First American Discount Corporation v. Commodity Futures Trading Commission

1008 in this ease have

Instead, we what DISCOUNT AMERICAN FIRST investiga- a series more than nothing CORPORATION, trades, ultimate- which Broumas’ into tions Petitioner, under- with sufficient SEC the ly provided file to underlying scheme the standing of v. us. Neither before complaint now the TRADING FUTURES COMMODITY said can be petitioners the nor Broumas COMMISSION, Respondent. the way. And along the cleared have been an earlier prosecute failure SEC’s 99-1098. pro- agency from estop the not does stage Appeals, suffi- Court finally accumulated it United States ceeding once Circuit. of Columbia so.26 District to do cient evidence 19, 2000. Jan. Argued Ill 18, 2000. Aug. Decided evidence substantial that We conclude that determination SEC’s the supports viola- Broumas’ abetted aided and

Graham 10(b) Be- 10b-5. and Rule section

tions of upon the solely rested defense

cause Voss’ Graham, uphold we also

exoneration reason- that failed he

SEC’s determination order her. The supervise

ably

SEC

Affirmed. to, of, any given approval or Research, upon & merits 628 F.2d 174 26. See Investors or security any transactions or transaction argument estoppel where (rejecting n. 37 therein...."). evidence the was "no there early violation” all facts learned Cir.1955), (2d SEC, 224 861 v. F.2d In Klein Funds, Capital petitioners); meetings with- held Second by petitioners, the Circuit cited Cir.1965) (8th SEC, 588 348 F.2d Inc. v. examined had an NASD committee after that es- SEC was argument (rejecting viola- markup no and found a broker’s 50% investigated but previously topped because it tion, charging him not sanction could action); F.2d Culpepper, SEC v. took no 241, markup years later two because same Cir.1959) (2d (finding that routine in believ- "justified broker] [the prior review provided "no fact-basis examination markup did violate ing that a 50% the Commission "neither estoppel” because regarded the court Id. at 864. The Rules.” indirectly directly caused staff nor its interpre- as "an determination earlier NASD's it concurred understand defendants broker] [the Rules on of the tation sales”); [subject] G.K. Scott of the legality die no assis- Id. Klein is of reasonably relied.” (“A Co., S.E.C. n. & however, they make petitioners, tance early ac- authority’s to take regulatory failure initial in- the SEC’s reliance on claim of no estoppel against operates as an tion neither event, Circuit any the Second vestigation. violation.”) (internal nor cures later action to ac- limit subsequently appeared to Klein denied, omitted), quotation review NASD, holding that because decision); tions (table (D.C.Cir.1995) cf. act Congress,” it could an "Act of enforces SEC ("No or failure § 78z action U.S.C. acquiesced in” if it had estopped even “be ... administration the Commission was now the one it similar to a transaction to mean chapter be construed shall 270 F.2d at sanctioning. Culpepper, way passed any particular authority has I under regulated (CEA) a “fu- Act Commodity Exchange (FCM). See merchant” tures commission la(12).1 the com- An FCM is 7 U.S.C. of a securities equivalent modity market’s house, accepting and soliciting brokerage accepting and contracts for futures orders credit in connection extending funds or Regula- Timothy and cause King argued the SnideR, Patrick G. J. therewith. Op- petitioner. for the briefs was on and Futures tion of Commodities ed.1997). (2d. Prior § 6.04 MarKets tions Godel, Attorney, Commodi- D. Maria C. public did business with FCMs to Commission, argued Trading ty Futures known employees, their own through both on the With her respondent. cause for through and persons,” as “associated Douglas J. R. Merrill and were David brief S.Rep. 97- No. “agents.” loosely affiliated Richards, General Counsel. Deputy (1982). function of main Muldoon, the brief III on was J. John procure business was to many such agents Regu- FCM Coalition for amicus curiae agents at 111. These id. for FCMs. See latory Fairness. unregulat- unregistered and largely were RANDOLPH, HENDERSON, Before: id. ed. See GARLAND, Judges. Circuit and Congress advised the CFTC by filed Circuit for the Court Opinion agents growing the number Judge GARLAND. who used that FCMs and significantly, responsi- any disavowed them “have often in the concurring Separate statement the Act these bility for violations Judge by Circuit judgment filed ” proposed The Commission ‘agents.’ Id. RANDOLPH. commission ‘agent’ of futures that “each GARLAND, Judge: Circuit register to required be merchant Corporation Discount American commis- that futures person of associated Commodity an order seeks review of however, Congress, Id. sion merchant.” (CFTC) Trading Commission Futures recommenda- adopt CFTC’s did severally jointly and company holding Agri- on Committee tion. As the Senate a commodities broker for the acts of liable Nutrition, culture, Forestry explained: and had liabilities First whose inap- felt would Committee [T]he con- guarantee. agreed (1) indepen- require these propriate to regulation pursuant that the CFTC tends branch entities become dent business into to which it entered mer- futures commission offices of the procedural- substantively and agreement trades are through which their chants invalid, further ly argues liabili- impose vicarious cleared or benefits of waived the customer broker’s merchant commission ty on futures rejected these guarantee. entity. independent of an the actions claims, as do we. acceptance or such solicitation nection with FCM CEA as: 1. The defines securities, orders, money, or accepts any individual, association, partnership, cor- thereof) (or in lieu property extends credit (A) engaged in poration, trust or that — any trades margin, guarantee, or secure accepting soliciting orders or there- or result that result or contracts any commodity for fu- purchase sale of from. subject delivery to the rules on or ture la(12). market; (B) 7 U.S.C. in or in con- any contract time, 41. At Congress Id. at the same brokers] to remain economically via- acknowledged ble, the need “to ac- although it is intended that fitness responsible countability and conduct of comparable tests required to those id., persons,” who “deal with com- persons associated will also be em- and, thus, modity op- customers have the ployed. The intent of the conferees is to portunity engage prac- sales abusive require Commission registration of all tices,” id. at 111. persons dealing public, with the but to dilemma, provide registrants Congress

To resolve this draft- with substantial flex- legislation requiring persons ed all ibility who as to the manner and classification accept solicit or customer orders for FCMs of registration. CFTC, register with the but permitting Rep. 97-964, (1982). H.R. Conf. at 41 register per- them to either as “associated 1983, April In responded the CFTC FCMs, part sons” of or as of a new Congress’ by publishing mandate a notice registrants class of called “introducing proposed of rulemaking setting forth a brokers.” Id. 112. The latter were $25,000 “minimum adjusted net capital re- independent conceived of as entities that quirement” for introducing brokers. accepted and solicited customer orders but 14,933, 14,942 (1983) Fed.Reg. (proposed used the services of for clearing, FCMs rule). addition, those brokers whose keeping record retaining and customer capital reserve decreased to than less an funds. See id. at 41. To “early warning level” of 150% of that brokers, accountability introducing of would, rule, amount proposed under the require authorized to required notify be the CFTC and file them to “minimum require- meet financial monthly 14,- financial statements. Id. at ments.” See id. therefore, capital requirement, 951. The provisions The new part were enacted as $37,500. would effectively have been 1982, Trading of the Futures Act of Pub.L. 35,262 (1983) (final 35,248, Fed.Reg. 97-444, 2294, 96 Stat. which amended rule). The requiring CFTC stated that significant pur- the CEA. Most for our introducing perma- brokers to have such a poses la, are amended CEA section capital only nent base “not would establish la,§ category U.S.C. creates the a benchmark of economic viability, but brokers,”2 “introducing and amended sec- important would also be an element of 4f(b), 6f(b), § tion 7 U.S.C. which directs 14,- protection.” customer Fed.Reg. every the CFTC to ensure that introduc- proposed 942. “pro-. minimum would

ing broker “meets such minimum financial coverage potential vid[e] liabilities requirements may by as the Commission arising operations, from business custom- regulation prescribe necessary as to insure er handling proprie- relations and the meeting his his a regis- as tary accounts.” Id. latter, trant.”3 In adopting the the House Report Conference stated: notice, publication After comments, CFTC received numerous in- contemplate [T]he conferees cluding many industry Commission will from establish financial re- contend- quirements ing proposed which will enable capital requirements [introduc- antee, introducing 2. The statute defines any broker or trades secure or contracts that as: may result or result therefrom. person la(14). any (except § an individual who elects 7 U.S.C. registered to be and is as an associated merchant) person aof futures commission registration 3. The amended statute bars of an engaged soliciting accepting or in orders broker unless the broker meets purchase any commodity or sale of requirements, the CFTC's minimum financial subject delivery for future on or to the rules 6f(b), § see 7 U.S.C. and makes it unlawful any accept contract market who does not engage in business as an securities, (or any money, property ex- such, registered unless as see 7 U.S.C. 6d. thereof) margin, guar- tend credit in lieu principal, Allen Wolf Futures and its Scott its final issued were excessive. 3, collectively The final rule August referred [hereinafter rule on into account comments industry’s a CFTC August took ‘Wolf’]. On capital re- net reducing the minimum by found that Wolf had Judgment Officer entirely eliminat- and quirement to account without written traded Violette’s warning require- early proposed Regula- of CFTC authorization violation 48 Fed. introducing brokers. See ment for 166.2, 166.2. See Violette tion C.F.R. addition, adopting the 35,249. In Reg. Doc. Corp., Am. Discount v. First FCMs, the Commis- suggestion of several No.97-R020, (Aug. 1998 WL method for an alternative announced sion 1998). damages The Officer assessed requirement. complying with the financial interest $13,438.50, plus prejudgment and alternative, bro- Under purposes, significant for our costs. Most without satisfy requirement ker jointly and the Officer held own, if it any capital net maintaining “liable for the acts Wolf severally agreement with into a enters Id. at guarantor.” its status as virtue of agrees to: which the FCM FCM under *23. by the intro- guaranteed performance Commis- appealed of, jointly ... ducing broker (1) sion, that the for, raising arguments: three of the obligations all severally liable providing guarantor regulation under the Commodi- introducing broker CFTC respect ... with ty Exchange congressional Act intent contrary status involving (2) of and transactions invalid; solicitation regulation thus and ... accounts commodity all customer proper for lack notice under was void into entered on introducing broker (APA); Act Procedure the Administrative agree- [the] date of or after the effective exculpatory clause in a that an and ment. First Ameri- Violette signed contract (Part B); 17 1-FR-IB see CFTC Form agreement. guarantee can overrode 35,249.4 1.3(nn); Fed.Reg. § at 48 C.F.R. against First Amer- The Commission ruled August on The rule became effective affirmed ican on all three claims and 1983.5 Judgment Officer. See decision advantage of the alternative Taking Violette, 92428, at *1. Pursuant 1999 WL in the fi- compliance mechanism contained 18(e), peti- to 7 U.S.C. rule, a entered into nal for review of the tions this court Commis- Futures with Wolf sion’s order. Inc., Pur- Group, introducing an broker. regulations, agree- to the new suant II would be ment stated that First American’s initial claim is First severally for all of Wolfs jointly and liable rule, which final sets CFTC’s under obligations introducing broker as requirements and capital forth minimum v. First Am. Dis- the CEA. See Violette 97-R020, guarantee of a permits the alternative Doc. No. Corp., count CFTC 1999). (Feb. 24, at n. the 1982Act. Our agreement, WL *3 contravenes introduced subsequently Futures interpretation Wolf agency’s analysis of Violette to First American Gregory two-step by the frame guided statute is open trading account commodity futures NRDC, Inc. v. U.S.A. work Chevron name. Violette’s 837, 842-43, 104 S.Ct. U.S. (1984). first ask “wheth L.Ed.2d 694 We 11, 1996, filed On December Violette directly spoken to the Congress has against Wolf er complaint with the CFTC inflation, 1996, citing the CFTC raised Introducing register this 5. 4. who under Brokers $30,000. See 61 from option Introduc- the floor are as "Guaranteed known 35,260. 19,177, 19,183 (1996). Fed.Reg. n.31 Fed.Reg. at Brokers.” issue,” in precise at which ease erations and customer question relations.” 48 Fed. 35,264. Reg. unambiguously we “must effect to Congress.” Id. If the expressed intent of Recognizing support the absence of ambiguous “statute is silent or with re position in statutory language, issue,” however, specific we spect to the American asks us to retrace our Chevron step move to the second and must defer to steps step and reconsider by looking one agency’s interpretation long as it is legislative history of the 1982 Act. permissible “based on a construction of the contends, history, appellant That expressly 843, 104 statute.” Id. at S.Ct. guarantee provision bars the at issue here. In support, First American pas- cites the only First American raises a Chev sage Report in the stating Senate that the step argument, contending ron one Committee felt it would be inappropriate guarantee provision “contrary “to require” introducing brokers to become express intent Congress.” First Ameri FCMs, branch offices of impose” or “to perceive can Br. at 7. canWe no such liability vicarious on FCMs for acts of express intent. The 1982 Act authorizes S.Rep. 97-384, introducing brokers. regulations prescribing the CFTC to issue 41. First American contends that requirements” “minimum financial to en is inconsistent with sure that an broker meets “his concern, congressional arguing that it as a registrant.” U.S.C. effectively requires 6f(b). The statute is silent as to what a branch become office of its affiliated be, a financial requirement might FCM, effectively imposes lia- vicarious say certainly does bility on an FCM for the conduct of its not use an FCM’s satisfaction affiliated broker. Instead, requirement. “Congress of that explicitly gap agency has left a to in argument The flaw this is that the fill” express delegation and has made “an guarantee provision does not “require” or authority agency of to the to elucidate “impose” option it is anything: merely an specific provision of the statute [the] introducing that either the broker or the Chevron, 843-44, regulation.” reject. U.S. FCM is free to Rather than seek proceed 104 S.Ct. 2778. We therefore out an for a guarantee, FCM introduc- step satisfy Chevron’s two. instead choose to capital requirement the itself. And an Although American ad- does not by an introducing FCM asked broker for a Chevron, step dress the second the decline, guarantee may simply in- electing analysis CFTC does and we find its com- employees to use its own or work stead pelling. question is whether the indepen- with brokers that can capital requirement, combination of a net satisfy capital dently requirement. supplemented with the alternative of a Accordingly, regulation, under the CFTC’s guarantee, reasonably within the un- falls acceptance liability through the FCM’s term, require- defined “minimum financial choice, voluntary a is which responds ments.” The that CFTC history precludes in nothing legislative impose statute authorizes it to such re- making the CFTC from available. quirements to that an introducing insure But, obligations reg- protests, guar- broker can meet “his as a istrant,” reasonably option. In truly the Commission antee is not is, view, $20,000 explains petitioner’s that the mini- guarantee alternative the CFTC’s capital requirement, way capital requirement high like the a of: mum is so that “(1) Insuring effectively that introducing brokers are brokers are judgment proof; providing sign guarantee agreements. “forced” to It assertedly coverage potential reality liabilities of intro- is this that contravenes ducing arising op- brokers from business both the Senate Committee’s distaste FCMs, finally settling upon a minimum fered for and the upon imposing $20,000. Fed.Reg. contemplation “that Report’s requirement Conference 35,264. financial re- 35,261, And First will establish [introducing will enable that concluding quirements offers no basis for economically viable.” reasonably to remain high brokers] to be requirement is too Rep. 97-964, H.R. Conf. that cus- goal ensuring No. related not rendered moot be- claims are tomers’ legisla- nothing in the statute seeWe judgment are brokers cause however, would foreclose history, tive $13,000 than anything, If the more proof. requirement as $20,000 capital minimum relatively small damages awarded ques- silent on the Both are high.” “too that the facts suggests before us in “minimum case now “minimum” of what the tion Moving contrary. means. are to the requirements” financial two, we also see no step again to Chevron’s $20,000 sum, we conclude the CFTC’s standard upon which ground capital for introduc- requirement minimum impermissible inter- could be viewed as permissible exercise tory brokers term, or even of of that pretation and that regulatory authority, the CFTC’s viable.” phrase, “economically conferees’ permissible for the Commis- equally it is proposed an effective originally entering alternative of provide sion $37,500, cutting it almost requirement agreement with an FCM. into a industry $20,000 considering after half to Indeed, faithful providing option such an has offered no comments. Congress’ direction to substantiate evidence whatsoever “provide registrants substantial is still too claim that a requirement flexibility as to the manner and classifica- introducing brokers to re- to allow high Rep. registration.” tion of H.R. Conf. viable, economically or that it is so main 97-964, at 41. opt for an FCM force them high guarantee.6 Ill Moreover, although it is true that challenge second First American’s history congressional legislative reflects procedural. rule is Peti to the CFTC’s in- viability of that the concern economic guarantee option tioner contends maintained, it also troducing brokers because was should be invalidated the statute Congress’ reflects intent —as subject prior and comment to notice requirements the says financial itself —-that discussed, the final As we have issuance. that an be set at a level that will ensure proposed rulemaking notice of issued “his introducing broker meets 6, 1983, April on stated that 6f(b). § The registrant.” as a U.S.C. 7 $25,000 contemplating a was impose stan- Commission was instructed which, when capital requirement, combined guarantee sufficient “to accountabili- dards proposed “early warning” require with the S.Rep. conduct,” ty responsible No. 97- ment, effectively require would a minimum 384, 41, persons and to “that ensure $37,500. possibility of capital level of commodity trades can- handling orders for option, later offered in the a escape responsibility for their actions not rule, final was mentioned. Petitioner capital,” id. at 112. adequate for lack of publish failure to notice contends this intent congressional Implementing APA, option violated the the CFTC of- of the precisely the was rationale $25,000 net acknowledged SEC had firm to maintain more than 6. The CFTC 14,934 capital.” Fed.Reg. at n.13. The capital 48 a lower net re- established minimum ($5,000) higher introducing noted that its base amount CFTC also quirement for securities however, introducing necessary explained, a brokers brokers. It securi- "because have fewer restrictions introducing required to main- in commodities will broker is ties than the case for higher aggregate on their securi- activities tain indebtedness, 6%% 14,942-43. Id. at require a ties "which such brokers.” could

1015 ry agency responsibility and financial for the activ- generally requires broker”); oppor- days notice of and an thirty least ities of Com- Commodities, the terms or tunity comment on “either ments of Heinold Inc. at 2 proposed rule or a de- that, substance (proposal by registered as an FCM in- subjects and issues scription of capital requirement, to a alternative 553(b); § id. see volved.” U.S.C. carrying permitted FCM should be (d). 553(c), guarantor “stand as a liabilities”); potential broker’s Comments require that ev The law does Services, Inc. at 1 Cargill (sug- Investor proposed in a rule be reis ery alteration gesting long that as as “the FCM remains If that and comment. were sued for notice customer, fully responsible to the there is case, from agency could “learn [introducing no reason for to ful- brokers] only peril at the proposals on its comments ). capital requirement” fill a theOn other rulemaking without subjecting itself to of’ hand, argued it could that a rea- well be Harvester Co. v. end. International sonable commenter would not have Ruckelshaus, 615, 478 F.2d 632 & n. 51 thought guarantee option to comment on a (D.C.Cir.1973); v. see Fertilizer Institute (D.C.Cir.1991); EPA, 1303, only degree since it is different not but 935 F.2d States, requirement Ass’n v. United in kind from a financial de- American Medical (7th Cir.1989). 760, view, 768 & n. 7 887 F.2d nominated in dollars. Under that Instead, required only if renewed notice original the connection between the notice fairly final rule cannot be viewed as guarantee option “simply and the would be proposal. “logical outgrowth” of the initial regarded too tenuous” for the latter to be Task Lead Phase-Down Small “logical outgrowth” as a of the former. Refiner (D.C.Cir. EPA, 506, F.2d Force v. Refiner, Small 705 F.2d at 549. 1983). a “logical outgrowth,” The test for question, We need not resolve this how- a reasonable variously phrased, is whether ever, because failure to re-notice CFTC’s anticipated “should have commenter guarantee option was at best harmless. promulgat would be requirement” reviewing The APA directs courts take ed, id. at or whether the notice was prejudicial “the rule “due account” of parties that “sufficient to advise interested incorporated § 706. error.” 5 U.S.C. “As controverted comments directed to the” APA, into the the harmless error rule re- aspect of the final rule should have been asserting to demon- quires party error Institute, made, 935 F.2d at Fertilizer prejudice from the error.” Air strate DOT, F.3d v. Canada case, In this the outcome of that test is a (D.C.Cir.1998) 706); (citing 5 see U.S.C. question. As we have said relatively close Ass’n v. Steel EPA Mfrs. above, is reason (D.C.Cir.1994) (acknowledging agency’s of minimum finan ably regarded as form provide opportunity failure to for comment in requirement, promulgated cial and was rule, upholding the portion on one of a but that it offered response suggestions be provi- error” rule under APA’s “harmless $25,000 capital as an alternative sion); Egger, Cabais v. The fact requirement originally proposed. (D.C.Cir.1982) (“Even notice n. 4 where that in First American’s shoes — others omitted, a erroneously were and comment is, comment on and that other FCM’s—did need be invahdated regulation or rule not option propose guarantee sug indeed impact.”). Assum- if it has no substantial least, it a gests they, regarded that as provided by the CFTC ing that the notice outgrowth. See Comments of logical insufficient, that First we conclude was (proposal by law Abramson & Fox at 6 a result. prejudice no as American suffered major by futures firm “retained several above, portion As we have discussed carrying that “the commission merchants” objects full of the rule to which First permitted regulato- to assume FCM Wolf, an in primary guaranteeing to the the liabilities of alternative merely an maintaining requirement troducing broker who could not otherwise compliance primary That re- capital. net operated capital. in lack of sufficient have for lawful, and one perfectly quirement to make obligation First American had no an American did have which First upon exchange guarantee, but did so comment. First American opportunity to expect the financial both entities benefits accept the guarantee required was not joint reap arrangement. ed to from their alternative; away turn it was free to Wolf benefits, Having received First those employees or to to use its own and instead heard to attack American will not now be who only with brokers deal regulation that was their source. See capital requirement. That could meet the Federal Power Comm’n v. Colorado Inter did not do so evidences its Co., 492, 502, 75 state Gas 348 U.S. S.Ct. guarantee either that was view (“[Respondent] 99 L.Ed. 583 harmful, it harmful than or that was less attack an cannot now be allowed to official requirement by which it would primary approved merger condition of the while ly abide. The lack of otherwise have had to retaining at the same time all of its bene guarantee on the opportunity to comment fits.”). option therefore cannot be cause for over- turning regulation. the CFTC’s IV concept guar- of a We also note option looking came from FCMs antee challenge First final American’s introducing bro- way both their holding order it liable for the conduct of its an alternative to the kers and themselves exculpa- an introducing broker is based on This indi- capital requirement. minimum tory agreement clause included an that regarded guarantee that cates FCMs signed Violette with First American after beneficial rather as an alternative was Paragraph Wolf introduced the two. 23 of Although harmful to their interests. than two-page, standard-form “Customer is not bound the views Agreement” reads follows: “Customer FCMs, voluntary own deci- of its fellow its hereby any upon waives claim based option adopt guarantee makes sion to guarantee, any, American’s if of Introduc- way. it the regarded clear that it same Broker’s under the Com- the conclusion that This reinforces modity Exchange regula- Act or CFTC rulemaking failure to extend the CFTC’s argues tions.” J.A. at 27. First American provide opportunity for notice and that this immunizes it from liabil- option comment on the ity that would otherwise attach under the best harmless error. signed its Finally, the fact First Amer introducing broker. only by, ican was not harmed but disagrees. It states from, affirmatively

rather benefitted Regulation 1.10(j), its C.F.R. option availability sug of the l.lOCj), permits which gests a for not countenanc second reason satisfy capital requirements procedural claim of error. ing its Under guarantee, an FCM through cannot be estoppel, party the doctrine of “a equitable waived this manner. Whether or not facts, with full knowledge agency’s regulation ques is waivable is transaction, accepts the benefits of con intent, just agency’s tion of the as we tract, statute, regulation, may or order not agency’s in must defer reasonable subsequently position take an inconsistent terpretation statutory the it was of scheme corresponding to avoid or the administer, Servs., FSLIC, so too must we entrusted Kaneb Inc. v. 650 effects.” (5th Cir.1981). Here, 78, give interpretation regulation of its own F.2d the 81 “controlling weight plainly it is er- gave option CFTC First American the unless

1017 that if were ably argues guarantee the regulation.” with the inconsistent roneous or particularly the kind of through Rock & Sand wles v. Seminole Bo waivable— 1215, 410, 414, boilerplate contract at here —that Co., 89 issue 65 S.Ct. 325 U.S. wholly (1945); purpose v. Har would be defeated. See see Christensen 1700 L.Ed. Co., 576,-, 120 Gray Express S.Ct. v. American County, 529 U.S. ris (2000); (D.C.Cir.1984) 1663, 10, Auer 1655, (declining L.Ed.2d 621 ef- Robbins, 117 S.Ct. 519 U.S. in cardmember contract v. fect (1997). 905, 137 effectively L.Ed.2d that have waived cover- would Act); id. at 16

age Billing of Fair Credit (“The protection leg- of consumer rationale interpretation of its The CFTC’s inequalities that plain neither islation is to even out is regulation as non-waivable bargain. reg normally bring consumers with the nor inconsistent ly erroneous by protection rule To allow such to be waived text of the Nothing ulation. plate puts of the contract language waivable. boiler guarantee suggests legislative process to a foolish mandatory form contrary, To the task.”). unproductive by the rule states: required agreement binding and agreement is guarantee “This if Finally, perhaps telling, most even and effect full force is and shall remain in we were to hold with the in accordance unless terminated customer, not even First by waivable rules, promulgated orders regulations or mini- American contends that the CFTC’s respect to such by the with would itself be capital requirement mum 1-FR-IB Form CFTC terminations.” in that manner. See U.S.C. waivable 1.3(nn) (Part B); § (requir 17 C.F.R. see 6f(b) in- (providing registered § that each 1-FR).7 conform to Form ing guarantee to all times contin- troducing broker “shall at per regulations, termination Under require- minimum financial ue to meet” the (with by only) effect prospective mitted Commission). by prescribed ments parties mutual written consent Yet, the one is to hold the other. to hold Commission, by or prompt notice to the clear, guarantee As the rules make notice to the party with written either “in satisfaction is entered into agreement and to the Commission. other capital requirements adjusted net not 1.10(j)(5)(iii). § The rules do C.F.R. introducing broker other- with which the waiver of a custom permit termination per- and thus comply,” would have to wise er, argue American does not and First operate be- mits the broker permit termination which do the events required net minimum level of low the case. occurred (Part B); Form 1-FR-IB capital. CFTC 1.3(nn). Although § Moreover, per- see 17 C.F.R. contends that the CFTC may argues “under- American waiver would mitting customer waived, suggest it does not provided by the protections mine[] Violette, the intro- deregister thereafter agreement.” WL if it cannot muster ducing broker purpose *2. The Commis- cannot capital. But if the Commission coverage for the provide is to sion’s rule broker, permitting waiv- deregister such a and to brokers liabilities the broker effectively permit proof.” er would they “judgment are not ensure that capital requirement 35,264. slip the bonds of the reason- Fed.Reg. (with only) 35,265 (“If prospective if the expire effect guar- Fed.Reg. at 7. See also 48 fails to renew its expire FCM or agreement or is antee does suspend- registration is registration if such provisions with the terminated in accordance ed, revoked, 17 C.F.R. (5), withdrawn. See or remain in effect 1.10(j)(4) it shall 1.10(j)(4)(i)-(ii). agreements can indefinitely.”). Guarantee reasonably “compelled” inter- to enter into the altogether. agreement Wolf.10 countenancing as prets regulations its pur- of their blatant' circumvention pose. V complains that if American even uphold validity regulation We of the interpretation cor nowaiver the CFTC’s guarantee agreements as alter- permitting rect, it apply the Commission to allowing capital requirements, to minimum natives adjudication in this would first time uphold interpreta- and further the CFTC’s agree. There do be unfair.8 We regulation permitting tion of that as not regulation of the language in the nothing Accordingly, waivers. we have customer guar reasonable FCM that suggest to a reversing no ground Commission’s waivable, and the termination antees are and holding jointly order opposite. suggests quite provision severally regulatory liable for the viola- dating back to at least Court decisions tions committed broker. years signed Violette five before petition for review is denied. here, hold that waiver waiver issue agreements purporting to invalidate identi RANDOLPH, Judge, Circuit are unenforcea guarantee agreements cal concurring: contrary purpose ble of the statu See, tory e.g., regulatory framework. I in judgment concur all of Inc., Group Futures No. Skipper v. Index opinion except portion the court’s 91C1624, (N.D.Ill.1995); 1995 WL 493435 Part III holding the Commission’s Krantz, Corp. Resolution Trust v. failure to notice amounted harmless (N.D.Ill.1991).9 89C166, 1991 WL 148291 error.

Moreover, if it were unfair for the even only now to make clear that

CFTC waived,

regulatory requirement cannot be unfair would be at least as to Violette to Indeed, opposite

announce rule. we help irony petition

cannot but note the postal claim

er’s that Violette—a retired “voluntarily” entered into the

worker— boilerplate agreement with First waiver

American, while First itself—a firm-—-was

large brokerage simultaneously actually Cange, 8. This is the second case in which the ulation issue. See 826 F.2d at 596 (Easterbrook, J., concurring) (arguing CFTC has so ruled. The CFTC issued its first "[ujnless opinion subject generally upheld on month earlier. See waivers should McCabe, 97-R053, by regulation”). Clemons v. CFTC Doc. No. ... the CFTC them forbids 29, 1999). Moreover, (Jan. Cange majority opinion sug- WL at *2 gested exculpatory that an waiver signed prior trading to the initiation of would 9. First American cites two cases in which it not be enforceable. See 826 F.2d at 594-95. upheld exculpatory contends courts waiver provisions in contracts between FCMs and customers. See Cotton Co. v. Rothwell Rosen 10.We also note that First American has an Co., (7th agreement thal & 250-51 Cir. indemnification with Wolf that will 1987); Co., Cange permit v. Stotler and 826 F.2d 581 it to recover from the bro- (7th 1987); (Easterbrook, J., Cir. id. at 596 ker in the it is event held liable for the latter’s case, however, concurring). wrongdoing. In neither See Letter from Counsel for 20, 2000). (Jan. regula- there a between an broker, agree- FCM and an and hence in tions authorize such indemnification 35,264. waivability reg- Fed.Reg: neither was the CFTC's ments. See

Case Details

Case Name: First American Discount Corporation v. Commodity Futures Trading Commission

Court Name: Court of Appeals for the First Circuit

Date Published: Aug 18, 2000

Citation: 222 F.3d 1008

Docket Number: 99-1098

Court Abbreviation: 1st Cir.