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By Overnight Mail
Ms. Romunda Price
Administrative Office of the Courts
455 Golden Gate Avenue
San Francisco, California 94102
Re: Ethics Standards for Neutral Arbitrators in Contractual Arbitration; Response to Invitation to Comment
Dear Ms. Price:
National Futures Association (NFA) appreciates this opportunity to comment on the proposal to exempt securities industry self-regulatory organizations (SROs) from the Ethics Standards for Neutral Arbitrators in Contractual Arbitration. While we agree with the proposal, it does not go far enough. For the reasons explained below, futures industry SROs should also be included in the exemption.
NFA is a federally-authorized SRO for the futures industry. One of NFA's responsibilities under the federal Commodity Exchange Act (CEA) is to provide an arbitration forum for disputes between customers and NFA Members. In particular, Section 17(b)(10) of the CEA requires NFA to provide customers with fair and equitable dispute resolution procedures for claims between customers and NFA Members.1 Furthermore, NFA's arbitration program is regulated by the federal Commodity Futures Trading Commission (CFTC). CFTC Regulation 170.8 requires NFA's arbitration rules to be consistent with the guidelines and acceptable practices for dispute resolution found in Appendix A and Appendix B to Part 38 of the CFTC's regulations.2 Those guidelines and acceptable practices require NFA to provide customers with fair and equitable dispute resolution procedures that include the right to an objective and impartial decision-maker. The CFTC approves NFA's arbitration rules and audits NFA's arbitration program to ensure that the program meets these requirements.
All customer cases filed at NFA involve exchange-traded futures transactions, which Section 3(a) of the CEA declares to be transactions in interstate commerce.3 These transactions are specifically preempted from state regulation by Section 2(a)(1)(A) of the CEA.4
As you can see, there are at least two ways in which NFA's case for preemption is even stronger than that of the securities SROs. First, unlike the securities SROs, federal statutory law expressly requires NFA to provide a dispute resolution forum to customers - most of whom qualify as consumers under the ethics standards - and specific federal regulations govern the conduct of that forum.5 Second, unlike most of the securities transactions involved in arbitration proceedings at the securities SROs, the transactions involved in NFA arbitration proceedings are themselves preempted from state regulation.
For the most part, the California Ethics Standards are similar to the standards that NFA applies to its arbitration proceedings. In fact, NFA asks its arbitrators to disclose the information before NFA makes the appointment, and many of the disclosures required by Standard 7(b) are treated as automatic disqualifications that keep NFA from appointing an arbitrator to a case in the first place, even when our experience with the arbitrator leads us to believe that the arbitrator would be scrupulously impartial.
As these relationships become more attenuated, however, the likelihood that they will result in partiality decreases. For these more attenuated relationships, NFA appoints the arbitrator subject to challenges for cause and discloses the relationship. As is the case with the securities SROs, NFA rules give staff authority to decide challenges, and disqualification is not automatic. NFA evaluates each disclosure based on its particular facts to determine if they create a reasonable impression of partiality and, therefore, create a valid objection for cause.
For the reasons described above, a lawsuit challenging the application of the Ethics Standards to NFA or another futures SRO would find that federal law preempts those standards. We would prefer to resolve the issue by exempting futures SRO arbitration proceedings from the Ethics Standards rather than forcing customers and Members to litigate it in the event that a losing party (customer or Member) moves to vacate the award under California Code of Civil Procedure § 1286.2(a)(6) on the grounds that a neutral arbitrator failed to disclose information or did not recuse himself after an objection was raised.6
NFA requests that proposed Standard 3(b)(I) be amended to read as follows (with our additions in bold italics):
(I) An arbitration proceeding governed by rules adopted by a securities self-regulatory organization and approved by the United States Securities and Exchange Commission under federal law or an arbitration proceeding governed by rules adopted by a futures self-regulatory organization and approved by the United States Commodity Futures Trading Commission under federal law.
If you have any questions or need any additional information, please contact me. My telephone number is 312-781-1393 and my e-mail address is firstname.lastname@example.org. You can also find more information about NFA and its arbitration program on NFA's web site at www.nfa.futures.org.
Very truly yours,
Kathryn Page Camp
Associate General Counsel
1 7 U.S.C. § 21(b)(10).
2 17 C.F. R. § 170.8. See also Appendices A and B to 17 C.F.R. § 38.1, et seq.
3 7 U.S.C. § 5(a).
4 7 U.S.C. § 2(a)(1)(A).
5 A separate section of the CEA requires the futures exchanges, which are also SROs, to provide a dispute resolution forum. See 7 U.S.C. § 7(d)(13). Although NFA is the only futures industry SRO that currently runs a nationwide forum and conducts hearings in California, an exemption should apply to all futures SROs.
6 NFA provides customers with the option of choosing either a neutral "non-Member" panel, where the single arbitrator or the majority of a three-person panel, including the chairperson, is not connected with an NFA Member, or a neutral "Member" panel, which is expected to have industry knowledge, and customers choose Member panels more than half the time. Since the futures industry is relatively small in terms of the number of people involved, it can be nearly impossible to find an arbitrator with futures experience and expertise that does not have at least one of the more attenuated relationships covered by the Ethics Standards.