CFTC Settles Charges with Non-U.S. Firm for Violating CFTC Registration Regulation
Commentary by Steven Lofchie
The CFTC ordered a non-U.S. financial services firm to pay a $140,000 civil monetary penalty for providing services to two U.S. customers who were trading foreign futures and options contracts without being (i) registered with the CFTC as futures commission merchants or (ii) exempted from registration under CFTC Rule 30.10. Both customers were subsidiaries of non-U.S. entities to which the non-U.S. financial firm was providing services already. Both customers also were algorithmic traders who sent orders to the foreign firm electronically and so had very limited contact with the foreign firm from within the United States. According to the CFTC order, the foreign firm did not realize that it was trading with entities who were U.S. persons, only discovered that fact by chance, and turned itself in to the CFTC after it discovered the fact.
Commentary
This case serves as a tough reminder for non-U.S. financial organizations that they must impose procedures to prevent themselves from dealing with U.S. customers even when the choice is unintentional. Otherwise, they risk subjecting themselves to the U.S. regulatory regime.
That said, the significant question raised by this case concerns the regulatory culture in the United States: what possible justification could there have been for levying a $140,000 fine against the foreign firm? The order implies that the two "U.S." customers essentially were the shell entities of non-U.S. firms. The order expressly states that the foreign firm did not realize it was trading with U.S. persons, and that it had no particular reason to know as much. In fact, the order seems to imply that all of the trading activity might have occurred outside the United States. Shortly after becoming aware that it was trading improperly with what were U.S. customers technically, the foreign firm closed the accounts, self-reported to the CFTC, and provided the CFTC with "significant cooperation."
In short, there was a victimless "crime" in which no one was injured, contact with the United States was minimal, the person violating the law was unaware of the key facts, and that person turned themselves in and provided significant cooperation. If anything in this story merits the imposition of a fine, much less a fine of $140,000, it certainly isn't apparent. Instead, the story shows that where regulators can impose a fine, they will, even if that fine seems not to be justifiable.