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Explanation of Proposals
Customer protection is NFA's most important mission, and the effective prosecution of Members who violate NFA rules goes to the heart of that mission. While our current procedures for disciplinary proceedings have served well, NFA recently re-examined these procedures to see if they can be improved by expediting NFA's disciplinary process while continuing to conform to principles of fundamental fairness.
In developing its recommendations, NFA gathered extensive data about the disciplinary process. NFA staff interviewed Compliance Department staff, NFA's enforcement attorneys, the General Counsel, and the Vice President of Compliance about their experiences with, concerns about, and suggestions for improving the process. NFA also interviewed hearing panelists and respondents' attorneys on these same issues. Finally, NFA benchmarked with four outside agencies that both administer and prosecute disciplinary cases: the Chicago Mercantile Exchange, the Illinois Attorney Registration and Disciplinary Commission, NASD Regulation, Inc., and the New York Mercantile Exchange.
NFA found that the most significant source of delay involves the current scheduling process. NFA staff may give certain cases a low priority in scheduling a hearing because the charges are deemed less serious than other cases or because of other conflicting demands on NFA's resources. The amendments adopted by the Board are primarily designed to transfer responsibility for scheduling hearings and managing the hearing process from NFA staff to the chairperson of the hearing panel. The Board believes that these rule amendments will reduce the average time between filing a complaint and issuing a decision while maintaining a fair and even-handed approach to NFA disciplinary proceedings.
Time for Filing Answers
Delays in the hearing process are sometimes caused by staff granting informal extensions of time for respondents to file answers. NFA believes that the process for obtaining extensions should be more formal, that the decision to grant an extension should be taken out of the hands of staff, and that extensions should be granted only for good cause shown.
The amendments to Compliance Rule 3-6 give respondents thirty days to answer the complaint. This period is consistent with other forums and appears adequate for a respondent to conduct a preliminary inquiry and prepare an answer.
The amendments also require respondents who request an extension to do so in a motion and to include reasons for the extension request. The motion would then be decided by the chairperson of the Business Conduct Committee ("BCC") or by another member of the BCC designated by the chairperson.
The amendments to NFA Compliance Rule 3-7 eliminate the requirement that a respondent who files an answer must file a separate request for a hearing. Under NFA's current rules, NFA must prove its case against any respondent who files an answer. If the respondent does not request a hearing, however, the respondent waives its right to present a defense or to cross-examine NFA's witnesses.
At times, respondents file an answer but do not request a hearing because they believe the case will settle. The case then tends to be given a low priority for scheduling. Since the case does not get scheduled for a hearing quickly, the parties have no incentive to settle quickly. And if the case does not settle, time is lost by waiting until settlement talks prove futile before scheduling the hearing.
As a practical matter, NFA has never told a respondent who has filed an answer that it cannot defend at the hearing, even if the respondent has not requested a hearing. Therefore, NFA believes that the process will run more efficiently, and these cases will be heard or settled more quickly, if all cases where an answer has been filed follow the same procedures. Under amended Compliance Rule 3-7, all respondents who have filed answers will be entitled to a full hearing.
NFA will appoint the chairperson of the Hearing Panel immediately after the answer is filed. The chairperson will then be responsible for setting deadlines, scheduling the hearing, and managing the hearing process.
Amended Compliance Rule 3-8(b) provides that the chairperson will hold a pre-hearing conference with the parties within 30 days after the chairperson is appointed. At the pre-hearing conference, which will normally be a teleconference, the chairperson and the parties will set deadlines for conducting discovery and filing pre-hearing motions and will, in most cases, select the hearing date. In a complex case with numerous discovery issues and complex motions, the chairperson may schedule a follow-up pre-hearing conference for setting the hearing date and resolving any remaining pre-hearing issues. Immediately appointing a chairperson and holding an initial pre-hearing conference that involves the parties in setting discovery and motion deadlines and hearing dates should limit the number of extension and continuance requests and expeditiously move the case to resolution through either hearing or settlement.
The amendments to Compliance Rule 3-8 will also give the chairperson the flexibility to manage the process based on a case's own characteristics. The deadlines for completing discovery, filing pre-hearing motions, and exchanging exhibits and witness lists have been eliminated. Eliminating the deadlines from the rules gives the chairperson the authority to set these deadlines at the pre-hearing conference, where the chairperson will have input from the parties.
The amendment to Compliance Rule 3-8(c) authorizes the chairperson to decide most procedural motions. This amendment will expedite the process in two ways. First, if the other two hearing panelists have not yet been appointed, the motion will not have to wait while the appointments are made. Second, it is faster and easier to contact one person than three.
As amended, Compliance Rule 3-8(c) specifically authorizes the chairperson to schedule pre-hearing conferences and hearing sessions and to decide pre-hearing motions concerning discovery, motion deadlines, hearing location, continuances, and requests for telephonic or video testimony. On the other hand, NFA does not believe that a single individual should make directly dispositive decisions or other decisions that might materially affect the outcome of the case, such as pre-hearing motions to exclude evidence. Rule 3-8(c) leaves those decisions to the full hearing panel.
In NFA's experience, respondents often ask for continuances simply to delay the hearing, even though they provide some other ostensible reason for the request. The amendment to Compliance Rule 3-8(d) requires that continuance requests be accompanied by a detailed affidavit. NFA believes this requirement will decrease the number of baseless continuance requests.
Compliance Rule 3-11 has been amended to provide that all settlement offers will go to the hearing panel for decision once a chairperson has been appointed. In most cases, this means that the Business Conduct Committee will rule on pre-answer settlement offers and the hearing panel will rule on post-answer settlement offers. However, if an answer has been filed but a chairperson has not yet been appointed, it will be more efficient to send the offer to the BCC. If the chairperson of the hearing panel has been appointed but the rest of the panel has not, the other two members of the panel will be appointed as quickly as possible when a settlement offer is made so that the offer can be considered by the full panel. Although this may impose a minor delay in ruling on the offer, settlement offers do not tend to be time-sensitive this early in the process. Since a settlement disposes of the case against one or more parties, NFA believes that the decision should be made by the full hearing panel rather than by the chairperson acting alone.
Sanctions for Misconduct
NASD Regulation, Inc. Rule 9280 provides for sanctions against a party when the party or the party's attorney treats the hearing panel or the hearing process with contempt. The panel can, for example, take certain facts as established, strike portions of the pleadings, or prohibit a party from presenting evidence on a particular matter. The panel can also exclude any attorney for any party (including the prosecuting attorney) from the hearing. NFA's Code of Arbitration contains sanctions similar to those in the NASDR rules.
New NFA Compliance Rule 3-18 adopts these same sanctions for NFA disciplinary proceedings. NFA believes that this rule will discourage some of the improper tactics that parties and their attorneys occasionally engage in. Since the sanctions could materially affect the outcome of a case, however, Rule 3-18 requires them to be imposed by a majority of the full hearing panel.
The Board also made several technical amendments to NFA's disciplinary rules to codify current practices. The size of the Hearing Committee makes it an unwieldy decision-maker, and NFA has always treated it simply as a pool to draw hearing panelists from. The technical amendments delete references to the Hearing Committee as a decision-making body.