appointed, within thirty days after the response to the Notice of Intent is filed. Lists of witnesses and evidence will be filed after the hearing date is set. This conforms the registration case procedures to the procedures applicable to NFA's BCC cases. Appointing a chairperson early in the process and allowing NFA and the respondent to file witnesses and evidence closer to the date of the hearing will result in a more efficient process. Additionally, the witness and evidence filing is likely to be more accurate as attorneys generally have a better sense of what their evidence will be as the time of trial approaches.
4. Revised Settlement Procedures
The current rules require all APs and IB applicants and registrants to submit a signed Supplemental Sponsor Certification Statement ("SSCS") with their response to the Notice of Intent. This is a document, signed by a sponsor, which describes the conditions that the sponsor will impose if a conditioned registration is granted and commits the Sponsor to implementing them. Staff believes that this is unnecessary, as all of the conditions contained in the SSCS are already contained in NFA's Final Order. The only thing missing is the Sponsor's agreement to be bound by them. Additionally, the SSCS, in and of itself, is a cumbersome vehicle. Every time a registrant changes firms, NFA staff must locate the current SSCS and re-draft a new one for the registrant's new Sponsor to sign, making sure that the identical conditions are contained in the new SSCS.
Amendments to Rule 504 delete all references to the SSCS and will now simply require that a Sponsor, as well as the applicant or registrant, sign the original settlement offer which will include the proposed conditions. If the registrant changes firms after the Final Order is issued, NFA will have the firm sign an acknowledgment form. The acknowledgment will state that the new Sponsor is eligible to sponsor a conditioned registrant, that it has read the conditions contained in the Final Order (which will be attached) and that it agrees to be bound by them.
Amendments to Rule 507 and 509 also make changes regarding which firms are eligible to sponsor a conditioned registrant. The current rules prohibit anyone who is subject to any pending NFA or Commission case from sponsoring a conditioned registrant. This means that a firm that is the subject of a pending case alleging only recordkeeping violations may not sponsor conditioned registrants but a firm that has been found to have committed sales fraud may. Amended Rules 507 and 509 address this anomaly by providing that firms subject either to pending NFA or Commission actions alleging either fraud or failure to supervise or to findings of such violations within the last five years are prohibited from sponsoring a conditioned registrant. The current rules also provide that firms that are subject to special supervisory arrangements as a result of an NFA action, but not a Commission action, are ineligible to sponsor a conditioned registrant. The revised rules include Commission actions.
An amendment was made to Rule 502 to allow for the service of documents and pleadings via e-mail. The amendment stipulates that parties who file documents by e-mail thereby consent to accept service of pleadings by e-mail and waive any objection based on authenticity and genuineness of the e-mail.
Rule 510 was amended to provide that a petition to lift or modify the conditions on a registrant's registration shall show by affidavit that the registrant has not violated the Commodity Exchange Act or Regulations, or NFA Rules, since the time of the registrant's application. The rule was also amended to allow NFA 60 days to respond to the registrant's petition.
Finally, minor, technical amendments were made throughout the revised rules to render the rules more understandable.