NFA fines futures commission merchant for inadequate supervisory measures
This summer, the Compliance Department of the National Futures Association (NFA) filed a complaint against futures commission merchant (FCM)and NFA member R.J. O’Brien & Associates for violating NFA Compliance Rule 2-9(a), which involved failing to have adequate supervisory measures to monitor and detect unusual allocation activity.
R.J. O’Brien has proposed to settle the charges by paying a $150,000 fine and of course, to enhance its processes and procedures. The firm is not an inexperienced newcomer to the business. The Chicago, IL-based R.J. O’Brien has been a registered FCM since 1977 and an NFA member since 1982. The firm also is a registered notice broker-dealer, provisionally registered as a swap dealer, and approved as a forex firm, swap firm, and exempt foreign firm agent. It’s a regular beehive of activity.
At the time of the NFA complaint, the firm carried several accounts managed and controlled by Jonathan M. Hansen and his firm Newport Private Capital, which was a commodity trading advisor, a commodity pool operator and also an NFA member located in Newport Beach, CA. It is at this point, that events began to unravel.
How long can a poor compliance decision linger?
A long time. On September 4, 2013 (yes, misbehavior does have a way of lingering…), The NFA issued a Member Associate Responsibility Action ordering the Hansen to repay a 2009 loan by a commodity pool that he operated to a real estate investment fund that he also controlled. The deadline for repayment was set on or before January 15, 2014.
Moreover, the NFA noted that Hansen and any other person acting on his behalf were prohibited from disbursing funds from any trading accounts controlled by him without the NFA’s prior approval.
Failure to repay the loan by the deadline would result in an immediate trading ban against Hansen being imposed. He missed the deadline.
Barred from trading…trade for someone else?
During this period, the market surveillance staff of the Chicago Mercantile Exchange (of which R.J. O’Brien was a clearing member), reported that following his ban from trading, Hansen began to trade an account in the name of his wife Angela Hansen. Trading on the account began September 27, 2013, and when it ended on February 11, 2014, the account made net profits of approximately $266,000.
At issue was that R.J. O’Brien acted as the FCM that carried the Angela Hansen account and executed and allocated trades post-execution for her account (and other accounts that Hansen controlled.) This happened, the NFA determined, because the firm did not have adequate supervisory measures in place to monitor for and detect unusual allocation activity, nor did it adopt adequate supervisory measures to ensure that when the NFA issued an MRA that the FCM does not permit violations to occur.
Was it worth risking additional fines and censures?
Well, Hansen may have thought so. It took time to uncover the exposure, but in the end, the NFA and the Chicago Mercantile Exchange got their person. Wouldn’t compliance have been less costly?
Of course, but sometimes things fall through the cracks. This is 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.