NATIONAL FUTURES ASSOCIATION
of testimony before the U.S. Senate Committee on Agriculture,
Nutrition and Forestry Subcommittee on Agricultural Research,
birth of the National Futures Association (NFA) was a painful
and arduous process. But it was a must. The authority for such
a self-regulatory body with a mandatory membership requirement—which
had been a primary focus of the futures industry—had been authorized
under Title III of the original CFTC act. Our primary motivation
for its creation was to institute a uniform minimum financial
rule and oversee the vast number of unregulated non-member
Futures Commission Merchants (FCM)—who were not members of
any exchange, received and held customer money but had no supervision
with respect to their finances, and whose ranks were growing
by the day.
that time, the foregoing was considered the financial Achilles
Heel of our industry. The CFTC neither had the resources nor
the know-how to regulate this large number of non-member FCMs.
In addition to assuring that adequate capital requirements
were met, the NFA was also willing to assume a number of other
CFTC regulatory functions which in the opinion of the industry,
the NFA could perform better and cheaper, i.e., regulation
of sales practices, protection of customers funds, examination
and registration of commodity representatives, and arbitration
and reparation procedures.
the concept had opposition not only from members of the futures
industry—who opposed the idea for the creation of another regulatory
policeman—but from some within the CFTC itself who feared the
NFA would usurp its power base. The conflict between these
forces lasted for years. Finally, in 1981, the process moved
forward until the CFTC nearly killed it again. The CFTC sponsored
a proposal for a user fee (a special regulatory transaction
tax) to fund the NFA. The industry was inexorably opposed to
such a tax for many of the same reasons that still apply today.
While the industry was willing to tax itself to fund the NFA,
it was unwilling to do so if it was also to be subject to a
federal transaction tax.
prevailed. On behalf of the industry, I negotiated an agreement
with Majority Leader of the United States Senate, Senator Robert
Dole whereby, in lieu of any federal transaction tax on futures,
the industry would place an NFA charge on each non-member customer
transaction for the purpose of carrying out certain regulatory
functions and relieving the CFTC of those burdens.
I appear before you today to acquaint you with the life of an
entity conceived by the very same body that all of you proudly
represent; a life that today is in your hands and whose future
depends on your decision; a life that represents the hope and
promise for our industry; and a life you sponsored, we devised,
and the Commodity Futures Trading Commission ordained. I speak
of the very short life of the National Futures Association—the
of the NFA occurred in 1974 when the United States Congress adopted
the Commodity Futures Trading Commission Act and provided, under
Title III thereof, for the birth of a new self-regulatory organization
for the commodity futures industry. Two years of incubation followed
the act of conception. The first signs of fertility occurred
in 1976 when a not-for-profit corporation, sponsored by leaders
of our industry and called the National Futures Association,
was registered under the corporate laws of the State of Delaware.
What followed was one of the most difficult periods of gestation
ever recorded in private sector embryology. It was a five year
painful and dangerous pregnancy during which the prognosis for
a healthy birth was often in doubt.
were many who were against its conception from the beginning.
The antagonists from within our industry argued that the NFA
would represent but one more body of regulation in a world already
possessed of too many regulators; that this new organization
could not and would not fairly represent all the diverse sectors
of the industry; that it would be too costly to ourselves; that
it would duplicate functions of the CFTC; and some cynically
asked why we should regulate properly and forcibly in areas where
the CFTC had failed. The antagonists from outside the industry
argued simply that NFA represented a ruse to divert authority
from the CFTC and that no self-regulatory private-sector organization
could be trusted to do a proper job.
there were also protagonists—both from within and outside our
industry—who claimed to be more responsible and farsighted.
They insisted that the NFA could be the potential savior of the
futures industry and of its federal regulatory agency; that it
could save the industry from unnecessary duplicative regulations,
perform regulatory functions in a more proficient manner, relieve
the CFTC of some obligatory burdens so it could better perform
its oversight mandate in areas where it had failed to so do expeditiously,
and that it would prevent the onerous onslaught of those who
proposed a user fee system to defray the cost of regulation.
Aside from these specifics, the protagonists argued that the
NFA was consistent with the banner of self-regulation the futures
industry so proudly hailed for over 100 years of its existence.
protagonists prevailed, and in March 1981, the NFA filed its
application before the CFTC for designation as a futures association
pursuant to Section 17 of the Commodity Exchange Act. As delineated
in the comprehensive application package filed with the CFTC,
NFA was devised to do the following: To effectively police the
futures industry itself as well as those segments operating outside
the system of exchange standards and surveillance; To achieve
better cost control over regulatory expense by eliminating duplication
and conflict between governmental and self-regulatory programs;
and, To facilitate a reduction in the costs of federal regulation
for the benefit of taxpayers in general and market users in particular.
lengthy and exhaustive as well as constructive review process
followed. All went well, and with no small measure of pride,
the CFTC announced the birth of the National Futures Association
on September 22, 1981. The NFA was designated as an official "registered
futures association." At first our industry went into shock.
It had been such a long arduous process we were not fully prepared
for the event. Soon, however, with the realization of parenthood,
preparations for the offspring's well-being began.
progress has been swift and impressive. Since December 15, when
Pat Carlisle was chosen as Acting Executive Director, substantial
sums of money have been committed to the project. The core of
a full-time professional staff was hired to develop programs
and systems for membership qualification, member registration,
FCM financial audits and NFA's professional standards and compliance
programs. The national headquarters of the NFA was opened at
120 South Riverside Plaza in Chicago. An advisory was mailed
to all exchanges and 3,500 futures industry professionals apprising
them of the next immediate stages of NFA formation and the expected
timetable for membership. A plan was formulated to appoint the
first 40-person NFA Board of Directors to represent every segment
of our industry. Additionally, the agenda was prepared for a
full briefing of our industry at the annual Futures Industry
Association (FIA) convention later this week. In short, we are
well on the way to fulfilling our objectives and on target for
meeting the goal of being a significant self-regulatory factor
in our industry by October 1 of this year.
NFA proposes to enhance regulation by assuming the following
obligations: comprehensive FCM audits; introducing broker oversight
and ethical standards; pool operator and trading advisor oversight
and ethical standards; sales practice reviews; options program
oversight of FCMs and introducing brokers; registrations and
fitness standards for industry professionals including sales
personnel; speedy, inexpensive, equitable customer claim procedures;
and enforcement of ethical rules on all industry professionals.
propose an emphasis on self-regulation by the nation's eleven
commodity exchanges through streamlined exchange rule-approval
procedures; streamlined market-designation procedures; giving
exchanges front-line responsibility over speculative limits;
and avoidance of duplicative and redundant programs including
surveillance and enforcement efforts. When implemented, NFA estimates
that it will permit the CFTC to reduce its staff levels by at
least one-third and result in a substantial reduction of its
1983 budget request.
the NFA's very existence is being threatened, even before it
can justify its existence; before it can produce any of the benefits
it was so painfully programmed to perform; before it is even
one year old. Its existence is threatened by the CFTC's recent
decision—supported by the Office of Management and Budget—to
propose a special regulatory tax on all futures market participants
including hedgers and market makers.
I am here to plead for the life of the NFA and to impress upon
you why the enactment of the CFTC tax is unnecessary, unwise,
and incompatible with the premise upon which the NFA was created.
The CFTC's proposed tax would deprive NFA of its funding base,
thereby destroying the underlying reason for its creation (to
absorb some of the regulatory burdens in a cost efficient manner)
and removing the single most effective incentive of a self-regulatory
organization (to prevent duplicative oppressive regulation).
Our industry cannot rationally be expected to pay twice for the
same regulatory process. It would make little sense for our
industry to fund a self-regulatory organization if the CFTC plan
Chairman Johnson, who for many years has been a foremost protagonist
of NFA, was in error when he recently stated "that proponents
arguing abandonment of NFA if a fee system is adopted, are largely
the same people who earlier opposed NFA for other reasons."
I represent one of the seven organizers of NFA who toiled against
bitter odds to give birth to this entity. I am testifying today
to respectfully advise you that we cannot in good conscience
tell our industry members that NFA would represent the same purpose,
the same promise, the same productive result if the CFTC tax
system were imposed.
John Marshall said that "The power to tax involves the power
to destroy." That is clearly the central view of the present
Administration. President Reagan has repeatedly spoken out against
burdensome taxation and its destructive force on the private
sector. Succinctly, he set the tone for the Administration by
declaring in his State of the Union Address that his plan for
recovery is "removing unnecessary regulation to spark productivity."
Moreover, both Republicans and Democrats alike have gone on record
against excessive regulation and have urged self-regulation in
its place wherever possible. A futures transaction tax is not
merely perverse in economic terms and a dangerous incentive for
growth of federal economic regulation, it represents the antithesis
of the agreed-to theme of both the Administration and Congress.
is not an instance where an industry is shirking its responsibilities.
Quite the contrary. The futures industry exemplifies the finest
tradition of participation in the burden of government. We are
prepared, willing, and capable of sharing the regulatory burden
and costs estimated at between 6 to 8 million dollars annually.
That sum will no doubt grow over time. However, we are not prepared
to duplicate these costs.
agree with CFTC Commissioner David Gartner who stated "This organization
[NFA] will be totally funded by the industry to the tune of millions
of dollars annually. And [NFA] will take over many of the functions
performed by the Commission. Having mandated the NFA, I do not
believe . . .that the Commission should place an additional burden
on market user(s) by way of the transaction tax."
a separate document of legislative recommendations, NFA has set
forth many compelling reasons why a transaction tax is indefensible
from the standpoint of economic policy, principles of regulatory
reform and legal/ historical doctrines. This document also contains
recommendations that relate directly to NFA's ability to act
as a self-regulatory unit and its ability to improve the level
and efficiency of regulation at significant cost savings to the
U.S. taxpayer. I respectfully request that this document and
the accompanying complete text of a Futures Trading Regulatory
Improvements Act of 1982 be made a part of the record of
these hearings and be given your most serious consideration.
submit that if NFA were allowed to function and our recommendations
implemented, there would be no reasonable or proper fiscal rationale
for the imposition of a special regulatory tax on futures transactions.
Not only would a significant cost savings to the Federal Government
be accomplished through NFA, not only would the government have
advanced its cause in favor of deregulation and on behalf of
self-regulation, but it would have avoided the danger seen by
Federal Reserve Chairman Volcker when he cautioned "One danger
from . . .the imposition of heavy costs [on organized futures
markets] is that activity will shift to unregulated channels
here and abroad ... ."
is the self-regulatory answer to increased CFTC budget demands
in an era of diminishing federal resources. NFA is an answer
that requires no new taxes and that significantly cuts taxpayer
costs while actually enhancing the level and quality of customer
To this end, NFA makes the following specific recommendations for
Commodity Exchange Act improvements: Provide that NFA can assume
the burden of all registration-related functions under the Act
at no cost to the government; Provide that NFA's uniform, national
arbitration system can effectively supplant the CFTC reparations
system at no cost to the government; Direct the CFTC to achieve
regulatory efficiency and economy by integrating its programs with
private sector programs, avoiding duplication and redundancy and
permitting a substantial reduction in its budget or at least a
major reallocation of its resources; Repeal current CFTC "user
fee" authority hastily adopted in 1978 and replace it with a constitutionally
permissible service fee provision to defray CFTC expenses
which directly benefit particular recipients (for example, subscription
charges, charges for CFTC reports, duplication fees); Prohibit
the imposition of futures trading transactions and related taxes
on a state and local level since such taxes, wherever imposed,
are incompatible with the economic function of futures markets.
respectfully urge that these recommendations be enacted into
law. Detailed supporting analysis is contained in the bluebook
we have submitted to you.
believe that the CFTC's legislative proposals relating directly
to NFA—with the exception of one technical correcting amendment
included in NFA's legislative recommendations—are wholly unnecessary
and are unacceptable substitutes for NFA's recommendations.
In particular, NFA opposes the proposal that the Commission be
empowered to order NFA to perform certain functions relating
to registration, as well as the CFTC's recommendation concerning
agents. We strongly endorse the industry recommendation for
direct regulation of introducing brokers. The NFA program already
calls for this and we believe the Commodity Exchange Act should
should remember that the futures markets of the United States
have long functioned in the interests of both producers and consumers
of agricultural products. There were agricultural futures markets
before the CFTC. The transference of marketplace risks through
futures has contributed to America's enjoyment of a degree of
price stability and an abundance of food products unknown elsewhere.
Indeed, our agricultural industry is the marvel and envy of the
rest of the world.
recent years, financial futures have introduced to the business
community those same or similar benefits available in agriculture.
These benefits are not inconsiderable in a period such as we
live which has witnessed double-digit inflation and extremely
volatile movements in interest rates. Financial futures have
quickly become a valuable and indispensable asset to business
and money managers in our financial community. Indeed, financial
futures are modern-day examples of the validity of the adage
that "necessity is the mother of invention."
should also recall that the futures exchanges of the United States
are among the oldest continuously existing financial institutions
of the Western World. The youngest major exchange is more than
fifty years old while the oldest dates back almost a century
and a half. Few institutions in any field of commerce approach—much
less equal—that record. The longevity of our exchanges is a direct
result of the stern discipline imposed internally by the members
themselves. Long before there was even a suggestion of governmental
oversight for the exchanges, the members were making and enforcing
stringent rules to protect and defend the integrity of the markets.
Those rules have no parallel in other sectors of business. Few
industries can boast—as we can—that no single dollar of the public's
money was ever lost as a result of a failure or insolvency of
an exchange member firm. The NFA is proud to become a part of
this great tradition of self-discipline and self-regulation.
NFA is willing and able to bear its share of the burdens and
costs if just given a chance.
our economic, social, and political systems are already staggering
under the excesses of those who trust government regulation and
distrust freedom. Of late, however, there is a general recognition
that this country and the Congress must move in the direction
of lessening the burdens of regulation. The CFTC's bill—including
its tax plan—is a giant step in the opposite direction. I do
not believe that the members of this Committee will want to add
to the burdens already imposed upon our free and functioning
futures markets by supporting such legislation. It is a measure
that is ill-conceived and ill-considered. If enacted, it could
only have the worst of ill effects.
respectfully urges Congress to reject the CFTC's legislative
and taxing plan. We urge you to choose the NFA alternative instead.
This alternative is the only sensible and certain means to lower
the costs and burdens of federal regulation while at the same
time assuring that the public interest is well protected.
by permission. Excerpted from Melamed on the Markets, by Leo
Melamed. John Wiley & Sons, 1993
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