The Commodity Futures Trading Commission is expected to adopt next week new rules for settling disputes between customer and broker that would submit most complaints to industry-sponsored arbitration panels rather than to the commission's own judges.
If the CFTC approves the rules at its meeting Tuesday, as expected, customers of commodities brokers would be encouraged to agree when opening their accounts to submit any future disputes to arbitration, waiving their rights to go to the commission's "reparations" process or to court.
The rules have been criticized as favoring the brokers at the expense of their customers, but several commodities exchanges and brokerage houses that favor the change in principle have also objected to the rules on technical grounds.
The proposed rules were first published in the Federal Register on Dec. 14, 1981. According to CFTC sources, commission Chairman Philip McB. Johnson insisted that they be brought up for action before he leaves office May 1, despite numerous requests from within the commodities industry for further study and amendments. Johnson declined to discuss the issue yesterday.
At present, about 2,000 commodities customers a year are filing complaints with the CFTC that their accounts have been mismanaged or that their brokers have violated some commission rule. These complaints are handled within the commission through a process known as "reparations," in which impartial administrative law judges hear the proceedings informally; no lawyers are required and customers can get their money back if their complaints are upheld.
According to the CFTC's original rule-change notice, this procedure has overtaxed the commission's resources, created backlogs of unresolved cases, and violated the intent of Congress to have the reparations panels be only one of several possible means of resolving disputes.
The proposed solution is to authorize brokers to insert binding arbitration agreements in their contracts, provided customers are put on notice that they waive their other rights if they sign, and the brokers bear the cost of the arbitration proceedings.
"This whole thing is designed to give the shaft to the customer," said M. Van Smith, a lawyer in Palo Alto, Calif., who has been studying commodities disputes for years. He said the entire package was aimed at helping the brokerage firms, which, he said, "don't want their customers to be able to go into court. They'll have friends on the arbitration panels, and arbitrators don't award punitive damages."
When industry-sponsored arbitration panels were used on securities exchanges, Smith asked, "how did customers fare in exchange arbitration proceedings? How did the Christians fare with the lions?"
Gary J. Lekas, an attorney in Portland, Ore., who has represented both brokers and customers in the volatile commodities trade, said the industry has such a widespread effect on the public interest that "it ought not to be relegated to private arbitration proceedings where there is no protection afforded customers by the courts."
The CFTC acknowledged that many customers perceive arbitration proceedings sponsored by brokers or exchanges as less likely to be impartial than the commission's own reparations judges. To offset that view, the proposed rules require that the customer have a choice of at least two arbitration panels.
David Gelfand, director of arbitration programs for the National Futures Association, which would be one of the sponsoring agencies, said the customer would have a choice of arbitration panels comprised of persons from outside the industry or of "people who are involved in brokerage firms, presidents of member firms, commodities lawyers."
In comments submitted to the CFTC, however, brokers and exchanges that favor the arbitration rule in principle objected to the details of the CFTC proposal.
The Commodity Exchange, in New York, complained that different panels or arbitrators might render conflicting decisions in similar cases. The New York Cotton Exchange and several major brokerage houses objected to the provision requiring them to pay the cost of most arbitration proceedings. Floor traders complained they would be forced to leave their posts to appear before the panels.