CFTC Fines IB for Recordkeeping Failures
Commentary by Steven Lofchie
An introducing broker ("IB") settled CFTC charges for off-channel recordkeeping failures.
According to the Order, the IB failed to prevent employees, including senior-level staff, from using unapproved communication methods, such as personal text messages, for conducting business. The CFTC found that these messages were not retained or made accessible for regulatory review.
The CFTC determined that the firm violated CEA Section 4g ("Reporting and recordkeeping), and CFTC Regulations 1.35 ("Records of commodity interest and related cash or forward transactions"), 1.31 ("Regulatory records; retention and production") and Regulation 166.3 ("Supervision").
To settle the charges, the IB agreed to pay a $2 million civil monetary penalty and committed to implementing enhanced recordkeeping and supervision policies.
Statements
-
In a dissenting statement, Commissioner Summer K. Mersinger raised concerns that the case may signal that "everything is a business record." She emphasized that not all business-related communications through unofficial channels, such as personal text messages, necessarily constitute a violation. The issue, she argued, lies in whether "an entity failed to preserve a record they were required to preserve." Ms. Mersinger also criticized the lack of guidance provided by the settlement, arguing that it left other firms uncertain about how to avoid violations: "Without more information and context, others subject to the same regulations have limited ability to understand potential compliance risks." Further, she argued that enforcement should not be the default method for promoting compliance.
-
In another dissenting statement, CFTC Commissioner Caroline D. Pham argued that "the CFTC has no evidence that a violation of CFTC recordkeeping rules for introducing brokers (IBs) actually occurred." Ms. Pham asserted that the Order overstepped the CFTC's jurisdiction, because it stemmed from an SEC investigation and dealt with records related to securities and activities outside of the CFTC's purview.
Commentary
Commissioner Pham's dissent, pointing out that the CFTC lacked a clear jurisdictional basis for its fine, is troubling. Why do we need two regulators if they don't respect jurisdictional lines?