A CFTC Smackdown

DB + ADRs = Nearly $75 Million in Fines
July 25, 2018
You are never too small for regulators to fine you!
August 8, 2018

CFTC hits R.J. O’Brien & Associates LLC with $600K for supervisory failures and…

Well…the Commodity Futures Trading Commission (CFTC) closed the month of July with a bang. Not so for R.J. O’Brien & Associates LLC which must pay a $600,000 civil monetary penalty for supervisory failures and violation of a prior Commission order.

Simultaneously issuing and settling charges against the Chicago, IL, Futures Commission Merchant (FCM) for its failure to diligently supervise its employees’ handling of customer accounts and for violating the terms of a previous order.

What does failure to supervise cost you?

More than just the money, the firm is in the CFTC’s sights for the second time. And that can’t be a good thing.

Specifically, the CFTC found that between at least January 2013 and January 2014, the firm failed to diligently supervise its employees to ensure that they properly processed bunched orders allocated post-execution and that they appropriately monitored post-execution trade allocations for unusual activity.  The result, according to the CFTC was a delay in detecting a post-execution trade allocation scheme carried out by an R.J O’Brien client.

“Registrants stand as a first line of defense to prevent unlawful activity in our markets,” said James McDonald, Director of the CFTC’s Division of Enforcement. “The Commission expects these registrants to fulfill their duties to monitor transactions like those at issue here for suspicious activity. This ensures that wrongdoers will be identified and swiftly held accountable.”

Red flags unnoticed

During the period in question, the Order found that the client, who was registered as a Commodity Pool Operator and Commodity Trading Adviser, took improper advantage of post-execution allocation, disproportionately allocating profitable trades to the accounts in which the client or the client’s associates had a proprietary interest, and unprofitable or less profitable trades to the customer accounts or the Pool account.

Despite the presence of red flags indicating that the client may not have been allocating bunched orders in compliance with Commission regulations, R.J. O’Brien failed to make a reasonably sufficient inquiry into the client’s allocation practices or take other appropriate action. The Order also found that the firm failed to adhere to its internal protocols governing the processing of bunched orders, did not employ adequate compliance procedures to monitor, detect, and deter unusual activity concerning bunched orders allocated post-execution, and failed to supervise its employees processing bunched orders.

Bad client, negligent oversight

Additionally, the CFTC also found that during the relevant period, the National Futures Association had also issued two regulatory actions against the client prohibiting him from soliciting funds or withdrawing money from managed accounts, and ultimately, banning him from trading.  Despite these regulatory actions, he nevertheless opened and operated a new account in the name of his spouse.

The activities continued as R.J. O’Brien continued to process numerous requests for withdrawals from the Spouse Account, and cleared trades executed in the spouse Account even after the client was banned from trading. In failing to identify the relationship between the client and the spouse Account, the CFTC said R.J. O’Brien demonstrated the insufficiency of its policies and procedures regarding the opening of new accounts and compliance with regulatory actions.

Finally, the CFTC also noted that R.J. O’Brien’s supervisory failures also violated a 2013 Commission Order, in which the firm was charged with failure to supervise its employees in their processing of certain bunched orders, including the failure to employ adequate procedures to monitor, detect, and deter unusual activity concerning trades allocated post-execution.

 Was lack of oversight worth it?

Is it worth it the exposure, fines, and worse? That’s a question only you can answer. But that’s also where Patrina can help. We’ve built a business on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.

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