FCM Settles CFTC Charges for Failing to Supervise an IB

A futures commission merchant ("FCM") settled CFTC charges for failing to adequately supervise customer accounts carried on behalf of an unaffiliated introducing broker ("IB").

The CFTC alleged that the IB (i) misappropriated funds from a customer's accounts through a high volume of trade move requests made to the FCM based on "purported trade errors" in the customer's accounts, (ii) made "unauthorized and fictitious" trades in the customer's accounts "at favorable prices or quantities without competitive execution" and (iii) executed trades for the purpose of siphoning funds from the customer's account to the IB's proprietary accounts.

The CFTC found that the FCM failed to sufficiently flag the IB's fraudulent activity, taking at face value the IB's "benign" explanations for the trade move requests. The CFTC claimed that (i) the FCM's employees also failed to consistently obtain sufficient documentation from the IB concerning the trade move requests in connection with the FCM's trade moves policy and (ii) the FCM's supervisory policies regarding customer accounts did not properly define "trading irregularities or concerns." As a result of its findings, the CFTC determined that the FCM violated CFTC Rule 166.3 ("Supervision") for its insufficient supervisory system, which ultimately resulted in losses to the impacted customer.

To settle the charges, the FCM agreed to (i) cease and desist from future violations of CFTC Rule 166.3 and (ii) pay a $300,000 civil money penalty.