First Amer. v. Commodity Futures Trading Comm'n.

• Citation: 222 F.3d 1008,343 U.S.App. D.C. 71
• Decision Date: 18 August 2000
• Docket Number: No. 99-1098,99-1098
• Parties: (D.C. Cir. 2000) First American Discount Corporation, Petitioner v. Commodity Futures Trading Commission, Respondent
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1008

222 F.3d 1008 (D.C. Cir. 2000)

First American Discount Corporation, Petitioner v. Commodity Futures Trading Commission, Respondent

No. 99-1098

United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 19, 2000

Decided August 18, 2000

[Copyrighted Material Omitted]

On Petition for Review of an Order of the Commodity Futures Trading Commission

Patrick G. King argued the cause and was on the briefs for petitioner.

C. Maria D. Godel, Attorney, Commodity Futures Trading Commission, argued the cause for respondent. With her on the brief were David R. Merrill and J. Douglas Richards, Deputy General Counsel.

John J. Muldoon, III was on the brief for amicus curiae FCM Coalition for Regulatory Fairness.

Before: Henderson, Randolph, and Garland, Circuit Judges.

Opinion for the Court filed by Circuit Judge Garland.

Separate statement concurring in the judgment filed by Circuit Judge Randolph.

Garland, Circuit Judge:

First American Discount Corporation seeks review of an order of the Commodity Futures Trading Commission (CFTC) holding the company jointly and severally liable for the acts of a commodities broker whose liabilities First American had agreed to guarantee. First American contends that the CFTC regulation pursuant to which it entered into the guarantee agreement is substantively and procedurally invalid, and further argues that the broker's customer waived the benefits of the guarantee. The CFTC rejected these claims, as do we.

I

First American is regulated under the Commodity Exchange Act (CEA) as a "futures commission merchant" (FCM). See 7 U.S.C. S 1a(12).¹ An FCM is the commodity market's equivalent of a securities brokerage house, soliciting and accepting orders for futures contracts and accepting funds or extending credit in connection therewith. See Timothy J. Snider, Regulation of the Commodities Futures and Options Markets S 6.04 (2d. ed. 1997). Prior to 1982, FCMs did business with the public both through their own employees, known as "associated persons," and through loosely affiliated "agents." S. Rep. No. 97-384, at 40 (1982). The main function of many such agents was to procure business for FCMs. See id. at 111. These agents were largely unregistered and unregulated. See id. at 40.

In 1982, the CFTC advised Congress that the number of agents was growing significantly, and that FCMs who used them "have often disavowed any responsibility for violations of the Act by these 'agents.' " Id. The Commission proposed that "each 'agent' of a futures commission merchant be required to register as an associated person of that futures commission merchant." Id. Congress, however, did not adopt the CFTC's recommendation. As the Senate Committee on Agriculture, Nutrition, and Forestry explained:

[T]he Committee felt it would be inappropriate to (1)require these independent business entities to become branch offices of the futures commission merchants through which their trades are cleared or (2) to impose vicarious liability on a futures commission merchant for the actions of an independent entity . Id. at 41. At the same time, Congress acknowledged the need "to guarantee accountability and responsible conduct of such persons," id., who "deal with commodity customers and, thus, have the opportunity to engage in abusive sales practices," id. at 111.

To resolve this dilemma, Congress drafted legislation requiring all persons who solicit or accept customer orders for FCMs to register with the CFTC, but permitting them to register either as "associated persons" of the FCMs, or as part of a new class of registrants called "introducing brokers." Id. at 112. The latter were conceived of as independent entities that solicited and accepted customer orders but used the services of FCMs for clearing, record keeping and retaining customer funds. See id. at 41. To guarantee the accountability of introducing brokers, the Commission was authorized to require them to meet "minimum financial requirements." See id.

The new provisions were enacted as part of the Futures Trading Act of 1982, Pub. L. No. 97-444, 96 Stat. 2294, which amended the CEA. Most significant for our purposes are amended CEA section 1a, 7 U.S.C. S 1a, which creates the category of "introducing brokers,"² and amended section 4f(b), 7 U.S.C. S 6f(b), which directs the CFTC to ensure that every introducing broker "meets such minimum financial requirements as the Commission may by regulation prescribe as necessary to insure his meeting his obligations as a registrant."³ In adopting the latter, the House Conference Report stated:

[T]he conferees contemplate that the Commission will establish financial requirements which will enable [introducing brokers] to remain economically viable, although it is intended that fitness tests comparable to those required of associated persons will also be employed. The intent of the conferees is to require Commission registration of all persons dealing with the public, but to provide registrants with substantial flexibility as to the manner and classification of registration.

H.R. Conf. Rep. No. 97-964, at 41 (1982).

In April 1983, the CFTC responded to Congress' mandate by publishing a notice of proposed rule making setting forth a $25,000 "minimum adjusted net capital requirement" for introducing brokers. 48 Fed. Reg. 14,933, 14,942 (1983) (proposed rule). In addition, those brokers whose capital reserve decreased to less than an "early warning level" of 150% of that amount would, under the proposed rule, be required to notify the CFTC and file monthly financial statements. Id. at 14,951. The capital requirement, therefore, would effectively have been $37,500. See 48 Fed. Reg. 35,248, 35,262 (1983) (final rule). The CFTC stated that requiring introducing brokers to have such a permanent capital base "not only would establish a benchmark of economic viability, but would also be an important element of customer protection." 48 Fed. Reg. at 14,942. The proposed minimum would "provid[e] coverage for potential liabilities arising from business operations, customer relations and the handling of proprietary accounts." Id.

After publication of the notice, the CFTC received numerous comments, including many from the industry contending that the proposed capital requirements were excessive. The CFTC issued its final rule on August 3, 1983. The final rule took the industry's comments into account by reducing the minimum net capital requirement to $20,000 and entirely eliminating the proposed early warning requirement for introducing brokers. See 48 Fed. Reg. at 35,249. In addition, adopting the suggestion of several FCMs, the Commission announced an alternative method for complying with the financial requirement. Under this alternative, an introducing broker may satisfy the requirement without maintaining any net capital of its own, if it enters into a guarantee agreement with an FCM under which the FCM agrees to:

guarantee[ ] performance by the introducing broker of, and ... be jointly and severally liable for, all obligations of the introducing broker under the Commodity Ex-change Act ... with respect to the solicitation of and transactions involving all commodity customer ... ac-counts of the introducing broker entered into on or after the effective date of [the] agreement.

CFTC Form 1-FR-IB (Part B); see 17 C.F.R. S 1.3(nn); 48 Fed. Reg. at 35,249.⁴ The rule became effective on August 3, 1983.⁵

Taking advantage of the alternative compliance mechanism contained in the final rule, First American entered into a guarantee agreement with Wolf Futures Group, Inc., an introducing broker. Pursuant to the new regulations, the agreement stated that First American would be jointly and severally liable for all of Wolf's obligations as an introducing broker under the CEA. See Violette v. First Am. Discount Corp., CFTC Doc. No. 97-R020, 1999 WL 92428, at *3 n.1 (Feb. 24, 1999). Wolf Futures subsequently introduced Gregory Violette to First American to open a commodity futures trading account in Violette's name.

On December 11, 1996, Violette filed a complaint with the CFTC against Wolf Futures and its principal, Scott Allen Wolf [hereinafter referred to collectively as "Wolf"]. On August 31, 1998, a CFTC Judgment Officer found that Wolf had traded Violette's account without written authorization in violation of CFTC Regulation 166.2, 17 C.F.R. S 166.2. See Violette v. First Am. Discount Corp., CFTC Doc. No. 97-R020, 1998 WL 552810 (Aug. 31, 1998). The Officer assessed damages of $13,438.50, plus prejudgment interest and costs. Most significant for our purposes, the Officer held First American jointly and severally "liable for the acts of Wolf by virtue of its status as guarantor." Id. at *23.

First American appealed to the Commission, raising three arguments: (1) that the CFTC regulation providing for guarantor status was contrary to congressional intent and thus invalid; (2) that the regulation was void for lack of proper notice under the Administrative Procedure Act (APA); and (3) that an exculpatory clause in a contract Violette signed with First American overrode the guarantee agreement. The Commission ruled against First American on all three claims and affirmed the decision of the Judgment Officer. See Violette, 1999 WL 92428, at *1. Pursuant to 7 U.S.C. S 18(e), First American petitions this court for review of the Commission's order.

II

First American's initial claim is that the CFTC's final rule, which sets forth minimum capital requirements and permits the alternative of a guarantee agreement, contravenes the 1982 Act. Our analysis of an agency's interpretation of a statute is guided by the two-step framework of Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837, 842-43 (1984). We first ask "whether Congress has directly spoken to the precise question at issue," in which case we "must give effect to the unambiguously expressed intent of Congress." Id. If the "statute is silent or...