Proposed Rule2017 | 2016 | 2015 | 2014 | 2013 | Show more years
NFA's proposed amendments formally require public involvement in NFA's disciplinary and membership processes.
I. The Disciplinary Process
NFA's disciplinary process has always been fair and impartial. The principal safeguard in the rules is the requirement that no committee or panel member shall participate in a disciplinary matter if the member, or any person with which the member is connected, has a financial, personal, or other direct interest in the matter. Further safeguards are provided in NFA Bylaw 708, which sets minimum eligibility standards for committee and panel members and prohibits members from voting on any matter in which there is a conflict of interest under CFTC Regulation 1.69, and in the requirement that at least one member of each disciplinary committee be a non-Member of NFA.
NFA Bylaw 704 provides that the Business Conduct Committee (BCC) shall consist of nine individuals, and NFA Bylaw 707 provides that the Hearing Committee shall consist of at least 15 individuals. They both provide that at least one member "shall not be an NFA Member or Associate." In practice, however, the non-Member representation is much greater than that required by these two Bylaws. The BCC is currently composed of six Member representatives and three non-Member representatives. The Hearing Committee is composed of 21 Member representatives and 17 non-Member representatives. NFA's proposal codifies this practice by requiring that at least one-third of the members of both committees be non-Member representatives and by including employees of NFA Members as Member representatives.
NFA Bylaw 702 provides that the Appeals Committee shall consist of five directors, at least one of whom shall be a public director. Since the Appeals Committee is drawn from a more limited pool of candidates (i.e., from the Board rather than from the membership and the public), the change does not require one-third of the members of the Appeals Committee to be non-Members. Instead, it requires that one-third of the members not be subject to NFA's disciplinary jurisdiction. One of these two committee members would have to be a public director but the other could be either a public director or an exchange director. There are currently a public director and an exchange director on the Appeals Committee, so changing Bylaw 702 will not require any changes to the current composition of that committee.
NFA Compliance Rule 3-17 requires that the BCC, Hearing Committee, Executive Committee (for MRAs), Appeals Committee, and Hearing Panels include at least one member who represents a membership category other than the respondent's membership category. If the respondent is a member of the Board, the BCC, or the Hearing Committee, then any disciplinary committee or panel considering the matter must also have one member who is not an NFA Member or Associate.
Compliance Rule 3-17 has been amended to extend the requirement to have a non-Member on the committee or panel in all disciplinary cases, not just cases where the respondent is a member of the board or a disciplinary committee. This requirement is somewhat duplicative for the Business Conduct Committee sitting as a charging body, the Appeals Committee, and the Executive Committee since the entire committee rules on disciplinary matters and the Bylaws (or the Articles in the case of the Executive Committee) already require non-Member representation on these committees. It is a substantive change for BCC panels that rule on early settlements and for Hearing Panels, however.
Given the composition of the Hearing Committee, NFA does not anticipate any problems appointing a non-Member panelist to each hearing panel. A requirement to have a non-Member on each panel could pose a logistical problem, however, if the non-Member panelist is unable to participate in a hearing at the last minute and a non-Member replacement cannot be found in time. If a Member panelist is found to replace the missing panelist, the parties will be asked if they are willing to proceed without a non-Member panelist. If neither a Member nor a non-Member panelist can be found, the parties will be asked if they are willing to proceed with two Member panelists. If they do not agree, the hearing will be continued to a later date. This procedure is currently used when there are problems with the composition of arbitration panels, and it has worked well in that context.
This procedure is also similar to the one used in disciplinary cases when a hearing panelist is unable to participate at the last minute and a replacement cannot be found in time. In that situation, the parties are asked if they are willing to proceed before the other two panelists. Again, this procedure has generally worked well. Therefore, the perception of fairness to be gained from changing the rules to require a non-Member panelist outweigh any logistical problems the requirement may create.
Furthermore, since there would be a non-Member on every disciplinary committee and panel, NFA is eliminating the requirement to have a member who represents a membership category other than the respondent's category, especially since this requirement has created logistical problems on occasion. The amendment does state, however, that NFA should endeavor to appoint hearing panelists with diverse interests. This language is limited to hearing panels since the disciplinary committees already have similar language in the Bylaws creating them and BCC panels can only accept or reject settlement offers.
NFA does not believe that the non-Member should have to chair the proceeding. Although the chairperson of a Hearing Panel can decide certain procedural motions, any motion that could determine the outcome of the proceeding must be decided by the full panel, which will always include a non-Member. Disciplinary committee chairpersons and chairs of BCC panels have even less authority to act on their own. Therefore, requiring the chairperson to be a non-Member would eliminate some highly qualified individuals from the chairperson pool without providing a corresponding benefit to the parties.
II. The Registration and Membership Process
As is true of NFA's disciplinary process, fairness of the registration and membership process is not a practical concern. Virtually all of the same safeguards that protect the fairness and impartiality of the disciplinary process apply to the registration and membership process. NFA Registration Rule 501 provides that no member of the Membership Committee or a Designated Subcommittee of the Membership Committee shall review a registration matter or participate in a registration action if the member, or any person with which the member is connected, has a financial, personal, or other direct interest in the matter. NFA Bylaw 708, which sets minimum eligibility standards for all NFA committee and subcommittee members, prohibits members of the Membership Committee from voting on any matter that is a conflict of interest under CFTC Regulation 1.69.
However, unlike the disciplinary process, there is no requirement that at least one member of the Membership Committee or a Designated Subcommittee be a non-Member of NFA, although in practice the Membership Committee has included a non-Member Director. As currently constituted, the Membership Committee consists of five Directors and four other persons. One of the current nine members is a public director and non-Member of NFA. A second member who is currently an Associate of an NFA Member intends to withdraw that status in the near future.
To accomplish its work, the Membership Committee divides into three-person Designated Subcommittees to conduct hearings and consider settlement offers. To ensure uniformity in treatment of similarly situated applicants, the Membership Committee meets quarterly to review the activities of these designated Subcommittees as well as staff's decisions to register, in accordance with Membership Committee policies, certain applicants who are subject to statutory disqualifications.
NFA proposes to formally adopt provisions requiring participation of persons who are not NFA Members or employees of NFA members in the membership process to avoid the appearance of unfairness. However, immediately requiring one-third of the Membership Committee to be non-Members would require a change in its composition. The current proposal amends Bylaw 701 to require that at least one member of the Membership Committee be a non-Member and amends Registration Rule 501 to require that at least one member of each designated Subcommittee be a non-Member.
These changes will not have an immediate impact on the Membership Committee's composition. The public director member of the Membership Committee and the other member who will soon withdraw his NFA Associate status will be able to provide the necessary representation in the short run. However, it is not realistic to expect that those two persons will be able to sit on every designated Subcommittee over the long term. Moreover, if for no reason other than consistency, eventually requiring that at least one-third of the members of the Membership Committee be non-Members is desirable. The Membership Committee is exploring various options to accomplish this.
III. Other Amendments
NFA Bylaws 701, 702, 704, and 707 authorize the Board to remove members of those committees "whenever in its judgment the best interests of NFA will be served thereby." This language could be read to give the Board authority to remove a committee member merely because the Board does not agree with a BCC determination to file (or not file) a complaint or does not like the decision rendered by the Appeals Committee, a Hearing Panel, or a designated Subcommittee of the Membership Committee. Obviously, the Board has never acted in this manner. In fact, there has not been a single instance where the Board has removed a member of the BCC, Hearing Committee or Membership Committee. Nonetheless, NFA is tightening up the grounds for removal by changing the language from "the best interests of NFA" to "for cause." The "for cause" language would still allow the Board to remove a committee member under appropriate circumstances (e.g., if the member is named as a respondent in a pending NFA or CFTC action, knowingly fails to disclose a clear conflict of interest, or engages in other egregious behavior) but is a more objective standard than "the best interests of NFA."
Several technical amendments to various rules eliminate outdated references to NFA regions and to the terms of the original committee members and include provisions in NFA Bylaw 301, which governs membership proceedings, to make it consistent with the rules governing the registration process.
NFA respectfully requests that the Commission review and approve the proposed amendments to NFA Bylaws 301, 701, 702, 704 and 707, Compliance Rule 3-17 and Registration Rule 501.