Don’t rush to sue NFA! Seek CFTC review first

Entities that target the National Futures Association (NFA) rules and decisions in Court are doomed to fail unless they exhaust all administrative remedies first, including seeking help from the Commodity Futures Trading Commission (CFTC). This is the conclusion to be drawn from the latest efforts of Effex Capital, the entity that was embroiled in FXCM’s exit from the US retail Forex market, to have the NFA publications about its actions and settlements with the broker taken down from the organization’s website.

FinanceFeeds has already reported on the Court’s ruling that the NFA should not change its publications. The precise argumentation has become clear thanks to a Memorandum Opinion and Order signed by Judge Andrea R. Wood of the Illinois Northern District Court late last week.

The document states that the Court sided with the NFA because Effex and its CEO John Dittami failed to exhaust all administrative steps before filing their lawsuit against the NFA. Putting it otherwise, the plaintiffs should have sought help from the CFTC first.

The NFA is a registered futures association that operates as a self-regulatory organization, and is overseen by the CFTC. While the NFA is a private organization, it performs regulatory functions to safeguard the integrity of the derivatives markets that the CFTC would otherwise have to undertake.

This lawsuit arises out of a disciplinary adjudication by the NFA. Effex and Dittami were not themselves the subjects of that adjudication—rather, the NFA was investigating Forex Capital Markets, LLC (FXCM) and its managers, with whom Effex did business.

In February 2017, the NFA and FXCM reached a settlement, under which a penalty was imposed on FXCM. The NFA issued a complaint, decision, narrative, and press release regarding its disciplinary adjudication against FXCM. According to Effex and Dittami, the NFA Publications contained false and defamatory statements regarding Plaintiffs (and their connection to FXCM) and revealed the plaintiffs’ trade secrets. As a result of the NFA Publications, Effex and Dittami claim to have sustained damage to their professional reputations, lost business, and were subjected to several lawsuits.

The Judge noted that the NFA, as a registered futures association, is subject to comprehensive oversight by the CFTC.

“Any action with respect to which a registered futures association is required by paragraph (1) to file notice shall be subject to review by the Commission on its motion, or on application by any person aggrieved by the action. Such application shall be filed within 30 days after the date such notice is filed with the Commission and received by the aggrieved person, or within such longer period as the Commission may determine”.

“Someone seeking CFTC review does not have to sit and wait for the CFTC to make a motion”, the Judge explains.

One of the ways the CFTC can enforce the fairness of the NFA’s rules and procedures is provided in 7 U.S.C. § 21(i)(1), which states that in reviewing “a final disciplinary action taken by a registered futures association against a member thereof or a person associated with a member,” the CFTC evaluates, among other things, whether the association rules “are, and were applied in a manner, consistent with the purposes” of the Commodity Exchange Act.

If the CFTC does not make such a finding, the CFTC may set aside the sanction imposed by the association and, if appropriate, remand the case to the association for further proceedings.

Furthermore, 7 U.S.C. § 21(j) obligates every registered futures association to file with the CFTC copies of any changes in or additions to the rules of the association—the CFTC might disapprove such rules if they are inconsistent with the requirements governing registered futures associations. The CFTC also has authority to abrogate any rule of the association if, “it appears to the Commission that such abrogation is necessary or appropriate to assure fair dealing by the members of such association, to assure a fair representation of its members in the administration of its affairs or effectuate the purposes of this section.”

That is why, the Judge noted that CFTC’s regulations set out several potential avenues for Effex and Dittami to pursue CFTC review of the NFA’s action (and rules). But the plaintiffs have not pursued any of those options.

Whereas the plaintiffs contend that an appeal filed with the CFTC would be futile because the CFTC does not review NFA’s settlements, this does not seem to be the case, the Judge says. While there might not be many instances where settled actions reach the CFTC for review, the CFTC does not appear to have a categorical rule barring such review and indeed has reviewed such actions.