Appendix A to Part 3 - Interpretative Statement With Respect to Section 8a(2)(C) and (E) and Section 8a(3)(J) and (M) of the Commodity Exchange Act
17:1.0.1.1.3.7.7.1.4 : Appendix A
Appendix A to Part 3 - Interpretative Statement With Respect to
Section 8a(2)(C) and (E) and Section 8a(3)(J) and (M) of the
Commodity Exchange Act Section 8a(2) (C) and (E)
The provisions of sections 8a(2)-8a(4) of the Commodity Exchange
Act (“Act”) establish a system of statutory disqualifications
pursuant to which the Commission may find an applicant or
registrant unfit for registration and vest the Commission with wide
discretion to deny, condition, suspend, restrict or revoke the
registration of any person subject to one or more of the
disqualifications set forth therein. The Commission recognizes that
the full exercise of its authority under these provisions of the
Act may have unintended results. In particular, the exercise of
such authority may, in certain cases, impede the efficient
enforcement of the Act and the various federal and state securities
acts.
At this time, the Commission cannot anticipate all of the
circumstances under which it may elect not to exercise its
authority under sections 8a(2)-8a(4). Until the Commission has
gained experience with these provisions of the Act, such
determinations generally must be made on a case-by-case basis.
Nonetheless, the Commission has identified two paragraphs of
section 8a(2) of the Act which it has determined to interpret more
narrowly than required.
Section 8a(2)(C). Section 8a(2) of the Act authorizes the
Commission to deny, condition, suspend or restrict the registration
of any person “upon notice, but without a hearing” and to revoke
the registration of any person “with such hearing as may be
appropriate,” if such person is subject to one or more of the
disqualifications described in paragraphs (A)-(H). Section 8a(2)(C)
authorizes the Commission to affect the registration of any
person:
“if such person is permanently or temporarily enjoined by order,
judgment, or decree of any court of competent jurisdiction * * * ,
including an order entered pursuant to an agreement of settlement
to which the Commission or any Federal or State agency or other
governmental body is a party, from (i) acting as a futures
commission merchant, introducing broker, floor broker, floor
trader, commodity trading advisor, commodity pool operator,
associated person of any registrant under the Act, securities
broker, securities dealer, municipal securities broker, municipal
securities dealer, transfer agent, clearing agency, securities
information processor, investment advisor, investment company, or
affiliated person or employee of any of the foregoing or (ii)
engaging in or continuing any activity involving any transaction in
or advice concerning contracts of sale of a commodity for future
delivery, concerning matters subject to Commission regulation under
section 4c or 19 of the Act, or concerning securities;”
The Commission believes that a person enjoined from acting in a
certain capacity as described in section 8a(2)(C)(i), even if the
order of injunction is entered into pursuant to an agreement of
settlement, similarly should be prohibited from acting in any other
capacity which requires registration with the Commission.
Therefore, the Commission does not intend to limit its authority
under section 8a(2)(C)(i) of the Act.
However, the Commission is also aware that it has often
initiated proceedings in which the sole relief sought was an
injunction from engaging in certain conduct. In such circumstances,
the Commission has accepted offers of settlement which provide that
the findings set forth in the settlement will not form the sole
basis for the denial, suspension or revocation of such person's
registration with the Commission. The Commission does not wish to
impede the resolution by negotiated settlement of such proceedings.
Therefore, the Commission has determined that it will not exercise
its authority under section 8a(2)(C)(ii) of the Act with respect to
any person temporarily or permanently enjoined by agreement of
settlement from engaging in any conduct described in that
paragraph, if the agreement of settlement clearly restricts the use
of such order of injunction or any findings set forth therein in
subsequent or collateral proceedings.
Thus, a provision in the agreement of settlement to the effect,
inter alia, that the findings set forth in the agreement
will not form the sole basis upon which the registration of
such person may be affected will preclude a collateral proceeding
under section 8a(2)(C)(ii) where the sole basis for such proceeding
is the agreement of settlement. Unless otherwise precluded in the
agreement of settlement, however, the person will be collaterally
estopped from denying the findings set forth therein, whether or
not admitted, in any other subsequent or collateral proceeding and
such findings may, in conjunction with the findings in such
subsequent or collateral proceeding, form a basis for affecting the
registration of that person or imposing such other sanctions as may
be deemed appropriate.
Section 8a(2)(E) of the Act authorizes the Commission to affect
the registration of any person:
If such person, within ten years preceding the filing of the
application or at any time thereafter, has been found in a
proceeding brought by the Commission or any Federal or State agency
or other governmental body, or by agreement of settlement to which
the Commission or any Federal or State agency or other governmental
body is a party, (i) to have violated any provision of this Act,
[the securities acts], chapter 96 of title 18 of the United States
Code, or any similar statute of a State or foreign jurisdiction, or
any rule, regulation, or order under any such statutes, or the
rules of the Municipal Securities Rulemaking Board where such
violation involves embezzlement, theft, extortion, fraud,
fraudulent conversion, misappropriation of funds, securities or
property, forgery, counterfeiting, false pretenses, bribery, or
gambling, or (ii) to have willfully aided, abetted, counseled,
commanded, induced, or procured such violation by any other
person;
As in section 8a(2)(C)(ii), the Commission will not exercise its
authority under section 8a(2)(E) of the Act with respect to any
person subject to a statutory disqualification thereunder, if the
findings are part of an agreement of settlement which clearly
restricts the use of such findings by inclusion of a provision to
the effect, inter alia, that the findings set forth in the
agreement will not form the sole basis upon which the
registration of such person may be affected.
Section 2(a)(1)(A) of the Act, inter alia, codifies the
legal concept of respondant superior by providing that a
futures commission merchant, introducing broker, commodity trading
advisor, commodity pool operator or leverage transaction merchant
may be held liable for the conduct of an associated person
sponsored by such registrant. * Thus, findings of the type
described in paragraph (E) may be entered against a registrant
solely because such registrant is responsible, under section
2(a)(1)(A) of the Act, for the conduct of its associated persons.
As prescribed in § 3.57 of the Commission's regulations, however,
the Commission will not exercise its authority under section
8a(2)(E) to affect the registration of such registrant, if
respondant superior is the sole basis for finding that the
registrant is subject to a statutory disqualification.
* Specifically, section 2(a)(1)(A)(iii) of the Act provides in
part, that the “act, omission or failure of any official, agent, or
other person acting for any individual, association, partnership,
corporation, or trust within the scope of his employment or office
shall be deemed the act, omission, or failure of such individual,
association, partnership, corporation, or trust as well as of such
official, agent, or other person.” 7 U.S.C. 4 (1982).
The Commission notes that section 8a(3)(C) and 8a(4) authorize
the Commission to affect the registration of a person if it is
found, after notice and opportunity for a hearing, that such person
“failed reasonably to supervise another person, who is subject to
such person's supervision, with a view to preventing violations of
this Act or [the securities acts], or of any of the rules,
regulation or orders thereunder, and the person subject to
supervision committed such a violation * * *” In this connection,
the Commission believes that any proceeding to affect the
registration of a registrant against which findings have been made
solely pursuant to section 2(a)(1)(A) of the Act is more
appropriately initiated under the provisions of section 8a(3)(C)
and 8a(4).
Section 8a(2)(E) may also be interpreted to authorize the
Commission to affect the registration of any person if the findings
described therein are made in a proceeding initiated by a private
party either in a court of law or in a reparations proceeding under
section 14 of the Act. At the present time, however, the Commission
does not intend to exercise its authority under section 8a(2)(E) on
the basis of such findings. The Commission believes that such
proceedings are intended primarily to provide restitution to the
customer and are not intended to be punitive in nature. Therefore,
it may not be appropriate to use findings in such proceedings to
affect the registration of any person under section 8a(2)(E).
At the same time, however, such findings may form the basis of a
proceeding against a person under the provisions of section
8a(3)(M) and 8a(4), which authorize the Commission, after notice
and opportunity for a hearing, to deny, condition, suspend,
restrict or revoke the registration of any person if “there is
other good cause.” Similarly, such findings may form the basis for
a proceeding against a registrant under sections 8a(3)(C) and 8a(4)
for the failure of such registrant “reasonably to supervise another
person, who is subject to such person's supervision, with a view to
preventing violations of this Act * * * or of any of the rules,
regulations or orders thereunder * * *” Moreover, because the
Commission views actions by private parties as an important adjunct
to the Commission's own enforcement proceedings, the Commission
intends to monitor carefully decisions in such proceedings and may
amend this interpretation if deemed appropriate.
Section 8a(3) (J) and (M)
Section 8a(3) authorizes the Commission to refuse to register an
applicant for registration if, after notice and opportunity for a
hearing, the applicant is found subject to one or more of the
disqualifications described in paragraphs (A)-(M). Section 8a(4)
authorizes the Commission, after notice and opportunity for a
hearing, to condition, suspend, restrict, or revoke the
registration of any person subject to a disqualification under
section 8a(3).
Section 8a(3)(J) authorizes the Commission to affect the
registration of any person if:
If such person is subject to an outstanding order denying,
suspending, or expelling such person from membership in a contract
market, a registered futures association, any other self-regulatory
organization or any foreign regulatory body that the Commission
recognizes as having a comparable regulatory program, or barring or
suspending such person from being associated with any member or
members of such contract market, association, self-regulatory
organization, or foreign regulatory body.
The Commission interprets the term “self-regulatory
organization” to include, in addition to a contract market and a
registered futures association, any self-regulatory organization as
defined in section 3(a)(26) of the Securities Exchange Act of 1934.
Thus, a self-regulatory organization includes any national
securities exchange, any registered securities association, any
registered clearing agency and the Municipal Securities Rulemaking
Board.
Section 8a(3)(M). Section 8a(3)(M) authorizes the
Commission to affect the registration of any person if “there is
other good cause”. Specifically, the Commission interprets
paragraph (M) to authorize the Commission to refuse to register
such person in any new capacity, if such person, or any principal
of such person, is the subject of an administrative proceeding
brought by the Commission to revoke the existing registration of
such person in any other capacity, pending a final decision in such
administrative proceeding. The Commission believes it would be
inconsistent to register a person in a new capacity, thereby
determining that such person is qualified to be registered, while
simultaneously seeking to revoke such person's registration in a
different capacity because such person's conduct disqualifies him
from registration.
Similarly, the Commission interprets paragraph (M) to authorize
the Commission to refuse to register, register conditionally or
otherwise affect the registration of any person if such person has
consented, in connection with an agreement of settlement with a
contract market, a registered futures association, or any other
self-regulatory organization, to comply with an undertaking to
withdraw all forms of existing or pending registration and/or not
to apply for registration with the National Futures Association or
the Commission in any capacity. Such person's effort to violate his
or her prior undertaking to withdraw from and/or not to apply for
registration shall be considered to constitute “other good cause”
under paragraph (M). The Commission believes that allowing such a
person to be registered would be inappropriate and inconsistent
with the intention of parties to the prior settlement agreement.
The failure to withdraw or the attempt to register in the face of
such an undertaking would indicate the lack of fair and honest
dealing which the Commission believes constitutes “other good
cause” for denying, revoking or conditioning registration under the
Act. The Commission also believes that allowing registration in
such a situation would be inconsistent with both Section 8a(2)(A),
which authorizes the Commission to refuse to register, to register
conditionally, or to revoke, suspend or place restrictions upon the
registration of any person if such person's prior registration has
been suspended (and the period of such suspension has not expired)
or has been revoked, and Section 8a(3)(J), which authorizes the
Commission to refuse to register or to register conditionally any
person if he or she is subject to an outstanding order denying,
suspending, or expelling such person from membership in a contract
market, a registered futures association, or any other
self-regulatory organization.
Good cause to affect a person's registration also exists: (1) If
the operations of such person disrupt or would tend to disrupt
orderly market conditions, or cause or would tend to cause sudden
or unreasonable fluctuations or unwarranted changes in the price of
commodities or contracts for future delivery of commodities or
commodity options; (2) if such person has used or is using in its
name a term such as “board of trade”, “clearing corporation” or
“exchange” in a misleading context, or uses any terms in its
representations to the public which may indicate that the person is
a contract market or a member of a contract market when such is not
the case, or has used or is using a misleading name which would
tend to suggest to the public that the person is affiliated with
another person when that is not the case or that the person is
engaged in a commodity-related business when the person is not in
fact substantially so engaged, or has failed to disclose to the
public an agency relationship with another person when such failure
could mislead the public; (3) if such person is subject to an
outstanding order denying, suspending or revoking the license of
such person by a licensing authority, such as a state real estate
or insurance commission; and (4) if such person has failed to
answer the inquiries or requests for further information concerning
an application for registration filed with the Commission.
This listing, of course, is not exclusive. In general, the
Commission interprets paragraph (M) to authorize the Commission to
affect the registration of any person if, as a result of any act or
pattern of conduct attributable to such person, although never the
subject of formal action or proceeding before either a court or
governmental agency, such person's potential disregard of or
inability to comply with the requirements of the Act or the rules,
regulations or order thereunder, or such person's moral turpitude,
or lack of honesty or financial responsibility is demonstrated to
the Commission.
Any inability to deal fairly with the public and consistent with
just and equitable principles of trade may render an applicant or
registrant unfit for registration, given the high ethical standards
which must prevail in the industry.
The Commission has further addressed “other good cause” under
Section 8a(3)(M) of the Act in issuing guidance letters on
assessing the fitness of floor brokers, floor traders or applicants
in either category:
[First guidance letter] December 4, 1997 Robert K. Wilmouth,
President, National Futures Association, 200 West Madison Street,
Chicago, IL 60606-3447 Re: Adverse Registration Actions with
Respect to Floor Brokers, Floor Traders and Applicants for
Registration in Either Category
Dear Mr. Wilmouth: As you know, the Commission on June 26, 1997,
approved for publication in the Federal Register a Notice and Order
concerning adverse registration actions by the National Futures
Association (“NFA”) with respect to registered floor brokers
(“FBs”), registered floor traders (“FTs”) and applicants for
registration in either category. 62 Fed. Reg. 36050 (July 3, 1997).
The Notice and Order authorized NFA to grant or to maintain, either
with or without conditions or restrictions, FB or FT registration
where NFA previously would have forwarded the case to the
Commission for review of disciplinary history. The Commission has
worked with its staff to determine which of the pending matters
could efficiently be returned to NFA for handling, and such matters
have been forwarded to NFA. The Commission will continue to accept
or to act upon requests for exemption, and the Commission staff
will consider requests for “no-action” opinions with respect to
applicable registration requirements.
By this correspondence, the Commission is issuing guidance that
provides NFA further direction on how it expects NFA to exercise
its delegated power, based upon the experience of the Commission
and the staff with the registration review process during the past
three years. This guidance will help ensure that NFA exercises its
delegated power in a manner consistent with Commission
precedent.
In exercising its delegated authority, NFA, of course, needs to
apply all of the provisions of Sections 8a(2) and (3) of the
Commodity Exchange Act (“Act”). 1 In that regard, NFA should
consider the matters in which the Commission has taken action in
the past and endeavor to seek similar registration restrictions,
conditions, suspensions, denials, or revocations under similar
circumstances.
1 7 U.S.C. 12a(2) and (3) (1994). The letter is intended to
supplement, not to supersede, other guidance provided in the past
to NFA. In this regard, the NFA should continue to follow other
guidance provided by the Commission or its staff.
One of the areas in which NFA appears to have had the most
uncertainty is with regard to previous self-regulatory organization
(“SRO”) disciplinary actions. Commission Rule 1.63 2 provides clear
guidelines for determining whether a person's history of
“disciplinary offenses” should preclude service on SRO governing
boards or committees. 3 In determining whether to grant or to
maintain, either with or without conditions or restrictions, FB or
FT registration, NFA should, as an initial matter, apply the Rule
1.63(a)(6) criteria to those registered FBs, registered FTs and
applicants for registration in either category. However, NFA should
be acting based upon any such offenses that occurred within the
previous five years, rather than the three years provided for in
Rule 1.63(c). NFA should consider disciplinary actions taken by an
SRO as that term is defined in Section 3(a)(26) of the Securities
Exchange Act of 1934 no differently from disciplinary actions taken
by an SRO in the futures industry as defined in Rule 1.3(ee). 4
Application of the Rule 1.63 criteria, as modified, to these
matters will aid NFA in making registration determinations that are
reasonably consonant with Commission views. 5 NFA should focus on
the nature of the underlying conduct rather than the sanction
imposed by an SRO. Thus, if a disciplinary action would not come
within the coverage of Rule 1.63 but for the imposition of a short
suspension of trading privileges (such as for a matter involving
fighting, use of profane language or minor recordkeeping
violations), NFA could exercise discretion, as has the Commission,
not to institute a statutory disqualification case. On the other
hand, conduct that falls clearly within the terms of Rule 1.63,
such as violations of rules involving potential harm to customers
of the exchange, should not be exempt from review simply because
the exchange imposed a relatively minor sanction.
2 Commission rules referred to herein are found at 17 CFR Ch.
I.
3 Rule 1.63(c) provides that a person is ineligible from serving
on an SRO's disciplinary committees, arbitration panels, oversight
panels or governing board if, as provided in Rule 1.63(b), the
person, inter alia: (1) within the past three years has been found
by a final decision of an SRO, an administrative law judge, a court
of competent jurisdiction or the Commission to have committed a
disciplinary offense; or (2) within the past three years has
entered into a settlement agreement in which any of the findings
or, in the absence of such findings, any of the acts charged
included a disciplinary offense.
Rule 1.63(a)(6) provides that a “disciplinary offense” includes:
(i) any violation of the rules of an SRO except those rules related
to (A) decorum or attire, (B) financial requirements, or (C)
reporting or record-keeping unless resulting in fines aggregating
more than $5,000 within any calendar year; (ii) any rule violation
described in subparagraphs (A) through (C) above that involves
fraud, deceit or conversion or results in a suspension or
expulsion; (iii) any violation of the Act or the regulations
promulgated thereunder; or (iv) any failure to exercise supervisory
responsibility with respect to an act described in paragraphs (i)
through (iii) above when such failure is itself a violation of
either the rules of an SRO, the Act or the regulations promulgated
thereunder.
4 Thus, for example, a disciplinary action taken by the Chicago
Board Options Exchange or the National Association of Securities
Dealers, Inc. should be considered in a manner similar to a
disciplinary action of the Chicago Board of Trade or NFA.
5 In reviewing these matters, the NFA should bear in mind recent
Commission precedent which allows for reliance on settled
disciplinary proceedings in some circumstances. See In the
Matter of Michael J. Clark, [1996-1998 Transfer Binder] Comm.
Fut. L. Rep. (CCH) ¶ 27,032 (Apr. 22, 1997) (“other good cause”
under Section 8a(3)(M) of the Act exists based upon a pattern of
exchange disciplinary actions resulting in significant sanctions
for serious rule violations - whether settlements or
adjudications), aff'd sub nom., Clark v. Commodity
Futures Trading Commission, No. 97-4228 (2d Cir. June 4, 1999)
(unpublished).
The Commission has treated the registration process and the SRO
disciplinary process as separate matters involving separate
considerations. The fact that the Commission has not pursued its
own enforcement case in a particular situation does not necessarily
mean that the Commission considers the situation to be a minor
matter for which no registration sanctions are appropriate.
Further, the Commission believes that it and NFA, entities with
industry-wide perspective and responsibilities, are the appropriate
bodies, rather than any individual exchange, to decide issues
relating to registration status, which can affect a person's
ability to function in the industry well beyond the jurisdiction of
a particular exchange. Thus, NFA's role is in no way related to
review of exchange sanctions for particular conduct, but rather it
is the entirely separate task of determining whether an FB's or
FT's conduct should impact his or her registration.
NFA also should look to Commission precedent in selecting
conditions or restrictions to be imposed, such as a dual trading
ban where a person has been involved in disciplinary offenses
involving customer abuse. Where conditions or restrictions are
imposed, or agreed upon, NFA also should follow Commission
precedent, under which such conditions or restrictions generally
have been imposed for a two-year period.
The Commission has required sponsorship for conditioned FBs and
FTs when their disciplinary offenses have involved noncompetitive
trading and fraud irrespective of the level of sanctions imposed by
an SRO. Indeed, but for a sponsorship requirement there would be no
one routinely watching and responsible for the activities of these
registrants. Absent sponsorship, such FBs and FTs would only be
subject to routine Commission and exchange surveillance. The
Commission's rules are premised upon the judgment that requiring
FTs and FBs to have sponsors to ensure their compliance with
conditions is both appropriate and useful. See Rule
3.60(b)(2)(i).
A question has arisen whether, if NFA is required to prove up
the underlying facts of an SRO disciplinary action, the exchanges
can provide information on exchange disciplinary proceedings
directly to NFA. Although Section 8c(a)(2) of the Act states that
an exchange shall not disclose the evidence for a disciplinary
action except to the person disciplined and to the Commission,
Section 8a(10) of the Act allows the Commission to authorize any
person to perform any portion of the registration functions under
the Act, notwithstanding any other provision of law. The effective
discharge of the delegated registration function requires NFA to
have access to the exchange evidence. Thus, the Commission believes
that Section 8a(10) may reasonably be interpreted to allow the
disclosure of information from exchange disciplinary proceedings
directly to NFA despite the provisions of Section 8c(a)(2).
Nothing in the Notice and Order affects the Commission's
authority to review the granting of a registration application by
NFA in the performance of Commission registration functions,
including review of the sufficiency of conditions or restrictions
imposed by NFA, to review the determination by NFA not to take
action to affect an existing registration, or to take its own
action to address a statutory disqualification. Moreover, the
Commission Order contemplates that to allow for appropriate
Commission oversight of NFA's exercise of this delegated authority,
NFA will provide for the Commission's review quarterly schedules of
all applicants cleared for registration and all registrants whose
registrations are maintained without adverse action by NFA's
Registration, Compliance, Legal Committee despite potential
statutory disqualifications.
The Commission will continue to monitor NFA activities through
periodic rule enforcement reviews, and NFA remains subject to the
present requirement that it monitor compliance with the conditions
and restrictions imposed on conditioned and restricted
registrants.
Sincerely,
Jean A. Webb, Secretary of the Commission [Second guidance letter]
April 13, 2000 Robert K. Wilmouth, President, National Futures
Association, 200 West Madison Street, Chicago, IL 60606-3447 Re:
Use of Exchange Disciplinary Actions as “Other Good
Cause” to
Affect Floor Broker/Floor Trader Registration
Dear Mr. Wilmouth:
I. Introduction and Background
In July 1997, the Commission issued a Notice and Order
authorizing the National Futures Association (“NFA”) to grant or to
maintain, either with or without conditions or restrictions, floor
broker (“FB”) or floor trader (“FT”) registration where NFA
previously would have forwarded the case to the Commission for
review of disciplinary history. 1 By letter dated December 4, 1997
(“Guidance Letter”), the Commission provided further direction on
how the Commission expected NFA to exercise its delegated power and
to ensure that NFA exercised its delegated power in a manner
consistent with Commission precedent.
1 Registration Actions by National Futures Association With
Respect to Floor Brokers, Floor Traders and Applicants for
Registration in Either Category, 62 FR 36050 (July 3, 1997).
The Commission has determined to revise the Guidance Letter.
Specifically, the Commission is revising the portion of the
Guidance Letter that addresses the use of exchange disciplinary
actions as “other good cause” to affect FB and FT registrations.
The Commission has made this determination following its own
reconsideration of the issue and at the urging of industry members.
2
2 See letters submitted by James Bowe, former president
of the New York Board of Trade (“NYBOT”), dated October 13, 1999,
Christopher Bowen, general counsel of the New York Mercantile
Exchange (“NYMEX”), dated October 18, 1999, and the Joint
Compliance Committee (“JCC”), dated February 2, 2000. The JCC
consists of senior compliance officials from all domestic futures
exchanges and the NFA (i.e., the domestic self-regulatory
organizations (“SROs”)). In addition, staff from the Contract
Markets Section of the Commission's Division of Swap Dealer and
Intermediary Oversight attend the JCC meetings as observers. The
JCC was established to aid in the development of improved
compliance systems through joint efforts and information-sharing
among the SROs. Commission staff have also discussed this issue
with SRO staff.
The Guidance Letter pointed out that, in exercising its
delegated authority, NFA must apply all of the provisions of
Sections 8a(2) and (3) of the Commodity Exchange Act (“Act”). 3 In
particular, Section 8a(3)(M) of the Act authorizes the Commission
to refuse to register or to register conditionally any person if it
is found, after opportunity for hearing, that there is other good
cause for statutory disqualification from registration beyond the
specifically listed grounds in Sections 8a(2) and 8a(3) of the Act.
The Commission held in In the Matter of Clark that statutory
disqualification under the “other good cause” provision of Section
8a(3)(M) may arise on the basis of, among other things, a pattern
of exchange disciplinary actions alleging serious rule violations
that result in significant sanctions, and that it is immaterial
whether the sanctions imposed resulted from a fully-adjudicated
disciplinary action or an action that was taken following a
settlement. 4
3 7 U.S.C. 12a(2) and (3) (1994).
4 In the Matter of Clark, [1996-1998 Transfer Binder]
Comm. Fut. L. Rep. (CCH) ¶ 27,032 (Apr. 22, 1997), aff'd sub
nom., Clark v. Commodity Futures Trading Commission, No.
97-4228 (2d Cir. June 4, 1999) (unpublished).
The Guidance Letter recommended the application of the
provisions of Commission Rule 1.63 5 as criteria to aid in
assessing the impact of an FB or FT applicant's or registrant's
previous disciplinary history on the person's fitness to be
registered, with the exception that NFA should be acting based on
disciplinary history from the previous five years, rather than the
three years provided for in Rule 1.63. 6 The Guidance Letter also
noted that NFA should consider disciplinary actions taken not only
by futures industry SROs but also those taken by SROs as defined in
Section 3(a)(26) of the Securities Exchange Act of 1934 (“1934
Act”), including settled disciplinary actions.
5 Commission rules referred to in this letter are found at 17
CFR Ch. 1.
6 Rule 1.63 provides, among other things, that a person is
ineligible from serving on SRO disciplinary committees, arbitration
panels, oversight panels or governing boards if that person,
inter alia, entered into a settlement agreement within the
past three years in which any of the findings or, in the absence of
such findings, any of the acts charged included a disciplinary
offense.
Rule 1.63(a)(6) defines a “disciplinary offense” to include:
(i) any violation of the rules of an SRO except those rules
related to (A) decorum or attire, (B) financial requirements, or
(C) reporting or record-keeping unless resulting in fines
aggregating more than $5,000 within any calendar year; (ii) any
rule violation described in subparagraphs (A) through (C) above
that involves fraud, deceit or conversion or results in a
suspension or expulsion; (iii) any violation of the Act or the
regulations promulgated thereunder; or (iv) any failure to exercise
supervisory responsibility with respect to an act described in
paragraphs (i) through (iii) above when such failure is itself a
violation of either the rules of an SRO, the Act or the regulations
promulgated thereunder.
II. Revised Guidance
As stated above, the Commission has determined to revise the
Guidance Letter. From this point forward, NFA should cease using
Rule 1.63 as the basis to evaluate the impact of an FB or FT
applicant's or registrant's disciplinary history on his or her
fitness to be registered. Instead, as Clark stated, when
reviewing disciplinary history to assess the fitness to be
registered of an FB, FT, or applicant in either category, a pattern
of exchange disciplinary actions alleging serious rule violations
that result in significant sanctions will trigger the “other good
cause” provision of Section 8a(3)(M). The “pattern” should consist
of at least two final exchange disciplinary actions, whether
settled or adjudicated.
NFA also should consider initiating proceedings to affect the
registration of the FB or FT, even if there is only a single
exchange action against the FB or FT, if the exchange action was
based on allegations of particularly egregious misconduct or
involved numerous instances of misconduct occurring over a long
period of time. If, however, a proceeding is initiated based on a
single exchange action that was disposed of by settlement, NFA may
have to prove up the underlying misconduct. Furthermore,
traditional principles of collateral estoppel apply to adjudicated
actions, whether they are being considered individually or as part
of a pattern. 7
7 Clark at 44,929.
As provided by the Guidance Letter, “exchange disciplinary
actions” would continue to include disciplinary actions taken by
both futures industry SROs and SROs as defined in Section 3(a)(26)
of the 1934 Exchange Act. Furthermore, NFA should review an
applicant's or registrant's disciplinary history for the past five
years. 8 At least one of the actions forming the pattern, however,
must have become final after Clark was decided by the
Commission on April 22, 1997. Finally, “serious rule violations”
consist of, or are substantially related to, charges of fraud,
customer abuse, other illicit trading practices, or the obstruction
of an exchange investigation.
8 The Commission generally looked at a five-year period of
disciplinary history. On occasion, however, the Commission examined
a longer period of an applicant's or registrant's disciplinary
history. For example, the Commission revoked the registration of
one FB on the basis of exchange disciplinary cases that extended
back six years, see Clark, 2 Comm. Fut. L. Rep. (CCH) ¶
27,032, and denied an application for registration as an FT on the
basis of exchange disciplinary cases that extended back seven
years, see In the Matter of Castellano, [1987-1990 Transfer
Binder] Comm. Fut. L. Rep. (CCH) ¶ 24,360 (Nov. 23, 1988),
summarily aff'd (May 29, 1990), reh. denied
[1990-1992 Transfer Binder] Comm. Fut. L. Rep. ¶ 24,870 (June 26,
1990), aff'd sub nom. Castellano v. CFTC, Docket No. 90-2298
(7th Cir. Nov. 20, 1991).
Congress, the courts and the Commission have indicated the
importance of considering an applicant's history of exchange
disciplinary actions in assessing that person's fitness to
register. 9 Furthermore, NFA's review of exchange disciplinary
actions within the context of the registration process should not
simply mirror the disciplinary actions undertaken by the exchanges.
The two processes are separate matters that involve separate
considerations. As part of their ongoing self-regulatory
obligations, exchanges must take disciplinary action 10 and such
disciplinary matters necessarily focus on the specific misconduct
that forms the allegation. In a statutory disqualification action,
however, NFA must determine whether the disciplinary history of an
FB, FT or applicant over the preceding five years should impact his
or her registration. Additionally, NFA possesses industry-wide
perspective and responsibilities. As such, NFA, rather than an
individual exchange, should decide registration status issues,
since those issues affect an individual's status within the
industry as a whole, well beyond the jurisdiction of a particular
exchange.
9 Letter dated July 14, 1995, from Mary L. Schapiro to R.
Patrick Thompson, President, New York Mercantile Exchange
(unpublished). See also Castellano, supra note 8.
10 See Rule 1.51(a)(7).
The Commission also wants to clarify to the fullest extent
possible that its power to delegate the authority to deny or
condition the registration of an FB, FT, or an applicant for
registration in either category permits exchanges to disclose to
NFA all evidence underlying exchange disciplinary actions,
notwithstanding the language of Section 8c(a)(2) of the Act. 11 The
Commission's power to delegate stems from Section 8a(10) of the
Act, which permits delegation of registration functions, including
statutory disqualification actions, to any person in accordance
with rules adopted by such person and submitted to the Commission
for approval or for review under Section 17(j) of the Act,
“notwithstanding any other provision of law.” Certainly, Section
8c(a)(2) qualifies as “any other provision of law.” Furthermore,
the effective discharge of the delegated function requires NFA to
have access to the exchange evidence. Thus, the exercise of the
delegated authority pursuant to Section 8a(10) permits the
exchanges to disclose all evidence underlying disciplinary actions
to NFA. 12
11 Section 8c(a)(2) states, in relevant part, that “[A]n
exchange * * * shall not disclose the evidence therefor, except to
the person who is suspended, expelled, disciplined, or denied
access, and to the Commission.”
12 Of course, the Commission could request records from the
exchange and forward them to NFA. The Commission believes that this
is an unnecessary administrative process and that NFA should obtain
the records it needs to carry out the delegated function of
conducting disciplinary history reviews directly from the
exchanges. In this context and pursuant to Commission orders
authorizing NFA to institute adverse registration actions, NFA
should be viewed as standing in the shoes of the Commission.
This letter supersedes the Guidance Letter to the extent
discussed above. In all other aspects, the Guidance Letter and
other guidance provided by the Commission or its staff remain in
effect. Therefore, NFA should continue to follow Commission
precedent when selecting conditions or restrictions to be imposed.
For example, NFA should impose a dual trading ban where customer
abuse is involved and any conditions or restrictions imposed should
be for a two-year period. Furthermore, NFA should require
sponsorship for conditioned FBs or FTs when their disciplinary
offenses involve noncompetitive trading and fraud.
Nothing in the Notice and Order or this letter affects the
Commission's authority to review the granting of a registration
application by NFA in the performance of Commission registration
functions, including review of the sufficiency of conditions or
restrictions imposed by NFA, to review the determination by NFA not
to take action to affect an existing registration, or to take its
own action to address a statutory disqualification. Moreover, the
Commission Order contemplates that to allow for appropriate
Commission oversight of NFA's exercise of this delegated authority,
NFA will provide for the Commission's review quarterly schedules of
all applicants cleared for registration and all registrants whose
registrations are maintained without adverse action by NFA's
Registration, Compliance, Legal Committee despite potential
statutory disqualifications.
The Commission will continue to monitor NFA activities through
periodic rule enforcement reviews, and NFA remains subject to the
present requirement that it monitor compliance with the conditions
and restrictions imposed on conditioned and restricted
registrants.
Sincerely,
Jean A. Webb,
Secretary of the Commission. [49 FR 8224, Mar.
5, 1984, as amended at 58 FR 19597, Apr. 15, 1993; 59 FR 5315, Feb.
4, 1994; 61 FR 58628, Nov. 18, 1996; 66 FR 53518, Oct. 23, 2001; 67
FR 62352, Oct. 7, 2002; 78 FR 22419, Apr. 16, 2013]