First Amer Discount v. CFTR ( 2000 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued January 19, 2000 Decided August 18, 2000
No. 99-1098
First American Discount Corporation,
Petitioner
v.
Commodity Futures Trading Commission,
Respondent
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 Corpo-
ration 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 substantive-
ly 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 Ex-
change 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 Timo-
thy 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 employ-
ees, known as "associated persons," and through loosely
__________
1 The CEA defines an FCM as:
an individual, association, partnership, corporation, or trust
that--(A) is engaged in soliciting or in accepting orders for the
purchase or sale of any commodity for future delivery on or
subject to the rules of any contract market; and (B) in or in
connection with such solicitation or acceptance of orders, ac-
cepts any money, securities, or property (or extends credit in
lieu thereof) to margin, guarantee, or secure any trades or
contracts that result or may result therefrom.
7 U.S.C. s 1a(12).
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 Commit-
tee 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 prac-
tices," id. at 111.
To resolve this dilemma, Congress drafted legislation re-
quiring 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 bro-
kers." Id. at 112. The latter were conceived of as indepen-
dent 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 re-
quirements." 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 regis-
trant."3 In adopting the latter, the House Conference Report
stated:
[T]he conferees contemplate that the Commission will
establish financial requirements which will enable [intro-
ducing 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 rulemaking setting forth a
__________
2 The statute defines an introducing broker as:
any person (except an individual who elects to be and is
registered as an associated person of a futures commission
merchant) engaged in soliciting or in accepting orders for the
purchase or sale of any commodity for future delivery on or
subject to the rules of any contract market who does not accept
any money, securities, or property (or extend credit in lieu
thereof) to margin, guarantee, or secure any trades or con-
tracts that result or may result therefrom.
7 U.S.C. s 1a(14).
3 The amended statute bars registration of an introducing
broker unless the broker meets the CFTC's minimum financial
requirements, see 7 U.S.C. s 6f(b), and makes it unlawful to engage
in business as an introducing broker unless registered as such, see 7
U.S.C. s 6d.
$25,000 "minimum adjusted net capital requirement" for in-
troducing brokers. 48 Fed. Reg. 14,933, 14,942 (1983) (pro-
posed 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 "pro-
vid[e] coverage for potential liabilities arising from business
operations, customer relations and the handling of proprie-
tary accounts." Id.
After publication of the notice, the CFTC received numer-
ous 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 intro-
ducing 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 Greg-
ory 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 Au-
gust 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 guar-
antor 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
__________
4 Introducing Brokers who register under this option are
known as "Guaranteed Introducing Brokers." See 48 Fed. Reg. at
35,260.
5 In 1996, citing inflation, the CFTC raised the floor from
$20,000 to $30,000. See 61 Fed. Reg. 19,177, 19,183 n.31 (1996).
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 Commis-
sion'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 ambiguous with respect to the specific
issue," however, we move to the second step and must defer
to the agency's interpretation as long as it is "based on a
permissible construction of the statute." Id. at 843.
First American raises only a Chevron step one argument,
contending that the guarantee provision is "contrary to the
express intent of Congress." First American Br. at 7. We
can perceive no such express intent. The 1982 Act authorizes
the CFTC to issue regulations prescribing "minimum finan-
cial requirements" to ensure that an introducing broker
meets "his obligations as a registrant." 7 U.S.C. s 6f(b).
The statute is silent as to what such a financial requirement
might be, and certainly does not say that the CFTC may not
use an FCM's guarantee in satisfaction of that requirement.
Instead, "Congress has explicitly left a gap for the agency to
fill" and has made "an express delegation of authority to the
agency to elucidate [the] specific provision of the statute by
regulation." Chevron, 467 U.S. at 843-44. We therefore
proceed to Chevron's step two.
Although First American does not address the second step
of Chevron, the CFTC does and we find its analysis compel-
ling. The question is whether the combination of a net
capital requirement, supplemented with the alternative of a
guarantee, reasonably falls within the undefined term, "mini-
mum financial requirements." The CFTC responds that the
statute authorizes it to impose such requirements to insure
that an introducing broker can meet "his obligations as a
registrant," and the Commission reasonably explains that the
guarantee alternative is, like the capital requirement, a way
of: "(1) Insuring that introducing brokers are not judgment
proof; and (2) providing coverage for potential liabilities of
introducing brokers arising from business operations and
customer relations." 48 Fed. Reg. at 35,264.
Recognizing the absence of support for its position in the
statutory language, First American asks us to retrace our
Chevron steps and reconsider step one by looking at the
legislative history of the 1982 Act. That history, appellant
contends, expressly bars the guarantee provision at issue
here. In support, First American cites the passage in the
Senate Report stating that the Committee felt it would be
inappropriate "to require" introducing brokers to become
branch offices of FCMs, or "to impose" vicarious liability on
FCMs for acts of introducing brokers. S. Rep. No. 97-384, at
41. First American contends that the guarantee provision is
inconsistent with this congressional concern, arguing that it
effectively requires an introducing broker to become a branch
office of its affiliated FCM, and effectively imposes vicarious
liability on an FCM for the conduct of its affiliated introduc-
ing broker.
The flaw in this argument is that the guarantee provision
does not "require" or "impose" anything: it is merely an
option that either the introducing broker or the FCM is free
to reject. Rather than seek out an FCM for a guarantee, an
introducing broker may instead choose to satisfy the capital
requirement itself. And an FCM asked by an introducing
broker for a guarantee may simply decline, electing instead to
use its own employees or to work with introducing brokers
that can independently satisfy the capital requirement. Ac-
cordingly, under the CFTC's regulation, the FCM's accep-
tance of liability through the guarantee is a voluntary choice,
which nothing in the legislative history precludes the CFTC
from making available.
But, First American protests, the guarantee provision is
not truly an option. In petitioner's view, the CFTC's $20,000
minimum capital requirement is so high that introducing
brokers are effectively "forced" to sign guarantee agree-
ments. It is this reality that assertedly contravenes both the
Senate Committee's distaste for imposing obligations upon
FCMs, and the Conference Report's contemplation "that the
Commission will establish financial requirements which will
enable [introducing brokers] to remain economically viable."
H.R. Conf. Rep. No. 97-964, at 41.
We see nothing in the statute or legislative history, howev-
er, that would foreclose a $20,000 minimum capital require-
ment as "too high." Both are silent on the question of what
the "minimum" in "minimum financial requirements" means.
Moving again to Chevron's step two, we also see no ground
upon which the CFTC's standard could be viewed as an
impermissible interpretation of that term, or even of the
conferees' phrase, "economically viable." The CFTC original-
ly proposed an effective requirement of $37,500, cutting it
almost in half to $20,000 after considering industry comments.
First American has offered no evidence whatsoever to sub-
stantiate its claim that a $20,000 requirement is still too high
to allow introducing brokers to remain economically viable, or
that it is so high as to force them to opt for an FCM
guarantee.6
__________
6 The CFTC acknowledged that the SEC had established a
lower minimum net capital requirement ($5,000) for securities intro-
ducing brokers. It explained, however, that a securities introducing
broker is required to maintain the higher of $5,000 or 62/3% of
aggregate indebtedness, "which could require such a firm to main-
tain more than $25,000 of net capital." 48 Fed. Reg. at 14,934 n.13.
The CFTC also noted that its higher base amount was necessary
"because introducing brokers in commodities will have fewer re-
strictions on their activities than is the case for securities introduc-
ing brokers." Id. at 14,942-43.
Moreover, although it is true that the legislative history
reflects congressional concern that the economic viability of
introducing brokers be maintained, it also reflects Congress'
intent--as the statute itself says--that the financial require-
ments be set at a level that will ensure that an introducing
broker meets "his obligations as a registrant." 7 U.S.C.
s 6f(b). The Commission was instructed to impose standards
sufficient "to guarantee accountability and responsible con-
duct," S. Rep. No. 97-384, at 41, and to ensure "that persons
handling orders for commodity trades cannot escape responsi-
bility for their actions for lack of adequate capital," id. at 112.
Implementing this congressional intent was precisely the
rationale the CFTC offered for finally settling upon a mini-
mum requirement of $20,000. See 48 Fed. Reg. at 35,261,
35,264. And First American offers no basis for concluding
that such a requirement is too high to be reasonably related
to the goal of ensuring that customers' claims are not ren-
dered moot because introducing brokers are judgment proof.
If anything, the more than $13,000 in damages awarded in the
relatively small case now before us suggests that the facts are
to the contrary.
In sum, we conclude that the $20,000 minimum capital
requirement for introductory brokers is a permissible exer-
cise of the CFTC's regulatory authority, and that it is equally
permissible for the Commission to provide the alternative of
entering into a guarantee agreement with an FCM. Indeed,
providing such an option is faithful to Congress' direction that
the CFTC "provide the registrants with substantial flexibility
as to the manner and classification of registration." H.R.
Conf. Rep. No. 97-964, at 41.
III
First American's second challenge to the CFTC's rule is
procedural. Petitioner contends that the guarantee option
should be invalidated because it was not subject to notice and
comment prior to final issuance. As we have discussed, the
notice of proposed rulemaking issued by the CFTC on April
6, 1983, stated that the Commission was contemplating a
$25,000 capital requirement, which, when combined with the
proposed "early warning" requirement, would effectively re-
quire a minimum capital level of $37,500. The possibility of a
guarantee option, later offered in the final rule, was not
mentioned. Petitioner contends that this failure to publish
notice of the guarantee option violated the APA, which gener-
ally requires an agency to give at least thirty days notice of
and an opportunity to comment on "either the terms or
substance of the proposed rule or a description of the subjects
and issues involved." 5 U.S.C. s 553(b); see id. s 553(c), (d).
The law does not require that every alteration in a pro-
posed rule be reissued for notice and comment. If that were
the case, an agency could "learn from the comments on its
proposals only at the peril of" subjecting itself to rulemaking
without end. International Harvester Co. v. Ruckelshaus,
478 F.2d 615, 632 & n.51 (D.C. Cir. 1973); see Fertilizer Inst.
v. EPA, 935 F.2d 1303, 1311 (D.C. Cir. 1991); American
Medical Ass'n v. United States, 887 F.2d 760, 768 & n.7 (7th
Cir. 1989). Instead, renewed notice is required only if the
final rule cannot fairly be viewed as a "logical outgrowth" of
the initial proposal. Small Refiner Lead Phase-Down Task
Force v. EPA, 705 F.2d 506, 547 (D.C. Cir. 1983). The test
for a "logical outgrowth," variously phrased, is whether a
reasonable commenter "should have anticipated that such a
requirement" would be promulgated, id. at 549, or whether
the notice was "sufficient to advise interested parties that
comments directed to the" controverted aspect of the final
rule should have been made, Fertilizer Inst., 935 F.2d at
1312.
In this case, the outcome of that test is a relatively close
question. As we have said above, the guarantee agreement is
reasonably regarded as a form of minimum financial require-
ment, and was promulgated in response to suggestions that it
be offered as an alternative to the $25,000 capital requirement
originally proposed. The fact that others in First American's
shoes--that is, other FCM's--did comment on and indeed
propose the guarantee option suggests that they, at least,
regarded it as a logical outgrowth. See Comments of Abram-
son & Fox at 6 (proposal by law firm "retained by several
major futures commission merchants" that "the carrying
FCM be permitted to assume full regulatory and financial
responsibility for the activities of the introducing broker");
Comments of Heinold Commodities, Inc. at 2 (proposal by
registered FCM that, as an alternative to a capital require-
ment, the carrying FCM should be permitted to "stand as a
guarantor for the introducing broker's potential liabilities");
Comments of Cargill Investor Services, Inc. at 1 (suggesting
that as long as "the FCM remains fully responsible to the
customer, there is no reason for [introducing brokers] to
fulfill a capital requirement" ). On the other hand, it could
well be argued that a reasonable commenter would not have
thought to comment on a guarantee option since it is different
not only in degree but in kind from a financial requirement
denominated in dollars. Under that view, the connection
between the original notice and the guarantee option would
be "simply too tenuous" for the latter to be regarded as a
"logical outgrowth" of the former. Small Refiner, 705 F.2d
at 549.
We need not resolve this question, however, because
CFTC's failure to re-notice the guarantee option was at best
harmless. The APA directs reviewing courts to take "due
account" of "the rule of prejudicial error." 5 U.S.C. s 706.
"As incorporated into the APA, the harmless error rule
requires the party asserting error to demonstrate prejudice
from the error." Air Canada v. DOT, 148 F.3d 1142, 1156
(D.C. Cir. 1998) (citing 5 U.S.C. s 706); see Steel Mfrs. Ass'n
v. EPA, 27 F.3d 642, 649 (D.C. Cir. 1994) (acknowledging
agency's failure to provide opportunity for comment on one
portion of a rule, but upholding the rule under APA's "harm-
less error" provision); Cabais v. Egger, 690 F.2d 234, 237 n.4
(D.C. Cir. 1982) ("Even where notice and comment were
erroneously omitted, a regulation or rule need not be invali-
dated if it has no substantial impact."). Assuming that the
notice provided by the CFTC was insufficient, we conclude
that First American suffered no prejudice as a result.
As we have discussed above, the portion of the rule to
which First American objects is merely an alternative to the
primary compliance requirement of maintaining $20,000 in net
capital. That primary requirement is perfectly lawful, and
one upon which First American did have an opportunity to
comment. First American was not required to accept the
guarantee alternative; it was free to turn Wolf away and
instead to use its own employees or to deal only with intro-
ducing brokers who could meet the capital requirement.
That First American did not do so evidences its view either
that the guarantee was not harmful, or that it was less
harmful than the primary requirement by which it would
otherwise have had to abide. The lack of opportunity to
comment on the guarantee option therefore cannot be cause
for overturning the CFTC's regulation.
We also note that the concept of a guarantee option came
from FCMs looking for a way to give both their introducing
brokers and themselves an alternative to the minimum capital
requirement. This indicates that FCMs regarded the guar-
antee as an alternative that was beneficial rather than harm-
ful to their interests. Although First American is not bound
by the views of its fellow FCMs, its own voluntary decision to
adopt the guarantee option makes clear that it regarded it the
same way. This reinforces the conclusion that the CFTC's
failure to extend the rulemaking to provide an opportunity for
notice and comment on the guarantee option was at best
harmless error.
Finally, the fact that First American not only was not
harmed by, but rather affirmatively benefitted from, the
availability of the guarantee option suggests a second reason
for not countenancing its claim of procedural error. Under
the doctrine of equitable estoppel, "a party with full knowl-
edge of the facts, which accepts the benefits of a transaction,
contract, statute, regulation, or order may not subsequently
take an inconsistent position to avoid the corresponding obli-
gations or effects." Kaneb Servs., Inc. v. FSLIC, 650 F.2d
78, 81 (5th Cir. 1981). Here, the CFTC gave First American
the option of guaranteeing the liabilities of Wolf, an introduc-
ing broker who could not otherwise have operated for lack of
sufficient capital. First American had no obligation to make
the guarantee, but did so in exchange for the financial bene-
fits both entities expected to reap from their joint arrange-
ment. Having received those benefits, First American will
not now be heard to attack the regulation that was their
source. See Federal Power Comm'n v. Colorado Interstate
Gas Co., 348 U.S. 492, 502 (1955) ("[Respondent] cannot now
be allowed to attack an officially approved condition of the
merger while retaining at the same time all of its benefits.").
IV
First American's final challenge to the order holding it
liable for the conduct of its introducing broker is based on an
exculpatory clause included in an agreement that Violette
signed with First American after Wolf introduced the two.
Paragraph 23 of the two-page, standard-form "Customer
Agreement" reads as follows: "Customer hereby waives any
claim based upon First American's guarantee, if any, of
Introducing Broker's obligations under the Commodity Ex-
change Act or CFTC regulations." J.A. at 27. First Ameri-
can argues that this provision immunizes it from liability that
would otherwise attach under the guarantee agreement it
signed with its introducing broker.
The CFTC disagrees. It states that its Regulation 1.10(j),
17 C.F.R. s 1.10(j), which permits an introducing broker to
satisfy its capital requirements through an FCM guarantee,
cannot be waived in this manner. Whether or not an agen-
cy's regulation is waivable is a question of the agency's intent,
and just as we must defer to the agency's reasonable inter-
pretation of the statutory scheme it was entrusted to adminis-
ter, so too must we give its interpretation of its own regula-
tion "controlling weight unless it is plainly erroneous or
inconsistent with the regulation." Bowles v. Seminole Rock
& Sand Co., 325 U.S. 410, 414 (1945); see Christensen v.
Harris County, 120 S. Ct. 1655, 1663 (2000); Auer v. Robbins,
519 U.S. 452, 461 (1997).
The CFTC's interpretation of its regulation as non-waivable
is neither plainly erroneous nor inconsistent with the regula-
tion. Nothing in the text of the rule suggests that the
guarantee is waivable. To the contrary, the mandatory form
agreement required by the rule states: "This guarantee
agreement is binding and is and shall remain in full force and
effect unless terminated in accordance with the rules, regula-
tions or orders promulgated by the Commission with respect
to such terminations." CFTC Form 1-FR-IB (Part B); see
17 C.F.R. s 1.3(nn) (requiring guarantee to conform to Form
1-FR).7 Under the regulations, termination is permitted
(with prospective effect only) by mutual written consent of
the parties with prompt notice to the Commission, or by
either party with written notice to the other and to the
Commission. See 17 C.F.R. s 1.10(j)(5)(iii). The rules do not
permit termination by waiver of a customer, and First Ameri-
can does not argue that the events which do permit termi-
nation occurred in this case.
Moreover, the CFTC contends that permitting customer
waiver would "undermine[ ] the protections provided by the
guarantee agreement." Violette, 1999 WL 92428, at *2. The
purpose of the Commission's rule is to provide coverage for
the liabilities of introducing brokers and to ensure that they
are not "judgment proof." 48 Fed. Reg. at 35,264. The
CFTC reasonably argues that if the guarantee were waiva-
ble--particularly through the kind of boilerplate contract at
issue here--that purpose would be wholly defeated. See
Gray v. American Express Co., 743 F.2d 10, 16 (D.C. Cir.
1984) (declining to give effect to provision in cardmember
contract that would have effectively waived coverage of Fair
Credit Billing Act); id. at 16 ("The rationale of consumer
protection legislation is to even out the inequalities that
consumers normally bring to the bargain. To allow such
protection to be waived by boiler plate language of the
contract puts the legislative process to a foolish and unpro-
ductive task.").
__________
7 See also 48 Fed. Reg. at 35,265 ("If the guarantee agreement
does not expire or is not terminated in accordance with the provi-
sions of s 1.10(j)(4) or (5), it shall remain in effect indefinitely.").
Guarantee agreements can expire (with prospective effect only) if
the FCM or introducing broker fails to renew its registration of if
such registration is suspended, revoked, or withdrawn. See 17
C.F.R. s 1.10(j)(4)(i)-(ii).
Finally, and perhaps most telling, even if we were to hold a
guarantee agreement waivable by a customer, not even First
American contends that the CFTC's minimum capital require-
ment would itself be waivable in that manner. See 7 U.S.C.
s 6f(b) (providing that each registered introducing broker
"shall at all times continue to meet" the minimum financial
requirements prescribed by the Commission). Yet, to hold
the one is to hold the other. As the rules make clear, a
guarantee agreement is entered into "in satisfaction of the
adjusted net capital requirements with which the introducing
broker otherwise would have to comply," and thus permits
the introducing broker to operate below the minimum level of
required net capital. CFTC Form 1-FR-IB (Part B); see 17
C.F.R. s 1.3(nn). Although First American argues that the
guarantee may be waived, it does not suggest that the CFTC
may thereafter deregister the introducing broker if it cannot
muster $20,000 in capital. But if the Commission cannot
deregister such a broker, permitting waiver would effectively
permit the broker to slip the bonds of the capital requirement
altogether. The CFTC reasonably interprets its regulations
as not countenancing such blatant circumvention of their
purpose.
First American complains that even if the CFTC's no-
waiver interpretation is correct, allowing the Commission to
apply it for the first time in this adjudication would be unfair.8
We do not agree. There is nothing in the language of the
regulation to suggest to a reasonable FCM that guarantees
are waivable, and the termination provision suggests quite the
opposite. Court decisions dating back to at least 1991, five
years before Violette signed the waiver at issue here, hold
that waiver agreements purporting to invalidate identical
guarantee agreements are unenforceable as contrary to the
purpose of the statutory and regulatory framework. See, e.g.,
Skipper v. Index Futures Group Inc., No. 91C1624, 1995
__________
8 This is actually the second case in which the CFTC has so
ruled. The CFTC issued its first opinion on the subject a month
earlier. See Clemons v. McCabe, CFTC Doc. No. 97-R053, 1999
WL 46833, at *2 (Jan. 29, 1999).
WL 493435 (N.D. Ill. 1995); Resolution Trust Corp. v.
Krantz, No. 89C166, 1991 WL 148291 (N.D. Ill. 1991).9
Moreover, even if it were unfair for the CFTC only now to
make clear that the regulatory requirement cannot be waived,
it would be at least as unfair to Violette to announce the
opposite rule. Indeed, we cannot help but note the irony in
petitioner's claim that Violette--a retired postal worker--
"voluntarily" entered into the boilerplate waiver agreement
with First American, while First American itself--a large
brokerage firm--was simultaneously "compelled" to enter
into the guarantee agreement with Wolf.10
V
We uphold the validity of the regulation permitting guaran-
tee agreements as alternatives to minimum capital require-
ments, and further uphold the CFTC's interpretation of that
regulation as not permitting customer waivers. Accordingly,
we have no ground for reversing the Commission's order
holding First American jointly and severally liable for the
__________
9 First American cites two cases in which it contends courts
upheld exculpatory waiver provisions in contracts between FCMs
and customers. See Rothwell Cotton Co. v. Rosenthal & Co., 827
F.2d 246, 250-51 (7th Cir. 1987); Cange v. Stotler and Co., 826 F.2d
581 (7th Cir. 1987); id. at 596 (Easterbrook, J., concurring). In
neither case, however, was there a guarantee agreement between
an FCM and an introducing broker, and hence in neither was the
waivability of the CFTC's regulation at issue. See Cange, 826 F.2d
at 596 (Easterbrook, J., concurring) (arguing that waivers should
generally be upheld "[u]nless ... the CFTC forbids them by
regulation"). Moreover, in Cange the majority opinion suggested
that an exculpatory waiver provision signed prior to the initiation of
trading would not be enforceable. See 826 F.2d at 594-95.
10 We also note that First American has an indemnification
agreement with Wolf that will permit it to recover from the
introducing broker in the event it is held liable for the latter's
wrongdoing. See Letter from Counsel for First American (Jan. 20,
2000). CFTC regulations authorize such indemnification agree-
ments. See 48 Fed. Reg. at 35,264.
regulatory violations committed by its introducing broker.
The petition for review is denied.
Randolph, Circuit Judge, concurring: I concur in the
judgment and in all of the court's opinion except the portion
of Part III holding that the Commission's failure to give
notice amounted to harmless error.