Proposed Rule

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Explanation of Proposed Amendments

Increased Dollar Limit for Summary Proceedings

During the last few years, the use of summary proceedings, where one arbitrator decides the case based on the parties' written submissions, have provided important benefits to the parties and NFA. Summary proceedings are easier for NFA to administer and they move through the arbitration process more quickly, saving time and money for NFA and the parties. To illustrate, since 1995, NFA processed cases decided through a summary proceeding five months faster than cases requiring an oral hearing. Additionally, hearing fees for a summary proceeding are lower, which reduces the parties' costs.

In comparing NFA's arbitration rules with the rules of similar forums, NFA staff determined that claim amounts which qualify for summary proceedings at NFA may be unnecessarily low. Since 1992, NFA's cap for a summary proceeding in a customer case has been $10,000, though a party may ask for an oral hearing within 30 days after the last pleading is due if the claim is over $5,000 but not more than $10,000. The procedure is similar for Member cases, though the summary limit is $10,000 without the right to an oral hearing and $20,000 with the option to request an oral hearing. In comparison, the limit for summary proceedings at the NASD is $25,000, though a party or the single arbitrator may request an oral hearing at a lower dollar level.

NFA surveyed its Members and other interested parties on whether NFA should raise the dollar limit for summary proceedings and whether NFA should continue to appoint one arbitrator to these cases. NFA also asked for comments on other issues relating to summary proceedings (e.g., what dollar limit is appropriate).

The vast majority of the commentors and all three NFA Advisory Committees fully supported raising the dollar level for summary proceedings and having one arbitrator decide these cases. The majority of the commentors also suggested that NFA increase the dollar limit for customer cases to $25,000, mainly to be consistent with the NASD and in light of the economic times. For Member cases, the majority, which included the Advisory Committees, recommended $50,000 as the dollar limit. Finally, the majority of the responses indicated that NFA should continue to offer the parties the option of asking for an oral hearing if the claim amount falls into a certain dollar range.

The proposed amendments to Section 9(i) of the Code of Arbitration and Section 9(ii) of the Member Arbitration Rules set for summary proceedings a dollar limit of $25,000 for customer cases and $50,000 for Member cases. The proposed amendments to Section 11(a) of the Code of Arbitration and Member Arbitration Rules provide for low hearing fees for the new dollar limits for summary proceedings.

NFA will continue to appoint one arbitrator to these cases. NFA will also continue to offer the parties the option of asking for an oral hearing if the claim amount is over $5,000 through $25,000 in customer cases and over $10,000 through $50,000 in Member cases. While the majority surveyed favored raising the floors, we believe our approach offers the greatest benefits. Parties in most cases would still have the right to an oral hearing, recognizing the concerns of those commentors who felt the parties should have their "day in court." At the same time, NFA should achieve the goal of increasing the number of summary proceedings.

Having One Arbitrator Decide Oral Cases that Currently Require Three Arbitrators

Presently, customer cases with claims over $10,000 are decided by three arbitrators through an oral hearing. The threshold for a three-arbitrator hearing in Member cases is $20,000. However, NFA believes there are benefits to having more one-arbitrator hearings. Many of our claims are straight-forward and probably could easily be managed by one arbitrator. One-arbitrator hearings are also easier for NFA to administer since there are two less arbitrators for NFA to appoint and two less schedules for NFA to consider when planning the hearing. A one-arbitrator hearing also saves the claimant money since the fees for a one-arbitrator hearing are less than for a three-arbitrator hearing.

The ceiling for one-arbitrator hearings is higher at forums similar to NFA's. For example, the American Arbitration Association appoints one arbitrator to a case, despite the claim amount, unless the parties' arbitration agreement specifies otherwise or the AAA directs that three arbitrators be appointed. In NASD arbitration, one arbitrator decides claims under $50,000 unless a party requests a three-person panel or the single arbitrator asks for two additional arbitrators. Furthermore, the NASD recently launched a two-year pilot program to allow the parties with claims over $50,000 but not over $200,000 to have a single arbitrator hear their cases. Like NFA, the NASD is hoping to lower arbitration fees for the parties and expedite the arbitration process.

The majority of the those surveyed, including the CPO/CTA and IB Advisory Committees, supported NFA having more one-arbitrator oral hearings. The majority suggested that NFA offer this approach for customer cases between $25,000 and $50,000 and for Member cases between $50,000 and $100,000. Furthermore, many of the commentors recommended that NFA offer the parties the option of having three arbitrators. Most of these commentors felt that the party who asked for three arbitrators should pay the additional hearing fees that are required for a three-arbitrator hearing, subject to the arbitrators having the authority to allocate the hearing fees in the award.

The proposed amendments to Section 4(a) of the Code of Arbitration and Section 3(a) of the Member Arbitration Rules allow for one-arbitrator oral hearings for customer cases between $25,000 and $50,000 and for Member cases between $50,000 and $100,000.

NFA intends to give the parties or the single arbitrator the option of asking NFA to appoint three arbitrators in these cases. Under this approach, a party may have a full panel if it wants one and the arbitrator is able to have two other panelists hear the case if he believes the circumstances warrant it.

With regard to additional hearing fees, NFA would have the party who asks for three arbitrators pay the additional fees. However, if the single arbitrator asks NFA to appoint two more arbitrators, then the parties would equally share the increased fees. In both situations, the arbitrators would have the authority to assess the hearing fees in the award.

Allowing Certain Arbitration Filings by Electronic Mail or Facsimile

Over recent years, there has been a growing trend for NFA to accept more filings electronically. For example, NFA accepts disclosure documents and financial reports electronically from Members. Most recently, NFA has permitted respondents in BCC cases to file pleadings electronically with NFA.

As a practical matter, NFA regularly accepts and sends certain filings by facsimile. For example, if NFA receives a motion, like a continuance request, right before the hearing, staff commonly asks the other party to send its response to NFA by facsimile. If the parties' submissions are not too long, staff will then send the motion and response to the arbitrators by facsimile. Faxing documents in this kind of situation expedites the arbitration process and conserves resources for the parties and NFA. NFA also uses e-mail in similar situations, but on a more limited basis.

NFA's proposed amendments adopt an approach similar to that used in NFA's disciplinary process. After the initial pleadings are filed in a case, NFA would accept and serve filings (e.g., letters and motions) in the arbitration process by electronic mail or facsimile. For the time being, the initial pleadings (e.g., Demands, Answers) would be excluded from this procedure because many documents that are included with a pleading are not generally available in electronic form (e.g., account statements, handwritten notes) or are difficult to read if submitted by fax. It is not believed that these issues exist to the same extent with letters and motions since they are usually word processing documents, which are easily and clearly transmitted by e-mail or fax.

The serving of documents by e-mail or fax would be optional in case a party does not have the ability to use these systems. Furthermore, while a party may simultaneously use different service methods (e.g., e-mail to NFA and fax to the other party), the filing party must ensure that the method used means everyone will receive the document on the same day. For example, if a respondent is going to send a letter by e-mail but the claimant does not have e-mail capabilities, then the respondent may e-mail the letter to NFA and fax it to the claimant. That way, the claimant should receive the letter on the same day as NFA.

The proposed amendments to Section 16(b) of the Code of Arbitration and the Member Arbitration Rules provide for the filing of documents via facsimile or electronic mail.

Failure to Comply with Pre-Arbitration Settlement

NFA is establishing a voluntary pre-arbitration mediation service. The proposed amendments to Section 14 of the Code of Arbitration and the Member Arbitration Rules reflect changes that provide for pre-arbitration mediation.

The proposed amendments to Section 10(g) of the Code of Arbitration and Member Arbitration Rules will allow NFA to suspend a Member or Associate who fails to comply with a settlement reached through NFA's new pre-arbitration mediation program. Section 10(g) was further amended to make it more understandable.

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