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October 25, 1996
Requests for Comments on Proposed Changes to NFA's Arbitration Rules
NFA has been effectively resolving futures-related disputes since 1983. NFAs arbitration forum is generally cheaper, faster and less formal than civil litigation or other dispute resolution forums. In fact, NFAs arbitration program has emerged as the primary method for the futures industry and its customers to resolve their disputes.
The vast majority of cases filed in NFA arbitration involve customers. The Commodity Exchange Act requires NFA to hear these types of cases, and they are administered under NFAs Code of Arbitration. NFA also administers claims under its Member Arbitration Rules, which essentially cover disputes between and among Members and Associates.
Over the past few years, NFA has seen an increase in the size and complexity of the claims that have been filed with the 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 NFAs 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 NFAs resources. Consider the following:
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 7 months for cases with claim amounts of under $100,000.
A greater number of motions are filed in the large cases. An average of 4.5 motions were filed in the large claims which closed from January 1994 to July 1996 while an average of just one motion was filed in the smaller claims.
Cases with large claims involve more hearing days. Since January 1994, NFA commenced oral hearings in 31 cases with claims of $100,000 or more. Twelve of those cases required three or more hearing days. In contrast, NFA commenced hearings in 34 cases with claims of under $100,000 only two 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 fact, arbitrators in several cases informed NFA that they were very discouraged about serving as arbitrators.
This situation troubles NFA. We pride ourselves on the reputation we have as an efficient forum, and we encourage individuals to serve as NFA arbitrators because it is a worthwhile and rewarding experience. Unfortunately, the cases with large claim amounts and a myriad of issues are complicating the arbitration process. Moreover, staff is concerned that these cases will dilute our arbitrator pool and increase our turnaround time.
Earlier this year, we discussed these problems with NFAs Advisory Committees. With their backing, we formed an Arbitration Discussion Group consisting of NFA arbitrators and attorneys who have been involved with some of the more problematic cases at NFA. The Groups goal is to help NFA seek solutions to the problems we are experiencing.
The problems that are significantly affecting NFAs arbitration program are described below. NFA believes it would be beneficial to obtain feedback and comments directly from the membership and other interested parties on these problems before NFA proposes specific rule changes to address these issues.
After reviewing the comments that are received, NFAs Advisory Committees and the Discussion Group will assist NFA in making specific proposals to NFAs Board of Directors, and ultimately to the Commodity Futures Trading Commission. We would appreciate receiving your comments by November 25, 1996. Comments should be directed to:
National Futures Association
200 West Madison Street
Chicago, Illinois 60606-3447
Phone: (312) 781-1490
Fax: (312) 781-1467
Automatic Exchange of Standard Documents
One problematic area is discovery. NFA has received complaints about parties who refused to produce requested documents and information, filed last-minute discovery requests or extensive discovery motions, or refused to comply with the arbitrators discovery orders.
One approach to deal with this situation would be to require the parties to exchange certain documents and information with each other on more of a routine basis. Under this procedure, NFA staff would identify certain standard documents which are material and relevant to the dispute based on the nature of the allegations in a particular case. The parties would then be notified by NFA that those documents must automatically be exchanged with each other. Documents and information not subject to the automatic exchange rule could then be requested according to the current discovery deadlines under Section 8 of the Code and Section 7 of the Rules.
This procedure is similar to methods currently under consideration for the arbitration programs of the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE). The Discussion Group thought this procedure would streamline the discovery process by requiring routine documents to be exchanged earlier in the proceeding and eliminate quarrels over standard documents. The Group also thought it would conserve the arbitrators time since arbitrators would presumably only have to resolve disagreements over non-routine discovery requests. Finally, it could ensure that routine documents which the arbitrators need to decide the case (e.g., floor order tickets in a bad fill case) are not overlooked in discovery.
NFA has identified certain documents which are frequently requested in discovery and for which motions to compel are usually granted. These documents are listed in Exhibit 1 at the end of this Notice.
NFA would appreciate your comments on this approach overall and is specifically interested in your response to the following questions:
Are there any documents identified by NFA that should not be automatically produced in discovery? If so, please identify the documents and explain why they should not be automatically exchanged.
Are there any documents that are not included on this list which should be automatically produced? If so, please identify the documents and explain why they should be automatically exchanged.
NFAs discovery rules currently give parties 30 days after the answer or reply is due to request documents and an additional 30 days to exchange the documents. If NFA adopts an automatic exchange rule, should there be a shorter time period for exchanging standard documents? For example, the automatic exchange of documents could occur 15 days after the answer or reply is due, which would give the parties several days to review the documents before serving their requests for less routine documents. Is 15 days too much time? If that time period is too long, please indicate how much time would be adequate and explainwhy. If more than 15 days are needed, please explain how much more time is necessary and why.
NFA would appreciate other suggestions to address our discovery concerns.
Arbitrators have complained to NFA that the parties often file a high number of pre-hearing motions. They also believe that many of these motions are unnecessary and frivolous. In response to these concerns, NFA has identified possible solutions to discourage parties from filing unnecessary pre-hearing requests.
One option is to specify in the rules that certain types of motions will not be allowed. Prohibited motions could include motions to dismiss for failing to state a claim and motions for summary judgment.
Alternatively, the rules could specifically identify the pre-hearing motions that will be permitted in NFA arbitration proceedings. The list of motions that would be allowed could include the following: motions to compel; motions for telephonic testimony; motions for a continuance of a hearing or summary proceeding; motions to determine whether a claim was timely filed; motions to determine whether a claim is barred by the doctrine of res judicata; motions to determine whether a claimant has standing to file a claim. And even though they are not filed as pre-hearing motions, motions for a directed verdict made by a respondent after the claimant has presented its case would also be allowed.
NFA is interested in the memberships input relating to this procedure and specifically requests comments on the following:
Should NFAs motion practice prohibit the parties from filing certain pre-hearing requests? If so, please identify which motions NFA should bar and explain why they should not be allowed.
Should NFAs motion practice be limited to specific motions only? If so, please indicate which motions should be permitted and explain why they should be allowed. In particular, are there any motions which should be allowed that are not listed above?
Assessing Fees for Filing Motions
Another possible remedy for dealing with the high volume of motions is to charge a party a fee for each pre-hearing motion over a certain number. Obviously, the fee should be high enough to discourage frivolous and unnecessary motions and encourage the parties to work things out on their own. At the same time, the fee should be low enough not to deter the parties from filing legitimate motions. The fee would not apply to requests to continue the hearing since NFA already assesses a postponement fee for that type of request.
With regard to this approach, NFA requests comments relating to the following questions:
Should fees be charged for filing pre-hearing motions? If so, how many motions should a party be permitted to file before a fee is assessed? In other words, how many "free" motions should be allowed before a fee is imposed?
What fee level is appropriate? Should there be a flat fee or should a sliding scale be adopted where the fee increases for each additional motion that is filed?
Should arbitrators be allowed to refund the fee if they believe the motion was filed in good faith? Should arbitrators be authorized to assess the fees against a different party if that partys actions caused the motion to be filed?
NFA would appreciate other suggestions which could reduce the number of pre-hearing motions that are filed.
HEARING PLANS AND HEARING-RELATED ISSUES
An important tool that is unique to NFA arbitration is the hearing plan. The purpose of the hearing plan is to provide a road map to help the hearing run smoothly and efficiently. Under our current rules, a hearing plan is required for all customer cases with oral hearings and must be finalized 10 days before the first hearing session begins. In Member cases, it is within the arbitrators discretion to require the parties to prepare a hearing plan. If a hearing plan is required in a Member case, the panel will set the due date for submitting it to NFA. It is NFAs experience that the arbitrators order the parties to prepare a hearing plan in virtually every Member case where an oral hearing is held.
NFA has always believed that it is extremely important to have a hearing plan to direct and control the hearing, and members of the Discussion Group agreed. However, many Group members had unpleasant hearing plan experiences. Some participants expressed frustration over the uselessness of the plan prepared by the parties while others complained about having no hearing plan at all. Furthermore, the parties often do not cooperate with NFA staff in finalizing the plan. And because the plan often isnt submitted to NFA until shortly before the hearing begins, it is usually too late for the arbitrators to deal with the problems.
To address these concerns, it was suggested that the parties submit a joint hearing plan (or separate plans if they cannot agree on a joint one) shortly after the discovery deadlines pass. Staff would then forward the plan to the arbitrators who could review the plan to ensure that it is complete and functional. The arbitrators could also use this as an opportunity to see if they can narrow and clarify the disputed issues in the case.
In more complex cases, it may be beneficial for the parties or their representatives to meet with the arbitrators at a hearing plan conference. The arbitrators could use this meeting to focus the parties in on their cases and get them to identify their witnesses and stipulate to exhibits. The chairman or the entire panel could be present at this meeting, depending on the panels preference.
NFA is seeking input on the following questions which relate to hearing plans:
Should the parties be required to submit the hearing plan earlier in the arbitration process, such as shortly after the discovery deadlines pass? If the plan should be submitted earlier, please indicate when the hearing plan should be submitted to NFA and explain your recommendation.
Given the fact that hearing plans are usually required in Member cases with oral hearings and because arbitrators seem to feel strongly about their importance in controlling the hearing, should the Member Arbitration Rules be amended to require a hearing plan for all Member cases with an oral hearing rather than leaving it to the discretion of the panel whether to require a plan? If not, please explain why a hearing plan should remain discretionary in Member cases.
Should arbitrators have the discretion to conduct a hearing plan conference with the parties where they would work to achieve a useful and concise hearing plan, a list of joint exhibits and other stipulations that would streamline and expedite the hearing?
Charging the Parties for Extending the Hearing
Another problem that NFA faces is the high number of hearing sessions. NFA staff and the arbitrators believe that in many cases the parties needlessly extend the hearing by presenting repetitive testimony, making frivolous objections, arguing with opposing counsel, and so on.
One way to discourage the parties from unnecessarily prolonging the arbitration hearing is to adopt a sliding scale to assess the parties higher hearing fees when the hearing sessions extend beyond a certain number of days. The fundamental purpose of the hearing fee is to reimburse NFA for the fees we pay to the arbitrators. Currently, NFA arbitrators are paid $150 for each hearing session lasting less than four hours and $225 for each hearing session of four hours or more. The chairman of the panel receives an additional honorarium of $50 per session.
Under the approach that NFA is considering, a separate and higher fee schedule would apply for each day of hearing after a certain number of days. NFA is seeking input on the following issues relating to this procedure:
How many hearing sessions should be allowed before a higher fee schedule applies? Should the higher schedule apply only to cases with large claims (i.e., claims of $100,000 or more) or should it apply to all cases regardless of the claim amount?
What fee levels would be appropriate for the higher schedule? Since NFA is required to provide an inexpensive forum for the customer cases but is not required to do so for Member cases, is a different approach needed for customer cases? In other words, should a different schedule with lower amounts be assessed for customer cases? Why or why not?
Should the higher fees be automatic unless the panel thinks the reason for the excess days is due to the complexity of the case rather than the parties tactics, in which case they could lower the hearing fees to the normal rates?
NFA is also interested in other procedures that would discourage the parties from needlessly prolonging the hearing.
The arbitrators ability to impose sanctions and the use of sanctions to deter unacceptable conduct in the arbitration process were reviewed by the Advisory Committees and the Discussion Group. Both groups felt that arbitrators should have discretionary authority to impose penalties against parties or their counsel for engaging in tactics that needlessly prolong the arbitration proceeding or complicate the process.
NFA arbitrators currently have the authority to assess sanctions under Section 8 of the Code and Section 7 of the Rules to deal with a party who fails to comply with pre-hearing requirements. However, those sections do not specifically indicate whether the arbitrators may assess monetary sanctions for failing to cooperate.
Arbitrators also have authority to assess sanctions under Section 12 of the Code and Rules. Section 12 specifies the costs that may be included in an award and limits the sanctions the arbitrators may impose in an award to reasonable and necessary expenses including attorneys fees incurred by the arbitrators or a party.
In a number of NFAs problematic cases, a partys representative was equally or entirely at fault for engaging in bad faith acts during the proceeding. Section 7 of the Code and Section 6 of the Rules do allow the Panel to bar a representative from the proceeding for engaging in dilatory, disruptive, or contumacious conduct.
This action is pretty drastic, however, and has never been used by a Panel. The arbitrators do not currently have the authority to impose lesser sanctions such as fines on a partys representative for his or her conduct during the arbitration.
NFA is considering expanding the sanctions available to the arbitrators under Sections 8 and 12 of the Code and Sections 7 and 12 of the Rules. As a result, we are asking for comments on the following issues:
Should arbitrators have explicit authority to impose monetary sanctions on a party for not adhering to the pre-hearing rule provisions? For example, should the arbitrators have the authority to fine a party for not observing the deadlines imposed for discovery or for failing to submit exhibits and the hearing plan on time and in proper form?
With regard to pre-hearing sanctions, should limits be established on the arbitrators authority to fine the parties? Should those limits be spelled out in the rules? What monetary restrictions are appropriate?
Should the arbitrators be authorized to assess attorneys fees and other monetary penalties during the course of the proceeding rather than waiting until the end of the case and including them in the award? Does assessing penalties as a case goes along send a stronger message to the parties than waiting until the end of the case?
Should the arbitrators authority to assess sanctions be expanded to hold a partys representative responsible for his or her conduct during an arbitration proceeding? In other words, should the arbitrators be able to fine counsel for willfully engaging in bad faith acts during the arbitration? Should a representative have the right to appeal the fines that were imposed and, if so, who should decide those appeals? Should NFA prohibit a person from representing a party in other NFA arbitration proceedings if that person is subject to an unpaid fine?
NFA arbitration is a highly subsidized program and we incur significant costs that are paid for by the membership or the public through assessment fees. Is making a party pay some or all of NFAs costs a reasonable penalty for abusing the arbitration process? In other words, should arbitrators have the power to order the parties to pay NFA the amount of its direct costs for processing the case? If not, please explain why this approach is not favored.
Should the sanctions which may be assessed in an award be expanded to include monetary sanctions which are not simply reimbursements for a partys or the arbitrators direct expenses (e.g., should a customer be compensated for the time lost at work by attending the hearing)?
SEPARATE RULES FOR LARGE AND COMPLEX CASES
As mentioned previously, most of NFAs problem cases are claims of $100,000 or more. While these claims make up a small portion of our caseload, they involve some of the most complicated cases which are filed at NFA. NFA is concerned, however, that procedures which are appropriate for large and complex cases may not be suitable for the small, straightforward claims which constitute the vast majority of our caseload. Therefore, we are considering adopting separate rules for large and complex cases.
With regard to this approach, NFA is interested in your response to the following questions.
Should there be a separate set of rules for large and complex cases? If so, how should NFA define "large and complex" cases?
Which of the changes discussed above should apply to large and complex cases only?
Are there any special procedures other than those discussed above that should apply to large and complex cases? For example, should we maintain a special roster of arbitrators to hear these cases? If so, what qualifications should these arbitrators have?
In summary, NFA does not want large and complex cases to put a strain on our successful arbitration program. We would appreciate the memberships input on the changes discussed in this Notice as well as any other suggestions that will address the issues outlined above or improve NFAs successful arbitration program. We would appreciate receiving your comments no later than November 25, 1996.