Regulations - Arbitration And Disciplinary Procedures
Arbitration And Disciplinary Procedures
It is inevitable that someone, somewhere along the line in this complex world of futures markets, is going to err. It may be an honest mistake or it may be flagrant fraud. In either event, the NFA has set procedures to deal with the ensuing disputes.
With all the money flowing through the futures exchanges, all the steps that must be made along the way to demonstrate professional prudence, and all the potential for catastrophic loss, the industry wisely set up an arbitration system to avoid what would otherwise be a torrent of litigation. You, as a Series 3 candidate, need to be familiar with the NFA's procedures for arbitration.
Mandatory arbitration usually stems from customer claims, but can also result from member firms' counterclaims against customers, or even employee complaints against the firm.
Once a claim is filed (within two years of discovery of the alleged wrongdoing), arbitration proceedings take place before an "arbitration panel" convened by the NFA. If the claim does not exceed $50,000, one arbitrator could decide the case. If the claim amount exceeds $50,000, NFA will appoint three arbitrators.
If the aggregate amount of the claim exceeds $25,000, but is not more than $50,000, the NFA can appoint three arbitrators if one of the parties serves a written request. All arbitration panels are appointed by the NFA's secretary and consist of individuals who are NFA members, one of whom is designated as chairperson. Prior to being appointed to the panel, an arbitrator must disclose any circumstances that might prevent her from acting impartially.
A proceeding is initiated by a "notice of intent to arbitrate." This notification can be either written or oral, but must later be substantiated by a more formal "arbitration claim," which also requires a filing fee; these fees currently range from $125 to $5,100, depending on the amount of money in dispute. The NFA then serves a copy of the completed claim on each person named as a "respondent," who must promptly answer the claim.
When claims involving common questions of fact, or arising from the same act or transactions, are received by the NFA, the secretary may order any or all of the proceedings to be "consolidated" for hearing in the interest of providing a fair, equitable and expeditious procedure.
The panel may, at the written request of a party or on its own motion, "dismiss without prejudice" any claim that it determines is not a proper subject for NFA arbitration.
A party may be represented by an attorney at any time throughout the arbitration proceeding.
The parties are expected to cooperate, without resorting to subpoenas, in the voluntary exchange of material and relevant documents and written information. They are further expected to cooperate with the NFA in the formulation of a "hearing plan," which is a written document that summarizes each claim, answer and reply; identifies any facts the parties have agreed to; identifies the factual and legal issues in dispute; and lists the witnesses and exhibits that will be presented at the hearing.
Each party may appear personally at the hearing to testify and produce evidence, present opening and closing arguments, and examine any other party or witness at the hearing and any evidence produced at the hearing.
The Panel must notify the NFA of its decision within 30 days after the record is closed. The NFA then prepares a written award form and serves a copy of the award on each party. The award shall be agreed to by the panel majority. The award may grant or deny any of the monetary relief requested, and may include an assessment of interest, costs or fees. The panel's award shall be final on the date thereof, but the award may be modified by the panel if a party submits a written request for modification that is received by NFA within 20 days from the date of service of the award on the parties, and the Panel deems modification necessary, because of miscalculation of figures or other errors. There is no right of appeal of the award. All parties are bound by the award or any modification.
Any firm doing business on the futures exchanges must have an independent compliance department in place, headed up by a compliance director. Given reason to believe that any NFA requirement is being, has been or is about to be violated, the compliance director must conduct an investigation, then submit a written report of the matter to the NFA's Business Conduct Committee. The report includes:
- the reason the investigation was begun;
- a summary of the complaint, if the investigation was begun as the result of a complaint;
- the relevant facts; and
- the compliance director's conclusion whether the Business Conduct Committee should proceed with the matter.
Upon completing the investigation the compliance director concludes that there is no reason to believe that a violation took place, he would submit a report recommending whether the Business Conduct Committee should issue a warning letter. The report, and any warning letter issued, becomes part of the investigation file, which may then be closed as the compliance director deems appropriate.
A complaint that cannot be dismissed with a warning letter, though, could lead to a report to the Business Conduct Committee that further investigation is necessary, "a service of complaint" to the person charged with a violation, a formal "notice of charges," and eventually a hearing.
In a hearing, the NFA convenes a hearing panel of no fewer than three members, the respondent is notified of the right to counsel, and the respondent is permitted to examine the evidence. After the hearing, the panel comes to a decision based on the charges, the respondent's answer to those charges, a summary of the evidence presented, a statement of findings and conclusions for each allegation, and a declaration of penalties imposed.
An appeal process is available if the respondent files notice of appeal within 15 days of an adverse decision.
Alternately, to avoid the whole unpleasant process, the respondent could submit an offer to settle to the Business Conduct Committee or the panel. The committee or the panel may accept or reject the settlement offer as it deems appropriate.