Proposed Rule

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Currently, parties to an NFA arbitration case are not required to verify or attest to the truth of the information contained in their pleadings. The Illinois courts, however, require parties to certify that the statements in their pleadings are true and correct. Neither NASD nor the Federal Rules of Civil Procedure require that pleadings be verified or accompanied by affidavit, but the Federal Rules do state that by presenting a pleading to a federal court, the filing party is certifying that the pleading is not being presented for any improper purpose, is nonfrivolous, and that the allegations or denials in the pleading have evidentiary support. The Board amended NFA's Code of Arbitration and the Member Arbitration Rules to add attestation requirements, which are similar to the requirements in Illinois state courts and federal courts.

In 2003, a customer filed a complaint with NFA's Compliance Department which eventually resulted in the initiation of a Business Conduct Committee ("BCC") case. Simultaneously, this customer filed a claim form with NFA's Arbitration Department against the same associated person ("AP") and alleging the same conduct as in the BCC complaint. In the disciplinary case, the customer cooperated fully with NFA staff in gathering evidence against the AP for making misleading and deceptive sales solicitations, mistreating the customer when she asked to close her account and failing to provide proper risk disclosure. However, on the eve of trial, and after settling her arbitration claim, the customer sent a letter to NFA stating that she was not willing to testify at the hearing and recanting all of her prior allegations. Had the customer been required to certify or attest to the truth of her statements in her arbitration complaint, NFA may have been able to use those statements as evidence to try the case.

In response to the above case, and to promote more responsible pleading by parties, staff recommended that an attestation be added to the arbitration demand form. These amendments will provide that parties attest to the truth of all pleadings and will make parties think twice about making untrue statements or about recanting statements they verified in good faith. Measures that promote responsible pleadings will produce more efficient arbitration proceedings and enhance the integrity of NFA's arbitration program.

As mentioned earlier, NFA is invoking the "ten-day" provision of Section 17(j) of the Commodity Exchange Act. NFA intends to make the amendments to NFA's Code of Arbitration and Member Arbitration Rules effective ten days after receipt of this submission by the Commission, unless the Commission notifies NFA that the Commission has determined to review the proposal for approval.

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