Rules of Practice; Final Rules

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 10

Rules of Practice; Final Rules

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is

adopting final regulations amending its Rules of Practice, which govern

most adjudicatory proceedings brought under the Commodity Exchange Act,

as amended (``Act''), other than reparations proceedings. In order to

improve the overall fairness and efficiency of the administrative

process, the Commission published for comment a notice of proposed

amendments to the existing rules. Following consideration of the

comments received, this notice sets forth each amended rule in its

final form.

Most of the substantive amendments adopted by the Commission serve

one of two purposes. Some are intended to foster a greater exchange of

information between the Commission's Division of Enforcement

(``Division'') and the respondents before a hearing takes place and to

clarify the production obligations of each party. Others will

facilitate use of the authority granted to the Commission by the

Futures Trading Practices Act of 1992 to require the

[[Page 55785]]

payment of restitution by respondents in administrative enforcement

proceedings. The remaining amendments are largely technical in nature.

EFFECTIVE DATE: The effective date of these rules November 18, 1998.

The amended Rules of Practice shall apply only to proceedings initiated

on or after the effective date. All proceedings initiated before the

effective date shall be conducted under the former Rules of Practice.

FOR FURTHER INFORMATION CONTACT: Stephen Mihans, Office of Chief

Counsel, Division of Enforcement, at (202) 418-5399, or David Merrill,

Office of the General Counsel, at (202) 418-5120, Commodity Futures

Trading Commission, Three Lafayette Center, 1155 21st Street, N.W.,

Washington, D.C. 20581.

SUPPLEMENTARY INFORMATION: On April 3, 1998, the Commission published a

notice in the Federal Register announcing proposed amendments to the

agency's Rules of Practice.\1\ Although the Commission's proposals were

not intended to be sweeping or groundbreaking, they did represent the

first major revision of the Rules of Practice in more than 20 years.

The notice identified fourteen existing rules that the Commission

proposed to amend. These provisions, and the subject areas that they

cover, included Rule 10.1 (scope and applicability of rules of

practice); Rule 10.12 (service and filing of documents; form and

execution); Rule 10.21 (commencement of the proceeding); Rule 10.22

(complaint and notice of hearing); Rule 10.24 (amendments and

supplemental pleadings); Rule 10.26 (motions and other papers); Rule

10.41 (prehearing conferences; procedural matters); Rule 10.42

(discovery); Rule 10.66 (conduct of the hearing); Rule 10.68

(subpoenas); Rule 10.84 (initial decision); Rule 10.101 (interlocutory

appeals); Rule 10.102 (review of initial decision); and Rule 10.106

(reconsideration). In addition, the Commission proposed adding to its

Rules of Practice a new subpart (proposed Subpart I) addressing the

administration of restitution orders issued pursuant to 7 U.S.C. 9

(1994) and a statement of policy relating to the acceptance of

settlements in administrative and civil proceedings instituted by the

Commission.

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\1\ See 63 FR 16453 (April 3, 1998).

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In its Federal Register notice, the Commission welcomed public

comment on the proposed changes to its Rules of Practice and invited

other suggestions to improve or expedite the adjudicatory process.\2\

Two comment letters were received, one from the Law and Compliance

Division of the Futures Industry Association (``FIA'') and the other

from the Committee on Commodities and Futures Law of the New York State

Bar Association (``NYSBA''). Both letters were supportive of the

Commission's efforts to improve the overall fairness and efficiency of

the administrative process. Neither letter included specific comments

on the proposed amendments to Rules 10.1, 10.12, 10.21, 10.22, 10.26,

10.41 and 10.66, all of which are being adopted as presented in the

Federal Register notice of April 3, 1998.

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\2\Although the comment period was originally scheduled to end

on June 2, 1998, it was extended by the Commission for an additional

30 days. See 63 FR 30675 (June 5, 1998).

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However, both the FIA and the NYSBA raised issues relating to the

remaining seven rules that the Commission proposed amending. While most

of their comments focused on issues related to discovery and

restitution, both groups asked that the Commission either modify or

clarify other proposed revisions to the Rules of Practice. A discussion

of their comments, as well as the changes that the Commission has

determined to make in the wording of the proposed amendments, follows.

I. Rule Changes Related to Discovery

A. Prehearing Materials

As proposed by the Commission, new Rule 10.42(a) expands the

information required to be included in each party's prehearing

memorandum to include the identity, and the city and state of

residence, of each witness (other than an expert) who is expected to

testify on the party's behalf, along with a brief summary of the

matters to be covered by the witness's expected testimony. In addition,

each party will be required to furnish a list of documents that he or

she will introduce as evidence at the hearing and copies of any

documents that the other parties do not already have in their

possession or to which they do not have reasonably ready access. With

respect to expert witnesses, each party will be required to furnish the

other parties with a statement providing relevant information about the

witness, as well as a statement setting forth the opinions to be

expressed by the witness and the bases or reasons for those opinions.

In commenting on new Rule 10.42(a), the FIA expressed concern that,

since a respondent would not have had an opportunity to develop a

defense strategy before the complaint was filed, he or she may need

additional time to decide whether to seek the testimony of an expert

witness. As a consequence, it suggested that the Commission explicitly

require its administrative law judges (``ALJs'') to consider the amount

of time a respondent has had to prepare when issuing an order directing

him or her to submit materials under the new rule.

This suggestion is similar to other comments in both letters,

requesting that the amended Rules of Practice include detailed

guidelines for the Commission's ALJs to follow in scheduling

proceedings. The Commission generally avoids interfering with the

discretion of an ALJ to control his or her docket. Moreover, in new

Rule 10.42(d), the Commission specifically authorizes its ALJs to

modify any requirement of new Rules 10.42(a), 10.42(b) or 10.42(c) that

a party can show is unduly burdensome or inappropriate under all the

circumstances. The Commission is not inclined to attempt to draft a

code of all the various factors an ALJ may take into account in

establishing a schedule for the production of prehearing materials

under new Rule 10.42(a) or for other prehearing procedures. The

Commission is confident that, in issuing scheduling orders, its ALJs

will take all relevant factors into consideration so as to ensure both

fairness and efficiency. Accordingly, the Commission has determined to

adopt new Rule 10.42(a) as proposed, without making any further

changes.\3\

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\3\ For the sake of accuracy, the heading of new Rule 10.42(a)

has been changed from ``Pretrial materials'' to ``Prehearing

materials.''

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B. Investigatory Materials

As proposed by the Commission, new Rule 10.42(b) obligates the

Division of Enforcement to make available for inspection and copying by

the respondents a broad range of documents obtained during the

investigation that preceded the filing of the complaint against them.

These include all documents that were subpoenaed or otherwise obtained

by the Division from persons not employed by the Commission and all

transcripts of investigative testimony taken by the Division, together

with all exhibits to those transcripts. As proposed, the Division would

not have to produce, however, any documents that reveal (1) the

identity of confidential sources, (2) confidential investigatory

techniques or procedures or (3) the business transactions and positions

of persons other than the respondents unless they are relevant to the

resolution of the

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proceeding. In addition, nothing in the new rule limits the Division's

ability to withhold documents or other information on the grounds of

privilege or the work product doctrine.\4\

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\4\ In the final version of new Rule 10.42(b), this provision

has been revised to make clear that the rule is not intended to

require the production of documents containing information that is

protected from disclosure by applicable law.

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In commenting on new Rule 10.42(b), both the FIA and the NYSBA

expressed concern about a number of specific provisions and asked the

Commission to consider alternative approaches. As a result of these

comments and the Commission's own review of the original proposal,

several changes have been made in the wording of new Rule 10.42(b). A

discussion of the comments and changes follows.\5\

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\5\ The FIA suggested that a separate provision be added to new

Rule 10.42 clarifying that, notwithstanding the Division's right to

withhold documents on claims of privilege or the work product

doctrine, the Division is nonetheless obligated to turn over all

exculpatory materials required to be produced under Brady v.

Maryland, 373 U.S. 83, 87 (1963). In the notice announcing the

proposed amendments, the Commission expressly stated that the scope

of the Division's obligations to produce material exculpatory

information under In re First National Monetary Corp., [1982-1984

Transfer Binder] Comm. Fut. L. Rep. CCH) para. 21,853 at 27,581

(CFTC Nov. 13, 1981) and its progeny is not addressed by these rule

changes. 63 FR 16455 n.3. The issues potentially raised by

consideration of the appropriate interpretation and application of

an obligation to produce material exculpatory information are broad

and complex. They have been addressed to date only to a very limited

extent in Commission adjudicatory decisions. For these reasons, the

Commission is adhering to its decision not to address those issues

in these rule amendments.

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As an initial matter, based on its own further consideration of new

Rule 10.42(b), the Commission has made several substantive changes in

the final rule that are designed to clarify the limitations of the

Division's disclosure obligations. First, the final rule makes clear

that, if the Commission or another governmental entity has a continuing

investigative interest in another matter or another person, the

Division does not have to turn over information that relates to the

other matter or person simply because it happens to have been obtained

as part of the investigation that led to the pending proceeding. Only

if the information is also relevant to the resolution of the proceeding

would it have to be made available to the respondents under new Rule

10.42(b).

Second, and in a similar vein, the final rule clarifies that, if a

proceeding has resulted from a broad investigation into a general

subject matter or a general kind of conduct, the Division's disclosure

obligation under new Rule 10.42(b) only attaches to that portion of the

investigation relating to the particular transactions, conduct or

persons involved in the pending proceeding. At times, the Division will

undertake an investigation into a general subject matter area, like the

one that recently occurred in connection with so-called hedge to arrive

contracts in the grain industry. Such an investigation may spawn a

number of separate inquiries and result in the initiation of a number

of separate proceedings. When a proceeding is initiated as a result of

this kind of broad investigation, the Division is not required to

produce all of the documents that it has obtained in the larger

investigation. Instead, as paragraph (3) of new Rule 10.42(b) now

indicates, it will only be obligated to produce those materials that

relate to the particular matters at issue in the pending proceeding.

Third, a provision has been added to new Rule 10.42(b) that allows

the Division to withhold information obtained from domestic or foreign

governmental entities or from a foreign futures authority, as defined

in 7 U.S.C. 1a(10), that either (1) is not relevant to the resolution

of the proceeding or (2) was provided on condition that it not be

disclosed or only be disclosed by the Commission, or a representative

of the Commission, as evidence in an enforcement or other proceeding.

To carry out its statutory duties effectively, the Commission must be

in a position to receive information from other governmental entities

and from foreign futures authorities under circumstances that allow

them to be as forthcoming as possible. Thus, the Commission must be

able to protect the confidentiality of information that is irrelevant

to the pending proceeding or was furnished to the Commission upon

condition that its disclosure be restricted. The language that the

Commission has added to new Rule 10.42(b) strikes a balance between the

appropriate disclosure of information to the respondents in a

proceeding and the Commission's need to encourage cooperative

information-sharing with other governmental entities here and abroad

and with foreign futures authorities.\6\

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\6\ Of course, like all of the documents that new Rule 10.42(b)

allows the Division to withhold from inspection and copying by the

respondents, these materials may have to be produced under other

provisions in the rules, for example, if the Division intends to

introduce them into evidence at the hearing, if they were relied

upon by an expert witness testifying on the Division's behalf or if

they were appended as exhibits to a witness statement or to

investigate testimony taken by the Division.

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Turning to other concerns about new Rule 10.42(b), the FIA comment

letter proposed that the Division's disclosure obligations be widened

to include all subpoenas and written requests for information issued by

the Division, as well as all relevant final examination and inspection

reports prepared by the Commission's Division of Trading and Markets

and Division of Economic Analysis. The Commission agrees that making

available for inspection and copying by respondents those portions of

subpoenas and written requests for information that resulted in the

production of investigative materials may assist the respondents in

understanding the produced materials. Accordingly, language has been

added to the new rule requiring the Division to provide respondents

with access not only to all documents that were produced pursuant to

subpoenas issued by the Division or otherwise obtained from persons not

employed by the Commission, but also to any portion of a subpoena or

written request that resulted in the furnishing of such documents to

the Division. However, respondents need not be given access to

subpoenas and written requests (or any portion of a subpoena or written

request) that did not result in the production of investigatory

materials being made available to the respondents. The Commission is

also of the view that the FIA's request for all relevant final

examination and inspection reports is too vague.

Further commenting on new Rule 10.42(b), the FIA also requested

that the Division be required to make investigatory materials available

to a respondent within 14 days after he or she files an answer to the

complaint. This proposal, however, invites the kind of micromanaging of

the prehearing scheduling process in which the Commission is not

prepared to engage.

The NYSBA's comment letter raised separate concerns regarding new

Rule 10.42(b). First, it noted that, by making investigative materials

available at the Commission office where they are ordinarily

maintained, the new rule potentially works a hardship on respondents,

particularly where the investigation leading to the complaint was

conducted by Division staff at the Commission's headquarters in

Washington, D.C. Also, the letter suggested that, in the event the

Division chooses to withhold documents from production under new Rule

10.42(b), it automatically should be required to compile an index of

such documents, as is now the case under the Federal Rules of Civil

Procedure.

Both points are well taken. Accordingly, new Rule 10.42(b) has been

revised to require that, upon written request, a respondent will be

given access to prehearing materials at

[[Page 55787]]

the Commission office nearest to the location where the respondent or

his or her counsel resides or works. In addition, the Division will be

obligated to furnish the respondents with an index of all documents

being withheld when it makes prehearing materials available for

inspection and copying under new Rule 10.42(b). The new rule explicitly

states that the index of withheld documents should provide sufficient

information to enable the respondents to assess the privilege or

protection being claimed by the Division, consistent with the asserted

privilege or protection against disclosure.\7\

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\7\ In like fashion, paragraph (3) of new Rule 10.42(c) is being

revised to require that each party to a proceeding make and keep a

similar log of all documents withheld under that provision and turn

it over to the other parties when producing witness statements. The

FIA comment letter also proposed explicit recognition in the rules

of an ALJ's authority to conduct in camera review of materials being

withheld. While ALJs have exercised such authority without

Commission objection, the Commission does not wish at this time to

open up questions concerning the nature and scope of any such

authority by addressing it through rulemaking.

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New Rule 10.42(b) does not require the Division to identify on its

index of withheld documents any materials containing information

obtained from a governmental agency in the United States or abroad or

from a foreign futures authority that was provided on condition that it

not be disclosed or that it only be disclosed by the Commission or a

representative of the Commission as evidence in an enforcement or other

proceeding. In the Commission's view, no point would be served by

listing such materials on the Division's index, since they would be

properly withheld on the basis of the condition alone. However, if the

Division has received these kinds of materials from a governmental

agency or foreign futures authority, it will be required to inform the

respondents of that fact, without having to index or describe further

any of the documents at issue or their source.

Both the FIA and NYSBA objected to the provision in new Rule

10.42(b) that deals with any failure by the Division to make

investigative materials available to the respondents. As proposed, the

new rule requires that, in the event of such a failure, no rehearing or

reconsideration of a matter already heard or decided shall be required,

unless the respondent demonstrates resulting prejudice. Each comment

letter argued that the burden should be on the Division to show that

any failure to make documents available did not prejudice the

respondents. This argument overlooks, however, a substantial body of

federal case law holding that, even in criminal cases, it is the

defendant's burden to show prejudice from the loss or wrongful

withholding of evidence by the government. United States v. Walsh, 75

F.3d 1, 8 (1st Cir. 1995) (noncompliance with the Jencks Act does not

justify overturning a criminal conviction in the absence of ``some

showing of prejudice* * *beyond mere assertions that the defendant

would have conducted cross-examination differently''). As a general

rule, the burden is on the party claiming prejudice to show prejudice

and for good reason, since among other considerations, the obligation

to prove a negative--in this case, the lack of prejudice--often can be

impossible one. Accordingly, the final wording of paragraph (6) of new

Rule 10.42(b) is unchanged.\8\

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\8\ The Commission likewise has determined not to change the

burden relating to the showing of prejudice in paragraph (4) of new

Rule 10.42(c), which deals with failure of a party to produce

witness statements.

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C. Witness Statements

As proposed by the Commission, new Rule 10.42(c) requires that each

party to a proceeding make available to all of the other parties any

statement made by any person whom the party calls, or expects to call,

as a witness that relates to his or her anticipated testimony. These

statements include transcripts of investigative or trial testimony

given by the witness, written statements signed by witness and

substantially verbatim notes of interviews with the witness, as well as

the exhibits to such transcripts, statements or notes. For purposes of

the new rule, substantially verbatim notes mean notes that fairly

record the witness's exact words, subject to minor inconsequential

deviations.

New Rule 10.42(c) generally accords with Rule 26.2 of the Federal

Rules of Criminal Procedures, which places in the Federal Rules the

substance of the Jencks Act, 18 U.S.C. 3500. It differs from the former

Rules of Practice, inter alia, by requiring all parties, and not just

the Division of Enforcement, to produce witness statements. In

commenting on the new rule, the FIA and NYSBA argued that it

disadvantages respondents unfairly. In their view, by having to

produce, in advance of the hearing, statements of potentials witnesses

who may or may not testify and the scope of whose testimony may still

be uncertain, respondents are being forced to disclose their strategy

and evidence prematurely. Also, in their view, since the Division has

had an opportunity to prepare its case before the compliant was filed,

it is not similarly disadvantaged.

In response to this concern, the language of new Rule 10.42(c) has

been revised to require that a respondent will not have to make witness

statements available until the close of the Division's case-in-chief at

the hearing. By then, the respondent will reasonably know whom he or

she will call as witnesses for the defense, as well as the testimony

that those witnesses can be expected to give. The final rule also

provides that, if additional time is needed for the Division to review

and analyze a respondent's witness statements before cross-examining

his or her witnesses, the ALJ should grant the Division the necessary

continuance.

The NYSBA also suggested that the Commission require the production

of any summaries that have been made of investigative testimony or

witness statements. In the Federal Register notice announcing the

proposed amendments, however, the Commission specifically noted that it

does not intend to require the production of notes prepared by persons

other than the witness himself or herself, including attorney's notes.

The Commission created a narrow exception for notes that in effect

constitute transcriptions of a witness's statement. The NYSBA proposal

would substantially widen that narrow exception, opening the door to

endless disputes over what constitutes a summary and putting at risk

properly privileged material. Accordingly, the Commission has not

adopted the NYSBA proposal.

D. Objections to Authenticity or Admissibility of Documents

New Rule 10.42(f) governs prehearing objections to the authenticity

or admissibility of documents. As proposed, it provides that, upon

order by the ALJ presiding over a proceeding, each party serve on the

other parties a list of documents that it intends to introduce at the

hearing. Upon receipt of the list, the other parties have 20 days to

file a response, disclosing any objections that they wish to preserve

as to the authenticity or admissibility of the documents thus

identified. Where any other objects to the authenticity or

admissibility of any of the listed documents, the ALK may treat the

list of documents as a motion in limine. After affording the parties an

opportunity to brief the motion to the degree necessary for a decision,

the ALJ may rule on the advance of the hearing to the extent

appropriate.

New Rule 10.42(f) is modeled on Rule 26(a)(3)(C) of the Federal

Rules of Civil Procedure. As the NYSBA comment

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letter correctly noted, Rule 26(a)(3)(C) reserves for trial a party's

right to object to the admissibility of a document on grounds of

relevance, undue prejudice, confusion of issues, needles presentation

of cumulative evidence or waste of time. By contrast, under new Rule

10.42(f) as proposed, all objections not raised by a party may be

deemed waived. To make the new rule more compatible with the Federal

Rules on which it was modeled, the Commission has modified the final

rule to permit all objections not raised by a party to be deemed

waived, except fro relevance, needless presentation of cumulative

evidence or waste of time. Because the evidence and argument in an

administrative proceeding is heard by an ALJ rather than a jury, there

is no compelling need to preserve objections based on undue prejudice

or confusion of the issues.\9\

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\9\ In discussing new Rule 10.26(f), the NYSBA comment letter

also questioned whether 20 days is sufficient time for a party to

identify all of the objections that he or she may have to the

substantial number of trading records and other documents typically

involved in a complex trade-practice case. To allay this concern,

the language of the final rule has been revised to require the

filing of a party's response within 20 days or such other time as

may be designated by the ALJ. Again, the Commission is confident

that its ALJs will consider all relevant circumstances in trying to

set as expeditious a schedule as practicable, consistent with

fairness to all parties.

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E. Subpoenas

Under the former rules, documents subpoenaed by a party to an

administrative proceeding could only be produced at the time of the

hearing itself. New Rule 10.68 allows the parties to a proceeding to

apply for the issuance of a subpoena by the ALJ requiring the

production of documents at any designated time and place. Although both

comment letters were generally supportive of the new rule, the FIA

suggested it be modified (1) to permit the filing of a motion to quash

by the owner, creator or subject of a subpoenaed document (rather than

just the recipient of the subpoena) and (2) to enlarge the time within

such a motion could be filed from seven days to 15 days. In addition,

the FIA asked the Commission to clarify the standards under which a

protective order can be obtained from the ALJ.

In the Commission's views, new Rule 10.68 should not be an attempt

to resolve issues of standing with regard to motions to quash or modify

subpoenas. Such issues are more appropriately addressed through

adjudication.\10\ Also, the Commission has determined to set the time

for filing such motions at 10 days after the subpoena has been served,

which is the amount of time that Rule 10.26 allows generally for

responses to motions. Accordingly, paragraph (c) of new Rule 10.68 has

been revised to provide simply that, within 10 days after service of a

subpoena or at any time prior to the return date thereof, whichever is

earlier, a motion to quash or modify the subpoena may be filed with the

ALJ who issued it, without reference to who would have standing to file

such a motion.\11\

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\10\ See generally Fed. R. Civ. P. 45(c)(3).

\11\ The ALJ, of course, may extend the deadline for filing a

motion to quash or modify a subpoena, just as he or she may extend

other deadlines in the Rules of Practice, for good cause shown.

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To clarify the standards under which protective orders may be

authorized, the Commission has added language to new Rule 10.68(c)(2)

explicitly providing that protective orders may be issued upon a

showing of good cause and that, in considering whether to issue a

protective order, ALJs shall weight the harm resulting from disclosure

against the benefits of disclosure. Cf. Fed. R. Civ. P. 26(c) advisory

committee's note (observing that, in deciding whether to give trade

secrets immunity against disclosure, federal courts routinely weigh the

moving party's claim to privacy against the need for disclosure).

In promulgating new Rule 10.68(c)(2), the Commission notes that the

burden of justifying any protective order remains on the person who

seeks it. Federal Trade Comm'n v. Standard Financial Management, 830

F.2d 404, 411 (1st Cir. 1987) (unsealing defendant's financial

documents as germane to district court's approval of negotiated

settlement with agency). Good cause can be established only upon a

showing that the person seeking the protective order will suffer a

clearly defined and serious injury if the requested order is not

issued. Id. at 412 (``[a] finding of good cause [to impound documents]

must be based on a particular factual demonstration of potential harm,

not on conclusory statements''). Any such injury must be balanced

against the public's recognized right of access to judicial records.

Id. at 410. All of these considerations, which are reflected in new

Rule 10.68(c)(2), are particularly pertinent in the context of

enforcement proceedings initiated by the Commission, since such

proceedings are ``patently matters of significant public concern.'' Id.

at 412.

In connection with these revisions to new Rule 1068(c)(2), the

Commission has deleted language found in paragraph (7) of new Rule

10.42(c) that dealt with the issuance of protective orders covering

confidential information contained in prehearing materials produced by

the Division of Enforcement. In considering requests for protective

orders sought under any section of the rules, ALJs henceforth shall

rely on the standards set forth in paragraph (2) of new Rule 10.68(c)

\12\

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\12\ Consistent with the former Rules of Practice, new Rule

10.68(c)(2) provides that no protective order shall be granted that

will tend to impair either the Division's or a respondent's ability

to present its case.

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II. Rule Changes Related to Restitution

Since 1992, Section 6(c) of the Act, 7 U.S.C. 9 (1994), has

authorized the Commission to require restitution in administrative

proceedings to customers of damages proximately caused by violations

committed by the respondents. To facilitate this process, the

Commission prosed amending Rule 10.84 of the Rules of Practice to

include a new provisions specifically to address restitution and adding

a new Subpart I, which would address the administration of restitution

orders.

Commentting on this proposal, the NYSBA suggested that, because the

other provisions of Rule 10.84 deal only with procedural matters, it

would be preferable to move all of the regulatory provisions on

restitution to the new Subpart I. In promulgating final rules, the

Commission has made the suggested revision.

As thus revised, the final Subpart I provides that, in any

proceeding where an order requiring restitution may be entered, the ALJ

shall determine, as part of his or her Initial Decision, whether

restitution is an appropriate remedy. In making this decision, the ALJ

can consider the degree of complexity likely to be involved in

establishing individual claims; the likehood that such claimants can

obtain compensation through their own efforts; the respondent's ability

to pay claimants damages that his or her violations have caused; the

availability of resources to administer restitution; and any other

matters that justice may require. See In re Staryk, [Current Transfer

Binder] Comm. Fut. L. Rep. (CCH) para. 27,206 at 45,812 (CFTC Dec. 18,

1997). In the event that restitution is deemed to be appropriate, the

ALJ's Initial Decision shall include an order of restitution. In it,

the ALJ will specify (1) the violations that form the basis for

restitution, (2) the particular persons, or class or classes of

persons, who have suffered damages proximately caused by such

violations, (3) the method of calculating the amount of damages that

will be paid as restitution, and (4) if then determinable, the amount

of restitution to be paid.

Under new Subpart I, the ALJ's Initial Decision need not address

how or when restitution will be paid. Instead, after an

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order requiring restitution becomes effective (i.e., becomes final or

is not stayed), the Division of Enforcement will be required to

recommend to the Commission or, at the Commission's discretion, to the

ALJ, a procedure for implementing the payment of restitution. Each

respondent will be required to pay restitution shall be afforded notice

of the Division's recommendations and an opportunity to be heard.

Based on the Division's recommendations and any response from the

respondents, the Commission or the ALJ shall establish a procedure for

identifying and notifying individual claimants who may be entitled to

restitution; receiving and evaluating claims; obtaining funds to be

paid as restitution from the respondents; and distributing such funds

to qualified claimants. If appropriate, the Commission or the ALJ may

appoint any person, including a Commission employee, to administer, or

assist in administering, restitution. If the administrator is a

Commission employee, no fees shall be charged for his or her services

or for services performed by other Commission employees working under

his or her direction.\13\

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\13\ Under new Subpart I, the ALJ will be permitted to combine

the procedures for adopting and administering a plan of restitution

with the hearing on liability, when the ALJ concludes that

presentation, consideration and resolution of the issues relating to

restitution will not materially delay the conclusion of the hearing

or the issuance of an initial decision.

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Commenting on the new rules facilitating restitution, both the FIA

and the NYSBA argued that, in order to be consistent with provisions of

the Act governing reparations proceedings and private rights of action,

the Commission should impose a two-year state of limitations on claims

for restitution in administrative enforcement proceedings. This

argument ignores that, in amending Section 6(c) to add restitution as a

remedy available to the Commission in administrative proceedings,

Congress did not limit restitution to violations occurring less than

two years before the filing of a complaint. Similarly, despite concerns

raised by the FIA, the Commission does not believe it would be

appropriate to revise new Subpart I to preclude persons who have sued a

respondent in other forums from receiving restitution in an

administrative enforcement proceeding. The Commission expects that, as

part of the process of administering a restitution order, all

appropriate equitable considerations can and will be taken into account

to avoid double recovery or an undue windfall to any person.

Finally, new Subpart I provides that, unless otherwise ordered by

the Commission, all costs incurred in administering an order of

restitution shall be paid from the restitution funds obtained from the

respondent who was so sanctioned. In response to this provision, the

NYSBA asked that the Commission clarify that all costs incurred in

administering restitution will come from the restitution fund itself

and not from the funds of the respondent. The Commission recognizes

that, in federal court practice, receivership costs and other expenses

arising from the administration of restitution ordinarily are paid out

of the restitution funds themselves. See generally Gaskill v. Gordon,

27 F.3d 248,251 (7th Cir. 1994) ``[a]s a general rule, the expenses and

fees of a receivership are a charge upon the property administered'').

Nevertheless, it would be within the discretion of the Commission to

require a respondent to pay some or all of the costs incurred in

administering an order of restitution. Id. at 250 (``[r]eceivership is

an equitable remedy, and the district court may, in its discretion,

determine who shall be charged with the costs of receivership'').

III. Other Rule Changes

In addition to addressing the proposed amendments relating to

discovery and restitution, the FIA and the NYSBA commented on other

changes and proposed additional revisions to the Rules of Practice. A

review of those comments and proposals follows.

A. Separation of Functions and Ex Parte Contacts

Although the Commission did not announce any proposal to amend Rule

10.9, which deals with the separation of functions in enforcement

proceedings, the FIA comment letter pointed out that, as currently

written, the rule does not fully track the wording of 5 U.S.C. 554(d),

the section of the Administrative Procedure Act (``APA'') on which it

is based. The separation-of-functions requirement presently set forth

in Rule 10.9 only references Initial Decisions issued by the

Commission's ALJs. By contrast, 5 U.S.C. 554(d) requires that:

An employee or agent engaged in the performance of investigative

or prosecuting functions for an agency in a case may not, in that or

a factually related case, participate or advise in the decision,

recommended decision, or agency review pursuant to section 557 of

this title, except as witness or counsel in public proceedings.

The Commission and its staff, of course, abide by their obligations

under the law, and so the more narrow wording of Rule 10.9 is of no

substantive consequence. However, to avoid any possible

misunderstanding or confusion, the Commission has amended existing Rule

10.9 to follow the language of the APA more closely.

Although the FIA comment letter suggested otherwise, the Commission

sees no need to revise existing Rule 10.10, which prohibits interested

persons outside the Commission from making ex parte communications

relevant to the merits of a proceeding to any Commissioner, ALJ or

Commission decisional employee. The language of Rule 10.10 fully

accords with 5 U.S.C. 557(d)(1) and, like that provision of the APA, is

not intended to address communications between the Commission and its

staff. While the Commission recognizes that some agencies have extended

the ex parte communications rule to cover persons inside the agency,

the Commission does not view that extension as either necessary or well

advised. In the Commission's view, 5 U.S.C. 554(d) and the revised Rule

10.9 address the relevant concern. Accordingly, the expansion of the ex

parte communication rule suggested in the FIA comment letter is not

being adopted.

B. Amendments and Supplemental Pleadings

New Rule 10.24 clarifies the authority retained by the Commission

to amend the complaint in an administrative enforcement proceeding

after the proceeding has been initiated. In addition, it permits the

Division of Enforcement, upon motion to the ALJ and with notice to all

of the other parties and the Commission, to amend a complaint for the

limited purpose of correcting typographical or clerical errors or

making similar, non-substantive revisions.

In its comment letter, the NYSBA objected to new Rule 10.24 as

disadvantaging respondents unfairly. According to the comment letter,

the Commission should be able to amend a complaint only after the

respondent has had an opportunity to argue against amendment. The

NYSBA's objections notwithstanding, new Rule 10.24 simply recognizes

the plenary authority retained by the Commission over complaints that

it issues in administrative enforcement proceedings. In order to ensure

that respondents are not unfairly disadvantaged when the Commission

amends a complaint, a suggestion made

[[Page 55790]]

by both comment letters has been incorporated into the final version of

new Rule 10.24. As a result, the new rule will provide that, if the

Commission amends the complaint in an administrative proceeding, the

ALJ shall adjust the scheduling of the proceeding so as to avoid any

prejudice to any of the parties to the proceeding.

C. Interlocutory Appeals

Like its predecessor, new Rule 10.101 governs the filing of

interlocutory appeals from specified rulings of an ALJ. To correct an

ambiguity in the proposed rule that was pointed out in one of the

comment letters, the second sentence in paragraph (b)(1) of the rule

has been revised to clarify that, if a request for certification has

been filed with the ALJ, an application for interlocutory review under

any of the five paragraphs in Sec. 10.101(a) may be filed with the

Commission within five days after notification of the ALJ's ruling on

the request for certification.

D. Review of Initial Decisions

Like its predecessor, new Rule 10.102 governs the appeal of Initial

Decisions to the Commission. Unlike the former rule, however, the new

rule allows cross appeals and provides for the filing of reply briefs

by appellants. Under new rule 10.102, if a timely notice of appeal has

been filed by one party, any other party may file a notice of cross

appeal within 15 days after service of the notice of appeal or within

15 days after service of the Initial Decision, whichever is later. If

such a notice of cross appeal is filed, the Commission will, to the

extent practicable, adjust both the briefing schedule and any otherwise

applicable page limitations in order to allow for consolidated briefing

by all appealing parties.

In its comment letter, the NYSBA objected to cross appeals,

asserting that they raise due process issues. According to the comment

letter, by setting up the risk of a cross appeal by the Division of

Enforcement when an appeal otherwise would not have been filed, the new

rule creates a disincentive for the respondents to appeal Initial

Decisions. This argument ignores the fact that cross appeals have long

been permitted under the Federal Rules of Appellate Procedure, with no

apparent abridgement of any party's right to due process. See F.R. App.

P. 4(a)(3). The Commission continues to believe that the provision of

cross appeals will facilitate the appellate process and so has retained

the provision as proposed in the final rules.

The NYSBA comment letter also noted that, because existing Rule

10.12(a)(2) already does so, there is no need for new Rule 10.102 to

extend by three days the time within which a notice of appeal must be

filed if service of the Initial Decision or other order terminating the

proceeding has been effected by mail or commercial carrier. However,

since an ALJ is not a party to a proceeding and an Initial Decision is

not a document to which any response can be filed, it is unclear that

Rule 10.12(a)(2) governs the time within which a notice of appeal can

be filed. By amending the language regarding the deadline for filing a

notice of appeal, new Rule 10.102 removes any ambiguity.

E. Reconsideration; Stay Pending Appeal

Unlike its predecessor, which addressed motions for reconsideration

of Commission opinions and orders, new Rule 10.106 sets forth the

standards on which the Commission relies in granting applications by

respondents to stay sanctions in administrative enforcement proceedings

pending reconsideration by the Commission or judicial appeal. In order

to obtain such relief, the applicant must show (1) that he or she is

likely to succeed on the merits of the appeal, (2) that denial of the

requested stay would cause irreparable harm to the applicant and (3)

that neither the public interest nor the interest of any other party

will be adversely affected if the stay is granted.

Also, as proposed, new Rule 10.106 provides that, as long as

neither the public interest nor the interest of any other party is

adversely affected, the Commission shall grant any application to stay

the effect of a civil monetary penalty once the applicant has filed an

appropriate surety bond with the Commission's Proceedings Clerk. In

commenting on the new rule, both the FIA and the NYSBA appeared to

question whether a surety bond must be filed along with the stay

application itself or afterwards, i.e., once the Commission has

determined to grant the stay application.

The final version of new Rule 10.106 has been revised to clarify

that, if a respondent seeks to stay the imposition of a civil monetary

penalty, he or she must file an appropriate surety bond at the time he

or she applies for relief and demonstrate that neither the public

interest nor the interest of any other party will be harmed by the

stay. As the revision also makes clear, if a respondent chooses not to

post a surety bond, then he or she will have to meet all of the

criteria necessary to stay the effectiveness of other sanctions or the

Commission will not stay the imposition of his or her civil monetary

penalty.

In addition, the final rule has been revised to allow a respondent

to use the same surety bond procedure in seeking to stay the

effectiveness of an order requiring him or her to pay a specific sum as

restitution. The Commission added this provision because the rationale

justifying a stay of civil penalties after filing a bond is equally

applicable to orders of restitution where the amount of restitution to

be paid by the respondent has been determined. This provision would not

apply, however, to any restitution order of the Commission in which the

specific amount of restitution is not set.\14\

---------------------------------------------------------------------------

\14\ As revised, new Rule 10.106 also makes clear that, in the

event the Commission denies a motion to stay the effectiveness of an

order imposing a civil monetary penalty or directing the respondents

to pay a fixed amount as restitution, any surety bond that was filed

by the applicant will be returned to him or her by the Processings

Clerk.

---------------------------------------------------------------------------

F. Commission Policy Relating to the Acceptance of Settlements

As part of the proposed amendments to the Rules of Practice, the

Commission included a statement setting forth its policy not to accept

any offer of settlement in an administrative or civil proceeding if the

respondent or defendant wished to continue to deny the allegations of

the Commission's complaint (although they may state that they neither

admit nor deny the allegations). The FIA comment letter suggested that

the policy statement--which is being incorporated into the rules as new

Appendix A--be modified to reflect the fact that the Commission's

position is grounded in public policy.

The Commission believes that the public-policy considerations

underlying Appendix A are clearly reflected in the document itself. In

accepting a settlement and entering an order finding violations of the

Act or the regulations, the Commission makes uncontested findings of

fact and conclusions of law. The Commission does not believe that it

would be appropriate for the agency to be making such uncontested

findings of violations if the party against whom the uncontested

findings are to be entered is continuing to deny the alleged

misconduct. Since these considerations are clearly articulated in

Appendix A, the Commission sees no need to alter the wording of its

policy statement at this time.

IV. Related Matters

The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq.

(1988), requires that, in adopting final rules, agencies consider the

impact of those

[[Page 55791]]

rules on small businesses. In its preamble to the proposed amendments,

the Commission determined that the Part 10 rules are not subject to the

provisions of the RFA because they relate solely to agency

organization, procedure and practice. Nevertheless, because the rules

do not impose regulatory obligations on commodity professionals and

small commodity firms and because the amendments adopted by the

Commission will expedite and impose the administrative process, the

Chairperson certifies, on behalf of the Commission, that the amended

rules will not have a significant economic impact on a substantial

number of small business entities.

List of Subjects in 17 CFR Part 10

Administrative practice and procedure, Commodity futures.

In consideration of the foregoing, the Commission amends Chapter I

of Title 17 of the Code of Federal Regulations as follows:

PART 10--RULES OF PRACTICE

1. The authority citation for part 10 continues to read as follows:

Authority: Pub. L. 93-463, sec. 101(a)(11), 88 Stat. 1391; 7

U.S.C. 4a(j), unless otherwise noted.

2. Section 10.1 is amended by deleting the third ``and'' from

paragraph (d), redesignating paragraphs (e), (f), (g) and (h) as

paragraphs (f), (g), (h) and (i), respectively, and adding a new

paragraph (e), to read as follows.

Sec. 10.1 Scope and applicability of rules of practice.

* * * * *

(e) The issuance of restitution orders pursuant to section 6(c) of

the Act, 7 U.S.C. 9; and

* * * * *

3. Section 10.9 is amended by revising paragraph (b) to read as

follows:

Sec. 10.9 Separation of functions.

* * * * *

(b) No officer, employee or agent of the Commission who is engaged

in the performance of investigative or prosecuting functions in

connection with any proceeding shall, in that proceeding or any

factually related proceeding, participate or advise in the decision of

the Administrative Law Judge or the Commission except as witness or

counsel in the proceeding, without the express written consent of the

respondents in the proceeding. This provision shall not apply to the

members of the Commission.

* * * * *

4. Section 10.1 is amended by revising paragraph (a)(2) to read as

follows:

Sec. 10.12 Service and filing of documents; form and execution.

(a) * * *

(2) How service is made. Service shall be made by personal service,

delivering the documents by first-class United States mail or a similar

commercial package delivery service, or transmitting the documents via

facsimile machine. Service shall be complete at the time of personal

service or upon deposit in the mails or with a similar commercial

package delivery service of a properly addressed document for which all

postage or fees have been paid to the mail or delivery service. Where a

party effects service by mail or similar package delivery service, the

time within which the party being served may respond shall be extended

by three days. Service by facsimile machine shall be permitted only if

all parties to the proceeding have agreed to such an arrangement in

writing and a copy of the written agreement, signed by each party, has

been filed with the Proceedings Clerk. The agreement must specify the

facsimile machine telephone numbers to be used, the hours during which

the facsimile machine is in operation and when service will be deemed

complete.

* * * * *

5. Section 10.21 is revised to read as follows:

Sec. 10.21 Commencement of the proceeding.

An adjudicatory proceeding is commenced when a complaint and notice

of hearings is filed with the Office of Proceedings.

6. Section 10.22 is amended by adding a new sentence at the end of

the introductory text in paragraph (b) and adding new paragraphs (b)(1)

and (b)(2) to read as follows:

Sec. 10.22 Complaint and notice of hearing:

* * * * *

(b) Service. * * * If a respondent is not found at his last known

business or residence address and no forwarding address is available,

additional service may be made, at the discretion of the Commission, as

follows:

(1) By publishing a notice of the filing of the proceeding and a

summary of the complaint, approved by the Commission or the

Administrative Law Judge, once a week for three consecutive weeks in

one or more newspapers having a general circulation where the

respondent's last known business or residence address was located and,

if ascertainable, where the respondent is believed to reside or be

doing business currently; and

(2) By continuously displaying the complaint on the Commission's

Internet web site during the period referred to in paragraph (b)(1) of

this section.

7. Section 10.4 is amended by revising paragraphs (a), (b) and (c)

to read as follows.

Sec. 10.24 Amendments and supplemental pleadings.

(a) Complaint and notice of hearing. The Commission may, at any

time, amend the complaint and notice of hearing in any proceeding. If

the Commission so amends the complaint and notice of hearing, the

Administrative Law Judge shall adjust the scheduling of the proceeding

to the extent necessary to avoid any prejudice to any of the parties to

the proceeding. Upon motion to the Administrative Law Judge and with

notice to all other parties and the Commission, the Division of

Enforcement may amend a complaint to correct typographical and clerical

errors or to make other technical, non-substantive revisions within the

scope of the original complaint.

(b) Other pleadings. Except for the complaint and notice of

hearing, a party may amend any pleading once as a matter of course at

any time before a responsive pleading is served or, if the pleading is

one to which no responsive pleading is permitted, he may amend it

within 20 days after it is served. Otherwise a party may amend a

pleading only by leave of the Administrative Law Judge, which shall be

freely given when justice so requires.

(c) Response to amended pleadings. Any party may file a response to

any amendment to any pleading, including the complaint, within ten days

after the date of service upon him of the amendment or within the time

provided to respond to the original pleading, whichever is later.

* * * * *

8. Section 10.26 is amended by revising the last sentence in

paragraph (b) to read as follows:

Sec. 10.26 Motions and other papers.

* * * * *

(b) Answers to motions. * * * The absence of a response to a motion

may be considered by the Administrative Law Judge or the Commission in

deciding whether to grant the requested relief.

* * * * *

9. Section 10.41 is amended by redesignating paragraphs (f) and (g)

as paragraphs (g) and (h), respectively, and

[[Page 55792]]

by adding a new paragraph (f) to read as follows.

Sec. 10.41 Prehearing conferences; procedural matters.

* * * * *

(f) Considering objections to the introduction of documentary

evidence and the testimony of witnesses identified in prehearing

materials filed or otherwise furnished by the parties pursuant to

Sec. 10.42;

* * * * *

10. Section 10.42 is amended by revising paragraph (a); by

redesignating paragraphs (b) and (c) as paragraphs (c) and (e),

respectively; by revising newly redesignated paragraphs (c) and (e)(1);

and by adding a new paragraph (b), a new paragraph (d) and a new

paragraph (f), to read as follows.

Sec. 10.42 Discovery.

(a) Prehearing Materials--(1) In general. Unless otherwise ordered

by an Administrative Law Judge, the parties to a proceeding shall

furnish to all other parties to the proceeding on or before a date set

by the Administrative Law Judge in the form of a prehearing memorandum

or otherwise:

(i) An outline of its case or defense;

(ii) The legal theories upon which it will rely;

(iii) The identify, and the city and state of residence, of each

witness, other than an expert witness, who is expected to testify on

its behalf, along with a brief summary of the matters to be covered by

the witness's expected testimony;

(iv) A list of documents which it intends to introduce at the

hearing, along with copies of any such documents which the other

parties do not already have in their possession and to which they do

not have reasonably ready access.

(2) Expert witnesses. Unless otherwise ordered by the

Administrative Law Judge, in addition to the information described in

paragraph (a)(1) of this section, any party who intends to call an

expert witness shall also furnish to all other parties to the

proceeding on or before a date set by the Administrative Law Judge:

(i) A statement identifying the witness and setting forth his or

her qualifications;

(ii) A list of any publications authored by the witness within the

preceding ten years;

(iii) A list of all cases in which the witness has testified as an

expert, at trial or in deposition, within the preceding four years;

(iv) A complete statement of all opinions to be expressed by the

witness and the basis or reasons for those opinions; and

(v) A list of any documents, data or other written information

which were considered by the witness in forming his or her opinions,

along with copies of any such documents, data or information which the

other parties do not already have in their possession and to which they

do not have reasonably ready access.

(3) The foregoing procedures shall not be deemed applicable to

rebuttal evidence submitted by any party at the hearing.

(4) In any action where a party fails to comply with the

requirements of this paragraph (a), the Administrative Law Judge may

make such orders in regard to the failure as are just, taking into

account all of the relevant facts and circumstances of the failure to

comply.

(b) Investigatory materials--(1) In general. Unless otherwise

ordered by the Commission or the Administrative Law Judge, the Division

of Enforcement shall make available for inspection and copying by the

respondents, prior to the scheduled hearing date, any of the following

documents that were obtained by the Division prior to the institution

of proceedings in connection with the investigation that led to the

complaint and notice of hearing:

(i) All documents that were produced pursuant to subpoenas issued

by the Division or otherwise obtained from persons not employed by the

Commission, together with each subpoena or written request, or relevant

portion thereof, that resulted in the furnishing of such documents to

the Division; and

(ii) All transcripts of investigative testimony and all exhibits to

those transcripts.

(2) Documents that may be withheld. The Division of Enforcement may

withhold any document that would disclose:

(i) The identify of a confidential source;

(ii) Confidential investigatory techniques or procedures;

(iii) Separately the market positions, business transactions, trade

secrets or names of customers of any persons other than the

respondents, unless such information is relevant to the resolution of

the proceeding;

(iv) Information relating to, or obtained with regard to, another

matter of continuing investigatory interest to the Commission or

another domestic or foreign governmental entity, unless such

information is relevant to the resolution of the proceeding; or

(v) Information obtained from a domestic or foreign governmental

entity or from a foreign futures authority that either is not relevant

to the resolution of the proceeding or was provided on condition that

the information not be disclosed or that it only be disclosed by the

Commission or a representative of the Commission as evidence in an

enforcement or other proceeding.

(3) Nothing in paragraphs (b)(1) and (b)(2) of this section shall

limit the ability of the Division of Enforcement to withhold documents

or other information on the grounds of privilege, the work product

doctrine or other protection from disclosure under applicable law. When

the investigation by the Division of Enforcement that led to the

pending proceeding encompasses transactions, conduct or persons other

than those involved in the proceeding, the requirements of (b)(1) of

this section shall apply only to the particular transaction, conduct

and persons involved in the proceeding.

(4) Index of withheld documents. When documents are made available

for inspection and copying pursuant to paragraph (b)(1) of this

section, the Division of Enforcement shall furnish the respondents with

an index of all documents that are withheld pursuant to paragraphs

(b)(2) or (b)(3) of this section, except for any documents that are

being withheld because they disclose information obtained from a

domestic or foreign governmental entity or from a foreign futures

authority on condition that the information not be disclosed or that it

only be disclosed by the Commission or a representative of the

Commission as evidence in an enforcement or other proceeding, in which

case the Division shall inform the other parties of the fact that such

documents are being withheld at the time it furnishes its index under

this paragraph, but no further disclosures regarding those documents

shall be required. This index shall describe the nature of the withheld

documents in a manner that, to the extent practicable without revealing

any information that itself is privileged or protected from disclosure

by law or these rules, will enable the other parties to assess the

applicability of the privilege or protection claimed.

(5) Arrangements for inspection and copying. Upon request by the

respondents, all documents subject to inspection and copying pursuant

to this paragraph (b) shall be made available to the respondents at the

Commission office nearest the location where the respondents or their

counsel live or work. Otherwise, the documents shall be made available

at the Commission office where they are ordinarily maintained or at any

other location agreed upon by the parties in writing. Upon payment of

the appropriate fees

[[Page 55793]]

set forth in appendix B to part 145 of this chapter, any respondent may

obtain a photocopy of any document made available for inspection.

Without the prior written consent of the Division of Enforcement, no

respondent shall have the right to take custody of any documents that

are made available for inspection and copying, or to remove them from

Commission premises.

(6) Failure to make documents available. In the event that the

Division of Enforcement fails to make available documents subject to

inspection and copying pursuant to this paragraph (b), no rehearing or

reconsideration of a matter already heard or decided shall be required,

unless the respondent demonstrates prejudice caused by the failure to

make the documents available.

(7) Requests for confidential treatment; protective orders. If a

person has requested confidential treatment of information submitted by

him or her, either pursuant to rules adopted by the Commission under

the Freedom of Information Act (part 145 of this chapter) or under the

Commission's Rules Relating To Investigations (part 11 of this

chapter), the Division of Enforcement shall notify him or her, if

possible, that the information is to be disclosed to parties to

proceeding and he or she may apply to the Administrative Law Judge for

an order protecting the information from disclosure, consideration of

which shall be governed by Sec. 10.68(c)(2).

(c) Witness statements--(1) In general. Each party to an

adjudicatory proceeding shall make available to the other parties any

statement of any person whom the party calls, or expects to call, as a

witness that relates to the anticipated testimony of the witness and is

in the party's possession. Such statements shall include the following:

(i) Transcripts of investigative, deposition, trial or similar

testimony given by the witness,

(ii) Written statements signed by the witness, and

(iii) Substantially verbatim notes of interviews with the witness,

and all exhibits to such transcripts, statements and notes. For

purposes of this paragraph (c), ``substantially verbatim notes'' means

that fairly record the exact words of the witness, subject to minor,

inconsequential deviations. Such statements shall include memoranda and

other writings authored by the witness that contain information

relating to his anticipated testimony. The Division of Enforcement

shall produce witness statements pursuant to this paragraph prior to

the scheduled hearing date, at a time to be designated by the

Administrative Law Judge. Respondents shall produce witness statements

pursuant to this paragraph at the close of the Division's case in chief

during the hearing. If necessary, the Administrative Law Judge shall,

upon request, grant the Division a continuance of the hearing in order

to review and analyze any witness statements produced by the

respondents.

(2) Nothing in paragraph (c)(1) of this section shall limit the

ability of a party to withhold documents or other information on the

grounds of privilege, the work product doctrine or other protection

from disclosure under applicable law.

(3) Index of withheld documents. When a party makes witness

statements available pursuant to paragraph (c)(1) of this section, he

or she shall furnish each of the other parties with an index of all

documents that the party is withholding on the grounds of privilege or

work product. This index shall describe the nature of the withheld

documents in a manner that, to the extent practicable without revealing

information that itself is privileged or protected from disclosure by

law or these rules, will enable the other parties to assess the

applicability of the privilege or protection claimed.

(4) Failure to produce witness statements. In the event that a

party fails to make available witness statements subject to production

pursuant to this section, no rehearing or reconsideration of a matter

already heard or decided shall be required, unless another party

demonstrates prejudice caused by the failure to make the witness

statements available.

(d) Modification of production requirements. The Administrative Law

Judge shall modify any of the requirements of paragraphs (a) through

(c) of this section that any party can show is unduly burdensome or is

otherwise inappropriate under all the circumstances.

(e) Admissions--(1) Request for admissions. Any party may serve

upon any other party, with a copy to the Proceedings Clerk, a written

request for admission of the truth of any facts relevant to the pending

proceeding set forth in the request. Each matter of which an admission

is requested shall be separately set forth. Unless prior written

approval is obtained from the Administrative Law Judge, the number of

requests shall not exceed 50 in number including all discrete parts and

subparts.

* * * * *

(f) Objections to authenticity or admissibility of documents--(1)

Identification of documents. The Administrative Law Judge, acting on

his or her own initiative or upon motion by any party, may direct each

party to serve upon the other parties, with a copy to the Proceedings

Clerk, a list identifying the documents that it intends to introduce at

the hearing and requesting the other parties to file and serve a

response disclosing any objection, together with the factual or legal

grounds therefor, to the authenticity or admissibility of each document

identified on the list. A copy of each document identified on the list

shall be served with the request, unless the party being served already

has the document in his possession or has reasonably ready access to

it.

(2) Objections to authenticity or admissibility. Within 20 days

after service or at such other time as may be designated by the

Administrative Law Judge, each party upon whom the list described in

paragraph (f)(1) of this section was served shall file a response

disclosing any objection, together with the factual or legal grounds

therefor, to the authenticity or admissibility of each document

identified on the list. Except for relevance, waste of time or needless

presentation of cumulative evidence, all objections not raised may be

deemed waived.

(3) Rulings on objections. In his or her discretion, the

Administrative Law Judge may treat as a motion in limine any list

served by a party pursuant to paragraph (f)(1) of this section, where

any other party has filed a response objecting to the authenticity or

the admissibility on any item listed. In that event, after affording

the parties an opportunity to file briefs containing arguments on the

motion to the degree necessary for a decision, the ALJ may rule on any

objection to the authenticity or admissibility of any document

identified on the list in advance of trial, to the extent appropriate.

11. Section 10.66 is amended by revising paragraph (b) to read as

follows:

Sec. 10.66 Conduct of the hearing.

* * * * *

(b) Rights of parties. Every party shall be entitled to due notice

of hearings, the right to be represented by counsel, and the right to

cross-examine witnesses, present oral and documentary evidence, submit

rebuttal evidence, raise objections, make arguments and move for

appropriate relief. Nothing in this paragraph limits the authority of

the Commission or the Administrative Law Judge to exercise authority

under other provision of the Commission's rules, to enforce the

requirements that evidence presented be relevant to the proceeding

[[Page 55794]]

or to limit cross-examination to the subject matter of the direct

examination and matters affecting the credibility of the witness.

* * * * *

12. Section 10.68 is amended by revising paragraphs (a)(1), (a)(2),

(b)(3) and (c)(1), by revising the heading of paragraph (c), by adding

four new sentences to the end of paragraph (c)(2), by revising the

second sentence in paragraph (e)(1) and by adding a new sentence to the

end of paragraph (f), to read as follows.

Sec. 10.68 Subpoenas.

(a) Application for and issuance of subpoenas--(1) Application for

and issuance of subpoena ad testificandum. Any party may apply to the

Administrative Law Judge for the issuance of a subpoena requiring a

person to appear and testify (subpoena ad testificandum) at the

hearing. All requests for the issuance of a subpoena ad testificandum

shall be submitted in duplicate and in writing and shall be served upon

all other parties to the proceeding, unless the request is made on the

record at the hearing or the requesting party can demonstrate why, in

the interest of fairness or justice, the requirement of a written

submission or service on one or more of the other parties is not

appropriate. A subpoena ad testificandum shall be issued upon a showing

by the requesting party of the general relevance of the testimony being

sought and the tender of an original and two copies of the subpoena

being requested, except in those situations described in paragraph (b)

of this section, where additional requirements are set forth.

(2) Application for subpoena duces tecum. An application for a

subpoena requiring a person to produce specified documentary or

tangible evidence (subpoena duces tecum) at any designated time or

place may be made by any party to the Administrative Law Judge. All

requests for the issuance of a subpoena ad testificandum shall be

submitted in duplicate and in writing and shall be served upon all

other parties to the proceeding, unless the request is made on the

record at the hearing or the requesting party can demonstrate why, in

the interest of fairness or justice, the requirement of a written

submission or service on one or more of the other parties is not

appropriate. Except in those situations described in paragraph (b) of

this section, where additional requirements are set forth, each

application for the issuance of a subpoena duces tecum shall contain a

statement or showing of general relevance and reasonable scope of the

evidence being sought and be accompanied by an original and two copies

of the subpoena being requested, which shall describe the documentary

or tangible evidence to be subpoenaed with as much particularity as is

feasible.

* * * * *

(b) * * *

(3) Rulings. The motion shall be decided by the Administrative Law

Judge and shall provide such terms or conditions for the production of

the material, the disclosure of the information or the appearance of

the witness as may appear necessary and appropriate for the protection

of the public interest.

* * * * *

(c) Motions to quash subpoenas; protective orders--(1) Application.

Within 10 days after a subpoena has been served or at any time prior to

the return date thereof, a motion to quash or modify the subpoena or

for a protective order limiting the use or disclosure of any

information, documents or testimony covered by the subpoena may be

filed with the Administrative Law Judge who issued it. At the same

time, a copy of the motion shall be served on the party who requested

the subpoena and all other parties to the proceeding. The motion shall

include a brief statement setting forth the basis for the requested

relief. If the Administrative Law Judge to whom the motion has been

directed has not acted upon the motion by the return date, the subpoena

shall be stayed pending his or her final action.

(2) Diposition. * * * The Administrative Law Judge may issue a

protective order sought under paragraph (c)(1) of this section or under

any other section of these rules upon a showing of good cause. In

considering whether good cause exists to issue a protective order, the

Administrative Law Judge shall weigh the harm resulting from disclosure

against the benefits of disclosure. Good cause shall only be

established upon a showing that the person seeking the protective order

will suffer a clearly defined and serious injury if the offer is not

issued, provided, however, that any such injury shall be balanced

against the public's right of access to judicial records. No protective

order shall be granted that will prevent the Division of Enforcement or

any respondent from adequate presenting its case.

* * * * *

(e) Service of subpoenas--(1) How effected. * * * Service of a

subpoena upon any other person shall be made by delivering a copy of

the subpoena to him as provided in paragraphs (e)(2) or (e)(3) of this

section, as applicable, and by tendering to him or her the fees for one

day's attendance and mileage as specified in paragraph (d) of this

section. * * *

(f) Enforcement of subpoenas. * * * When instituting an action to

enforce a subpoena requested by the Division of Enforcement, the

Commission, in its discretion, may delegate to the Director of the

Division or any commission employee designated by the Director and

acting under his or her direction, or to any other employee of the

Commission, authority to serve as the Commission's counsel in such

subpoena enforcement action.

13. Section 10.84 is amended by revising paragraph (b) to read as

follows:

Sec. 10.84 Initial decision

* * * * *

(b) Filing of initial decision. After the parties have been

afforded an opportunity to file their proposed findings of fact,

proposed conclusions of law and supporting briefs pursuant to

Sec. 10.82, the Administrative Law Judge shall prepare upon the basis

of the record in the proceeding and shall file with the Proceedings

Clerk his or her decision, a copy of which shall be served by the

Proceedings Clerk upon each of the parties.

* * * * *

14. Section 10.101 is amended by revising paragraph (b)(1) to read

as follows:

Sec. 10.101 Interlocutory appeals.

* * * * *

(b) Procedure to obtain interlocutory review--(1) In general. An

application for interlocutory review may be filed within five days

after notice of the Administrative Law Judge's ruling on a matter

described in paragraphs (a)(1), (a)(2), (a)(3) or (a)(4) of this

section, except if a request for certification under paragraph (a)(5)

of this section has been filed with the Administrative Law Judge within

five days after notice of the Administrative Law Judge's ruling on the

matter. If a request for certification has been filed, an Application

for interlocutory review under paragraphs (a)(1) through (a)(5) of this

section may be filed within five days after notification of the

Administrative Law Judge's ruling on such request.

15. Section 10.102 is amended by revising paragraphs (a) and (d)(2)

and the first sentence of (e)(2); by redesignating paragraph (b)(3) as

paragraph (b)(4) and revising it; by adding a new sentence between the

third and fourth sentences of paragraph (e)(1); and by adding a new

paragraph (b)(3) and a new paragraph (b)(5), to

[[Page 55795]]

read as follows. (The undesignated paragraph after (b)(3) and before

paragraph(c) should appear after new (b)(5) and before paragraph (c).)

Sec. 10.102 Review of initial decision.

(a) Notice of appeal--(1) In general. Any party to a proceeding may

appeal to the Commission an initial decision or a dismissal or other

final disposition of the proceeding by the Administrative Law Judge as

to any party. The appeal should be initiated by serving and filing with

the Proceedings Clerk a notice of appeal within 15 days after service

of the initial decision or other order terminating the proceeding;

where service of the initial decision or other order terminating the

proceeding is effected by mail or commercial carrier, the time within

which the party served may file a notice of appeal shall be increased

by three days.

(2) Cross appeals. If a timely notice of appeal is filed by one

party, any other party may file a notice of appeal within 15 days after

service of the first notice of within 15 days after service of the

initial decision or other order terminating the proceeding, whichever

is later.

(3) Confirmation of filing. The Proceedings Clerk shall confirm the

filing of a notice of appeal by mailing a copy thereof to each other

party.

(b) * * *

(3) Reply brief. With 14 days after service of an answering brief,

the party that filed the first brief may file a reply brief.

(4) No further briefs shall be permitted, unless so ordered by the

Commission on its own motion.

(5) Cross appeals. In the event that any party files a notice of

cross appeal pursuant to paragraph (a)(2) of this section, the

Commission shall, to the extent practicable, adjust the briefing

schedule and any page limitations otherwise applicable under this

section so as to accommodate consolidated briefing by the parties.

* * * * *

(d) * * *

(2) The answering brief generally shall follow the same style as

prescribed for the appeal brief but may omit a statement of the issues

or of the case if the party does not dispute the issues and statement

of the case contained in the appeal brief. Any reply brief shall be

confined to matters raised in the answering brief and shall be limited

to 15 pages in length.

* * * * *

(3) Appendix to briefs--(1) Designation of contents of appendix. *

* * Any reply brief filed by the appellant may, if necessary,

supplement the appellant's previous designation. * * *

(2) Preparation of the appendix. Within 15 days after the last

answering brief or reply brief of a party was due to be filed, the

Office of Proceedings shall prepare an appendix to the briefs which

will contain a list of the relevant docket entries filed in the

proceedings before the Administrative Law Judge, the initial decision

and order of the Administrative Law Judge, the pleadings filed on

behalf of the parties who are participating in the appeal and such

other parts of the record designated by the parties to the appeal in

accordance with the procedures set forth in paragraph (e)(1) of this

section. * * *

* * * * *

16. Section 10.106 is amended by revising the section heading; by

designating the existing text as paragraph (a) and adding a paragraph

heading to it; and by adding a new paragraph (b) and a new paragraph

(c) to read as follows.

Sec. 10.106 Reconsideration; stay pending judicial review.

(a) Reconsideration. * * *

(b) Stay pending judicial appeal--(1) Application for stay. Within

15 days after service of a Commission opinion and order imposing upon

any party any of the sanctions listed in Secs. 10.1(a) through 10.1(e),

that party may file an application with the Commission requesting that

the effective date of the order be stayed pending judicial review. The

application shall state the reasons why a stay is warranted and the

facts relied upon in support of the stay. Any averments contained in

the application must be supported by affidavits or other sworn

statements or verified statements made under penalty of perjury in

accordance with the provisions of 28 U.S.C. 1746.

(2) Standards for issuance of stay. The Commission may grant an

application for a stay pending judicial appeal upon a showing that:

(i) The applicant is likely to succeed on the merits of his appeal;

(ii) Denial of the stay would cause irreparable harm to the

applicant; and

(iii) Neither the public interest nor the interest of any other

party will be adversely affected if the stay is granted.

(3) Civil monetary penalties and restitution. Nothwithstanding the

requirements set forth in paragraph (b)(2) of this section, the

Commission shall grant any application to stay the imposition of a

civil monetary penalty or an order to pay a specific sum as restitution

if the applicant has filed with the Proceedings Clerk a surety bond

guaranteeing full payment of the penalty or restitution plus interest

in the event that the Commission's opinion and order is sustained or

the applicant's appeal is not perfected or is dismissed for any reason

and the Commission has determined that neither the public interest nor

the interest of any other party will be affected by granting the

application. The required surety bond shall be in the form of an

undertaking by a surety company on the approved list of sureties issued

by the Treasury Department of the United States, and the amount of

interest shall be calculated in accordance with 28 U.S.C. 1961(a) and

(b), beginning on the date 30 days after the Commission's opinion and

order was served on the applicant. In the event the Commission denies

applicant's motion for a stay, the Proceedings Clerk shall return the

surety bond to the applicant.

(c) Response. Unless otherwise requested by Commission, no response

to a petition for reconsideration pursuant to paragraph (a) of this

section or an application for a stay pursuant to paragraph (b) of this

section shall be filed. The Commission shall set the time for filing

any response at the time it asks for a response. the Commission shall

not grant any such petition or application without providing other

parties to the proceeding with an opportunity to respond.

17. A new Subpart 1 is added to Part 10, to read as follows.

Subpart 1--Restitution Orders

Sec.

10.110 Basis for issuance of restitution orders.

10.111 Recommendation of procedure for implementing restitution.

10.112 Administraton of restitution.

10.113 Right to challenge distribution of funds to customers.

Subpart 1--Restitution Orders

Sec. 10.110 Basis for issuance of restitution orders.

(a) Appropriateness of restitution as a remedy. In any proceeding

in which an order requiring restitution may be entered, the

Administrative Law Judge shall, as part of his or her initial decision,

determine whether restitution is appropriate. In deciding whether

restitution is appropriate, the Administrative Law Judge, in his or her

discretion, may consider the degree of complexity likely to be involved

in establishing claims, the likelihood that claimants can obtain

compensation through their own efforts, the ability of the respondent

to pay claimants damages that his or her violations have

[[Page 55796]]

caused, the availability of resources to administer restitution and any

other matters that justice may require.

(b) Restitution order. If the Administrative Law Judge determines

that restitution is an appropriate remedy in a proceeding, he or she

shall issue an order specifying the following:

(1) All violations that form the basis for restitution;

(2) The particular persons, or class or classes of persons, who

suffered damages proximately caused by each such violation;

(3) The method of calculating the amount of damages to be paid as

restitution; and

(4) If then determinable, the amount of restitution the respondent

shall be required to pay.

Sec. 10.111 Recommendation of proceeding for implementing restitution.

Except as provided by Sec. 10.114, after such time as any order

requiring restitution becomes effective (i.e., becomes final and is not

stayed), the Division of Enforcement shall petition the Commission for

an order directing the Division to recommend to the Commission or, in

the Commission's discretion, the Administrative Law Judge a procedure

for implementing restitution. Each party that has been ordered to pay

restitution shall be afforded an opportunity to review the Division of

Enforcement's recommendations and be heard.

Sec. 10.112 Administration of restitution.

Based on the recommendations submitted pursuant to Sec. 10.111, the

Commission or the Administrative Law Judge, as applicable, shall

establish in writing a procedure for identifying and notifying

individual persons who may be entitled to restitution, receiving and

evaluating claims, obtaining funds to be paid as restitution from the

party and distributing such funds to qualified claimants. As necessary

or appropriate, the Commission or the Administrative Law Judge may

appoint any person, including an employee of the Commission, to

administer, or assist in administering, such restitution procedure.

Unless otherwise ordered by the Commission, all costs incurred in

administering an order of restitution shall be paid from the

restitution funds obtained from the party who was so sanctioned;

provided, however, that if the administrator is a Commission employee,

no fee shall be charged for his or her services or for services

performed by any other Commission employee working under his or her

direction.

Sec. 10.113 Right to challenge distribution of funds to customers.

Any order of an Administrative Law Judge directing or authorizing

the distribution of funds paid as restitution to individual customers

shall be considered a final order for appeal purposes to be subject to

Commission review pursuant to Sec. 10.102.

Sec. 10.114 Acceleration of establishment of restitution procedure.

The procedures provided for by Secs. 10.111 through 10.113 may be

initiated prior to the issuance of the initial decision of the

Administrative Law Judge and may be combined with the hearing in the

proceeding, either upon motion by the Division of Enforcement or if the

Administrative Law Judge, acting on his own initiative or upon motion

by a respondent, concludes that the presentation, consideration and

resolution of the issues relating to the restitution procedure will not

materially delay the conclusion of the hearing or the issuance of the

initial decision.

18. A new appendix A is added to part 10, to read as follows.

Appendix A to Part 10--Commission Policy Relating to the Acceptance

of Settlements in Administrative and Civil Proceedings

It is the policy of the Commission not to accept any offer of

settlement submitted by any respondent or defendant in any

administrative or civil proceedings, if the settling respondent or

defendant wishes to continue to deny the allegations of the

complaint. In accepting a settlement and entering an order finding

violations of the Act and/or regulations promulgated under the Act,

the Commission makes uncontested findings of fact and conclusions of

law. The Commission does not believe it would be appropriate for it

to be making such uncontested findings of violations if the party

against whom the findings and conclusions are to be entered is

continuing to deny the alleged misconduct.

The refusal of a settling respondent or defendant to admit the

allegations in a Commission-Instituted complaint shall be treated as

a denial, unless the party states that he or she neither admits nor

denies the allegations. In that event, the proposed offer of

settlement, consent or consent order must include a provision

stating that, by neither admitting nor denying the allegations, the

settling respondent or dependent agrees that neither he or she nor

any of his or her agents or employees under his authority or control

shall take any action or make any public statement denying, directly

or indirectly, any allegation in the complaint or creating, or

tending to create, the impression that the complaints is without a

factual basis; provided, however, that nothing in this provision

shall affect the settling respondent's or defendant's testimonial

obligation, or right to take legal positions, in other proceedings

to which the Commission is not a party.

Issued in Washington, DC, on October 8, 1998, by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 98-27983 Filed 10-15-98; 10:43 am]

BILLING CODE 6351-01-M