RIA Compliance Blog
The Commodity Futures Trading Commission (CFTC) showed this week that it may be increasing scrutiny of firms in connection with customer funds. This may be a result of the MF Global collapse last fall, in which the firm had misplaced more than $1 billion in customer funds. Since then, the CFTC has adopted stricter rules designed to better ensure the segregation of client funds from firm money.
On March 13, the CFTC brought numerous enforcement actions against firms to show that it plans to monitor firms’ treatment of customer funds more closely. These actions come during the same week in which the Futures Industry Association conference in Boca Raton was held. A former chief trial attorney for the CFTC, Allison Lurton, stated it has used trade conferences in the past as a means to drive home a point, so it may be no coincidence that the CFTC waited until the week of the conference to bring disciplinary actions. She stated, “They want to make sure that they’re sending the message to the market that they’re still on the beat and serious about protecting customer funds.”
In one of the enforcement actions, Goldman Sachs Execution & Clearing, L.P. agreed to pay the CFTC a $5.5 million civil monetary penalty and $1.5 million in disgorgement. The CFTC charged Goldman with failing to diligently supervise accounts it carried from about May 2007 to December 2009. Goldman provided back-office and other services to some broker-dealers, and the CFTC alleged that it neglected to diligently supervise the handling of a broker-dealer client’s account when it failed to investigate signs of questionable conduct by the broker-dealer. CFTC Division of Enforcement Director David Meister claimed, “The CFTC’s rules mandate that registrants diligently supervise their employees and agents. When registrants become aware of questionable activity, they must not simply rely on assurances from interested parties and their representatives, but instead must diligently investigate. As this case indicates, the Commission will hold registrants accountable if they fail in this regard.” The order also requires Goldman to make changes, including implementing enhanced supervision policies, procedures and training.
Finally, the CFTC charged MBF Clearing Corp., a registered futures commission merchant (FCM), with violating the Commodity Exchange Act and CFTC regulations concerning segregation of customer funds, and with supervision failures from September 2008 through March 2010. The regulations require that:
- The FCM title the account as a customer segregation account;
- The FCM obtain written acknowledgement that the bank has been informed that the funds in the account belong to the FCM’s customers and indicate that the funds are separately accounted for and held in accordance with the segregation provisions of the Commodity Exchange Act; and
- That the funds must be available in one business day.
MBF allegedly held the funds in an improperly non-segregated money market fund account which did not have to make the funds available in one business day. Because these funds were not properly held as customer segregated funds, violations occurred for more than a year. The complaint also alleged that MBF failed to obtain and keep written acknowledgements for at least six additional accounts, it did not have written policies or procedures governing the opening and maintenance of customer segregated accounts, and it did not implement an adequate supervisory structure to insure the proper segregation of customer funds.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.