UNITED STATES OF AMERICA 

Before the 

COMMODITY FUTURES TRADING COMMISSION 

CAPITAL MARKET SERVICES LLC 

Office of Proceedings 

Proceedings Clerk 

4:25pm, May 15, 2013 

v. CFTC Docket No. CRAA 09-02 

NATIONAL FUTURES ASSOCIATION OPINION AND ORDER 

Capital Market Services LLC ("CMS'') filed a notice of appeal from a decision by the 

National Futures Association's ("NFA") Telemarketing Procedures Waiver Committee 

("TPWC") denying CMS's request for a full waiver from the enhanced supervisory procedures 

imposed on some NFA member firms under NFA Compliance Rule 2~9. NFA filed a motion to 

dismiss for lack of subject matter jurisdiction~ arguing that its decision is a non~appealable 

regulatory action. CMS opposes NFA's motion to dismiss, arguing that the imposition of 

enhanced supervisory requirements upon it is in effect an appealable disciplinary action or 

alternatively a member responsibility action. The parties' positions are fully set forth in their 

pleadings filed to date and no fut1het· briefing is required. While the parties disagree on how to 

characterize certain facts, there is no dispute as to the operative facts bearing on the 

Commission's jurisdiction in this matter. 

Section 17 of the Commodity Exchange Act ("CEA"), 7 U.S.C. § 21, provides for 

Commission appellate review of certain NF A decisions, as do the Commission's Part 171 Rules, 

17 C.F.R. §§ 171.1-171.50. Appealable decisions include NFA disciplinary actions and member 

responsibility actions. Section 17(h) of the CEA, 7 U.S.C. § 71 (h). CMS does not dispute that 

the TPWC's decision to impose enhanced supervisory requirements on CMS did not occur 
through the NFA's well-established disciplinary and member responsibility procedures. Instead, 

CMS argues that NFA's imposition of enhanced supervisory requirements was effectively a 

disciplinary or member responsibility action that is subject to appeal. The record reveals that 

NF A had an adequate factual basis for imposing enhanced supervision and did so in accordance 

with its rules in a manner that does not appe~· to be a de facto disciplinary action. On this 

record, we find that the TPWC's enhancement of supervision of CMS is neither a de facto 

disciplinary action nor a member responsibility action. Based on this finding, we conclude that 

NFA 's imposition of enhanced supervisory requirements in this case was not an appealable 

decision under the Commodity Exchange Act and the Commission's Part 171 rules. 

Accordingly, we grant NFA's motion to dismiss. 

BACKGROUND 

I. 

NFA is designated as a self-regulatory organization by the CFTC. NFA's responsibilities 

include registration and frontline review of sales practices of its member-registrants. NF A 

requires futures commission merchants such,as CMS to train and properly supervise their sales I 

staff, including registered associated persons ("APs"). NFA's rules require a registrant "to adopt 

supervisory procedures specified by the [NFA Board of Directors] for the supervision of 

telemarketing" when the employment history of the APs hired by the registrant fit certain 

criteria. Compliance Rule 2-9(b) ("Rule 2-9(b)"). See Record ("R.") Tab 14. The NFA's longstanding interpretive statement issued under Rule 2-9(b) specifies the criteria that trigger the 

enhanced supervision requirements and the additional steps that the firm must take in overseeing 

telemarketing. See R. Tab 14, Interpretive Notice 9021. As relevant here, NF A's enhanced 

supervision requirements are triggered when a firm has at least 20 associated persons and at least 

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20 percent' of those APs having previously worked for a "Disciplined Firm." .!d., Interpretive 

Notice 9021, § II(B), at 3-4. An NFA member firm is designated by NFA as a "Disciplined 

Firm'' when: 

1. the firm has been formally charged by either the CFTC or NF A with 

deceptive telemarketing practices or promotional material; 

2. those charges have been resolved; and 

3. the firm has either been permanently barred from the industry at any time 

as a result of those charges or has been sanctioned in any way within the 

preceding five years as a result of those charg~s. 

ld. at 3. Members are advised that the "obligation to adopt the enhanced supervisory 

requirements is conclusively established on any day on which its sales force meets," in 

particular, this 20-percent rule. !d. at 5, n.l. . \ . . . 

II. 

CMS is a registered futures commission merchant and a forex dealer. Prior to October 

14, 2008, CMS employed 16 registered APs. On October 14, 2008, Joseph Kim, a CMS 

compliance officer, entered the registration applications of four newly hired APs into NFA's 

Online Registration System ("ORS"). All formerly were employed by IFX Markets, Inc., a 

Disciplined Firm found liable for sales practice violations. The addition of these four names 

caused CMS to reach the NF A's threshold for enhanced supervision by NF A. That is, as of close 

of business on October 14, 2008, the firm had 20 associated persons and at least 20 percent of its 

APs had previously worked for a Disciplined Firm. 

III . 

. NFA's Rule 2-9 informs NFA's member registrants, including CMS, that NFA may 

request it to "adopt supervisory procedures specified by the Board fol' the supervision of 

telemarketing." R. Tab 14, Rule 2-9 at 1. On October 16, 2008, NF A's Compliance Department 

3 
notified CMS that the firm was subject to enhanced supervisory requirements under NFA's Rule 

2-9. R. Tab 1. These enhanced supervision procedures included making audio records of all 

telephone conversations between CMS APs and existing or prospective customers. /d. In its 

October 16, 2008 notice, NFA staff advised CMS ofthe procedures it was required to 

implement, its right to request that some or all such procedures be waived, and various factors 

considered by NF A in deciding waiver requests. /d. at 2-3. 

CMS applied for a complete waiver from NFA enhanced supervision on November 14, 

2008, arguing that it should not be deemed to have exceeded the 20 percent threshold and that its 

current supervisory programs already satisfied 11most" of the enhanced supervision procedures 

NF A imposed. R. Tab 2. CMS stated that five associated persons were supposed to be added to 

ORS at the same time on October 14, but tha.t Mr. K•im did not enter the fifth name, that of 

Alexandra Shainskaya, on October 14 because he was interrupted by another work task. R. Tab 

2, at 1-2. Mr. Kim entered Ms. Shainskaya1s name into NFA's ORSon the afternoon of October 

. . \ . 

15, 2008. CMS contended that the submission of Ms. Shainskaya1s name on October 15 

resolved any issue with CMS's trigger of the 20-pcrcent threshold on October 14. /d. CMS 

reasoned that Ms. Shainskaya 1 s registration had brought CMS 's total number of APs to 21 1 

placing CMS under the 20 percent threshold. 

CMS contended that Ms. Shainskaya's name was not added to dilute or circumvent the 

20 percent triggering factor under NFA's Rule 2-9 procedures. !d. at 2 (stating that her "AP 

registration has no correlation to the employment of the four APs" from a Disciplined Finn). 

Ms. Shainskaya had worked at CMS since 2~05. /d., at 1. She held the position of business 

development manager. !d. at 2. CMS acknowledged that Ms. Shainskaya'sjob did not require 

registration, but represented that she might need to be registered in the future. !d. CMS 

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maintained that it should not be burdened with heightened supervisory requlrements based on the 

random sequence of data entry, contending that if Ms. Shainskaya' s name had been the first, 

second or third name entered by Mr. Kim the previous day, the enhanced supervisory ... ' 

requirements would not have been triggered. I d. at 2. In its request for a waiver of enhanced 

supervision from NF A, CMS also described in summary fashion its then·current supervisory 

program for monitoring the sales practices of the APs it employed. !d. at 2-3. CMS represented 

to NFA that CMS's supervisory programs "already satisfy most of the requirements of the 

enhanced supervision." ld. at 2-3. 

The NFA's Telemarketing Procedures Waiver Committee (TPWC) is NFA's designated 

decisionmaker for such waiver requests. R. Tab 1 at 2. NFA's Compliance Department 

informed the TPWC that it thought CMS's waiver request should be denied. R. Tab 3. NFA 

Compliance staff reasoned that CMS pierced the 20 percent threshold on October 14, 2008, and 

the fact that the ratio went down the next day with the addition of Ms. Shainskaya's name was 

11immaterial" to the triggering of Rule 2-9 under NF A'$ guidance, protocol. R. Tab 3, at 6. NFA 

Compliance staff also observed that CMS's ong~ing supervision of its APs was not "an entirely 

adequate substitute" for the NF A requirements. /d. at 6-7. 

IV. 

i 

On May 6, 2009, the TPWC issued a decision that relieved CMS of one aspect of the 

NFA's enhanced supervision requirements (the obligation to maintain enhanced net capital), but 

let stand the remaining elements of heightened supervision (including audiotaping of AP phone 

calls with customers). Record Tab 8 (modifying enhanced supervision requirement ofNFA's 

October 16, 2008 notification of enhanced supervisory requirements (Tab 1 )). Specifically, the 

TPWC's decision meant that CMS was required to: 

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• make complete audio recordings of all telephone conversations 

between APs and customers or prospective customers and retain 

these for five years; 

• catalog the recordings by AP and date; have APs maintain a daily 

solicitation log; and 

• file monthly reports with NF A regarding its compliance. 

SeeR. Tabs I, 8. These requirements are forms of enhanced supervision available under NFA's 

Rule 2-9 and associated interpretative guida~ce. R. Tab 14. 

NFA's TPWC addressed and rejected CMS's contention that NFA's decision to enhance 

supervision ofCMS was unfair, concluding that imposition of the requirements was "neither 

inappropriate nor unduly burdensome to CMS's operations as a futures commission merchant 

and forex dealer member." R. Tab 8,. at I. 

v. 

CMS's appeal to the Commission followed on June 10, 2009. R. Tab 9. NFA moved for 

the CFTC to decline to accept the appeal or, in the alternative, to dismiss CMS's appeal. R. Tab 

I 0. NF A also sought a stay in filing a record before the Commission until the Commission 

considered its request to decline to accept the appeal. CMS opposed this Motion to Dismiss. R. 

Tab II. By Order dated July 14, 2009, the ~o~mission denied NFA's request to stay NFA's 

obligation to file the administrative record with the CFTC~ R. Tab .13. 

DISCUSSION 

I. 

The Commission's appellate authority with respect to decisions of registered futures 

associations is set forth in Section 17 of the CEA, 7 U .S.C. § 2 I. The CEA authorizes 

Commission review of final disciplinary ~ctions and membership responsibility actions taken by 

a registered futures association such as NFA. Section 17(h) of the CEA, 7 U.S.C. § 21(h). The 

6 
CEA also sets forth the minimum procedural requirements that NF A must follow in taking such 

actions and the standards of review that the Commission must apply. Section 17(i) of the CEA, 

7 U.S.C. § 21(i). See also Section 17(b)(9) of the CEA, 7 U.S.C. § 2l(b)(9) (requiring the rules 

of a registered futures association to "provide a fair and orderly procedure" with respect to 

disciplinary actions). This statutory authority is implemented through the Commission'sPart 

171 Rules, 17 C.F.R. §§ 171.1M171.50. Rule 171.1(a) limits the Commission's review ofNFA 

decisions to those issued in disciplinary, membership denial, registration and member 

responsibility actions. See 17 C.F.R. §§ 171.2(b), (g), (h) and (I) (defining disciplinary action, 

member responsibility action, membership denial action and registration action). 

The NF A enhanced supervision procedures at issue here are distinct from these 

disciplinary and member responsibility actions. Congress mandated that selfMregulatory 

organizations such as NFA establish special supervisory guidelines. See Section 17(p)(4) of the 

CEA, 7 U.S.C. § 2l(p)(4) (providing that a self~regu1atory association's rules must Include 

. . 

"special supervisory guidelines to protect the public interest relating to the solicitation by 

telephone ... and make such guidelines applicable to those members determined to require such 

guidelines"). In particular, Congress made express that the type of supervisory requirements that 

NF A can impose included enhanced procedures for taping AP phone calls: 

For example, finns which have previously been the subject of 

enforcement actions involving telemarketing or finns whose sales 

force or management structure includes a large percentage of persons 

who previously worked·.for and received training from such finns 

could be required to adopt enhanced supervisory procedures. 

Enhanced procedures could include, for example, the tape recording or 

outside monitoring of all telephone sales solicitations. 

S. Rep. No. 101-191, 1st. Sess. 62 (Nov. 6, 1989). 

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II. 

In moving to dismiss CMS's'appeal, NFA argues that its decision to impose enhanced ., ) 

supervisory requirements on CMS is not within the scope of our appellate jurisdiction. R. Tab 

10 (NFA Motion to Decline Acceptance of Appeal or, in the Alternative, to Dismiss). CMS 

argues in opposition that the imposition of any enhanced supervisory requirements against it is 

the equivalent of an appealable disciplinary action or member responsibility action. R. Tab 12, 

CMS Opposition to Motion to Dismiss at 2. CMS asserts that the TPWC's decision was a 

"narrow concentration on a mere technical error," rendering NFA's action "nothing short of an 

unjust disciplinary action." /d. at 5. Based on facts that are undisputed, we disagree with CMS;. 

First, the TPWC's decision was not overly "narrow" in focusing on the 20 percent 

trigger. The decision ofNFA's TPWC is consistent with NFA's longstanding articulation of the 

conditions under which it places one· of its member ~egistrants under enhanced supervision, ·I 

including exceeding the 20 percent threshold. There is1nothing unjust about the NFA enforcing a 

rule which, under published interpretive guidance, does not give leeway generally for a registrant 

to "unring" the bell by bringing itself back under the 20 percent threshold. NFA's Rule 2-9 

supervisory enforcement procedures are "technical" in the sense that they have an arithmetic 

trigger, but that clarity does not render NFA's appro~ch hypert~chnical, let alone unjust. CMS 

does not dispute that it met the 20 percent threshold- it had a sufficient percentage of APs with a 

history at Disciplined Firms to warrant enhanced supervision- as of close of business on 

October 14, 2008. 1 From all that appears in the record before us, CMS has not presented any 

evidence that NFA applied its published guidance inconsistently, let alone punitively, when NFA 

1 This employment history, under NFA's well-estublish~d guidance, indicated to NFA's TPWC 

that CMS had a potential for sales practice problems based on inadequate or inappropriate 

training or supervision by previous employers. R. Tab 14; NFA Rule 2-9; see 7 U.S.C. § 21(p). 

8 
imposed the requirements on October I 6, 2008, and when the TPWC in part denied CMS's 

waiver request on May 6, 2009. SeeR. Tab 14, Interpretive Guidance at 5 n.1 ("obligation to 

adopt the enhanced supervisory requirements is conclusively established on any day on which its 

sales force meets one ofthe listed numerical criteria") (emphasis added). 

Second, the TPWC decision was not a disciplinary one. A disciplinary action is a 

"proceeding brought by NF A to enforce its rules that may result in expulsion, suspension, ' ' .' 1 

censure, bar from association with a member, fine in excess of $100 or any comparable sanction 

being imposed on a member or a person associated with a member." 17 C.F.R. § 171.2(b). No 

such sanctions have been imposed upon CMS. The automatic triggering of enhanced supervision 

under Compliance Rule 2-9, based on the 20 percent rule, is not a proceeding based on a 

suspected rule violation that may result in a sanction, but a prophylactic measure designed to 

prevent possible future misconduct. Far from being a sanction, NFA's enhanced supervision 

procedures may help registrants avoid sanctions by requiring better supervision of APs. See R. 

Tab 14 (NFA Interpretative Notice explaining that an AP from a Disciplined Firm may have 

"received inadequate or inappropriate training and supervision," including having "learned 

improper sales tactics," and that enhanced supervision is designed to ensure that improper ' ' ' I ' 

training does not "taint their sales efforts"). The enhanced measures are a "supervisory tool used 

to prevent future misconduct, not a disciplinary measure to remediate past misconduct." 

American Financial Corp. v. NFA, [2005-2007 Transfer Binder] Comm. Fut. L. Rep. (CCH) 

~ 30,381 at 58,717,2006 WL 3770772 (CFTC Dec. 21, 2006) (rejecting the claim that a firm's 

placement on the Disciplined Films list is a sanction). 

CMS asserts that NFA's decision was the result of a "mechanical, rigid, and unjustified" 

application ofNFA's "triggering" software. R. Tab 12, at 14 15. That NFA had an internal 

9 

,, 

' 
process to consider a waiver of the enhanced supervisory requirements and in fact the TPWC 

granted partial relief indicates this is not true. Moreover, CMS cannot establish the existence of 

a punitive motive by NF A, where it applied a clear rule to a set of facts to which the rule 

indisputably applies. 

CMS also contends that its supervisory programs already complied with "most" of the 

enhanced supervision requirements. R. Tab 2, at 3. As NFA compliance staff observed, CMS's 

undocumented assertion that it already recorded and monitored its APs' sales communications 

was unaccompanied by any details on the frequency, focus, and duration of such monitoring. R. 

Tab 3, at 6. Moreover, this undocumented assertion, eyen if true, does not establish that the NFA 

action was disciplinary in nature. To the contrary, CMS's position that NFA's approach was 

unduly burdensome to the point of being punitive is undercut by CMS's assertion that it already 

does "most" of what NF A required. 

For these reasons, no appellate review is available to CMS under the Commission's Rules 

for review of disciplinary actions. 17 C.F.R. §§ 171.23(a), 171.30-34.2 

We are also not persuaded by CMS's alternative argument that NFA's imposition of 

enhanced supervisory requirements can be viewed as a member responsibility action under our 

decisions. A member responsibility action requires a finding by NF A that there is reason to 

believe summary action is necessary, r.to protect the markets, and can involve NF A's suspension 

of a party's membership or a requirement that it restricH>perations. 17 C.F.R. § 171.2(g). The 

2 Because we decline jurisdiction, we do not reach the ultimate question whether the TPWC 

abused its discretion in not permitting CMS to avoid aJI enhanced supervisory procedures by, 

after-the-fact, registering Ms. Shainskaya. We do not resolve the factual question of whether 

Ms. Shainskaya,s name was added to the NFA database as an AP to at1empt to undo the Rule 2-9 

trigger or, as CMS insists, for unrelated reasons. A decision not to grant a full waiver based on 

these facts is not a disciplinary decision for the reasons NF A argues persuasively and thoroughly. 

CMS presents no legal authority to suggest that the Commission has ever held othetwise. 

10 
Commission has explained that such membership responsibility actions must comply with the 

. i . i 

procedures in the CEA for other disciplinary proceedings. American Financial Corp. v. NFA, 

[2005-2007 Transfer Binder] Comm. Fut. L. Rep. (CCH) ~ 30,381 at 58,717 n.6, 2006 WL 

3770772 (CFTC Dec. 21, 2006), citing? U.S.C. § 2l(i). CMS does not explain howNFA's 

decision could properly be shoehomed within the language of 17 C.F.R. § 171.2(g). The 

TPWC's discretionary, partial deniill of CMS's request for1;:t waiver of enhanced supervisory 

requirements was not a "summary action" entered on·· an injunctive or emergency basis. See 17 

C.F.R. § 171.2(g). Accordingly, no appellate review is available to CMS under 17 C.P.R. §§ 

171.40-46 (appeals of membership responsibility actions). 

In sum, because NF A has not taken a disciplinary or member responsibility action within 

the meaning of7 U;S.C. § 21 and the Commi.ssion's Part 171 Rules, CMS may not seek 

appellate review before the Commission.3 : ; ' 

III. 

We do not decide whether an NFAsupervisory action could ever be so unjust as to be a 

pretext for a disciplinary action triggering Commission appellate jurisdiction. On this 

administrative record, it is sufficient to find' that there is no evidence that NFA's TPWC acted 

outside of its supervisory enhancement authority or that NFA acted punitively in its imposition 

of enhanced supervisory measures. Accordingly, there is no legal basis for Commission 

3 Because the Commission finds that the NF A action is not appealable, the Commission does not 

reach NFA's further argument that, even if it: were, CMS would first be required to exhaust 

administrative remedies before NF A. See R. Tab 10, at 3-10: NFA takes the position that should 

CMS fail to comply with NF A's enhanced supervi~ory requirements, and be disciplined for 

doing so, then after exhausting administrative remedies before NFA's Business Conduct 

Committee, it could appeal any adverse decision to the Commission. Jd.; see 17 C.F.R. 

§ 171.1 (b)( 1) (excluding from Commission appellate review disciplinary actions where the 

aggrieved party has knowingly failed to pursue its internal right to appeal before NFA). 

11 
appellate review of the merits of the TPWC's discretionary decision not to grant CMS a full 

waiver from enhanced supervision. 

CONCLUSION 

Based on the foregoing, we decline to take jurisdiction of this matter. NFA's motion to 

dismiss CMS's appeal is granted, and this appeal is dismissed. 

! 

IT IS SO ORDERED. 

By the Commission (Chairman GENSLER and Commissioners SOMMERS, CHILTON, 

O'MALIA and WETJEN). 

Mel ssa D. Jurgens 

Secretary of the Com JSSJOn 

Commodity Futures Trading Commission 

Dated: May 15,2013 

. ; 

12 ,.