Commodity Futures Trading Commission (CFTC) is a federal regulatory agency that was established in 1974 with jurisdiction over commodity futures trading. In 1982, federal legislation established the National Futures Association (NFA), as a self-regulatory organization responsible for the oversight of the futures trading industry, including commodities futures. Commodity futures contracts serve the purpose of the assumption and transference of risk of price changes in the underlying commodities between the current “spot” market prices and future market prices. The parties that utilize commodities futures are producers of commodities, who hedge the risk of future price changes and traders, who speculate for profit on future price changes in commodities. Futures contracts allow for the management of pure and speculative risk scenarios related to changes in the prices of the underlying commodities without the need to take physical delivery of the commodity.
The National Futures Association (NFA) and the Commodities Futures Trading Commission (CFTC) both regulate and assure compliance with commodity futures industry rules and regulations designed to protect its members and the investing public. These regulatory bodies regulate commodities firms in a highly complex industry with a language all its own containing many acronyms unfamiliar even to those within the securities industry. The commodities industry, much like the securities industry, employs a process of arbitration to resolve disputes between customers and members. Our lawyers have significant experience arbitrating NFA claims governed by the NFA Code of Procedure, and we understand the ins-and-outs of the NFA’s practice of quickly moving claims through the NFA arbitration process. Many of our cases involve claims against Introducing Brokers (IB), Futures Commission Merchants (FCM) and their representatives who are guilty of excessive trading/churning, unsuitable investment advice, and misrepresentation and omission of material facts to customers.
Guaranteed Introducing Brokers:
Many Introducing Brokers do not have a long standing history, adequate staffing or the financial resources to meet the recordkeeping and compliance requirements for Independent Introducing Brokers. In these instances, a Guarantee Agreement with a Futures Commission Merchant may be used which allows the introducing broker to conduct business. As a result of the Guarantee Agreement, Guaranteed Introducing Brokers:
- Do not have to meet minimum net capital requirements;
- FCM to Guarantee Agreement to be jointly and severally liable for all IB obligations under the Commodity Exchange Act;
- IB must conduct all of their business with the FCM which guarantees them;
- Must submit promotional material to FCM’s Compliance Department; and
- Do not have financial reporting requirements.
According to the terms of a Guarantee Agreement, should the Guaranteed Introducing Broker become insolvent and dissolved as a going concern, the Futures Commission Merchant is responsible for the obligations, as the guarantor. The significance of the Guarantee Agreement for investors who have sustained account losses that are the result of CFTC rules and regulations violations is they may seek the recovery of these damages from the Futures Commission Merchant through the NFA arbitration or mediation process.
The NFA Arbitration process is generally more expeditious and less costly than litigation. During the arbitration process both parties present their arguments and supporting documentary evidence to a panel that is comprised of impartial arbitrators, trained in the issues in controversy, who decides how the matter should be resolved. A party to the arbitration can represent themselves or retain a lawyer skilled in this particular area of litigation.
The NFA sponsors a mediation process where the parties agree to meet with an unbiased mediator, trained in the topics at issue to find a mutually agreeable solution. NFA offers a mediation alternative during the arbitration process in cases where the total amount of the arbitration claim is less than $150,000. Settling a dispute through mediation can also save the parties considerable time and financial resources.
Our lawyers have represented investors in National Futures Association (NFA) claims against introducing brokers and merchant commission merchants with regard to commodity futures arbitration matters. The cases have included claims for misrepresentations and omissions of material facts, conflicts of interest, excessive trading/churning, unsuitable investment advice and the failure to supervise which result are the cause of account losses due to violations of CFTC federal rules and regulations.
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