FCM Settles CFTC Charges for Mishandling Frozen Accounts
Commentary by Steven Lofchie
A futures commission merchant settled CFTC charges for failing to properly supervise employees in handling accounts that were subject to a statutory restraining order.
According to the CFTC Order, the FCM failed to supervise employees that were responsible for managing accounts required to be frozen in connection with a fraud case involving an individual and an affiliated company. The CFTC said that the FCM failed to fully implement the required restrictions despite receiving the restraining order. The CFTC found that the FCM prevented the individual from withdrawing funds, but the firm allowed the accounts to remain active, enabling trades that ultimately resulted in $233,425.70 in losses.
The CFTC found that the FCM did not have sufficient policies or procedures in place for emergency account actions which included freezing positions or blocking account access. The CFTC found that the firm placed the accounts on a "liquidation-only" status, which allowed the individual to close positions, exposing the accounts to market risk and contributing to the financial losses. The CFTC said it uncovered the violations when it questioned the firm about the dissipation of value in the frozen accounts.
The CFTC determined that the FCM violated CFTC Regulation 166.3 ("Supervision").
To settle the charges, the FCM agreed to (i) cease and desist from further violations and (ii) pay a $750,000 civil monetary penalty and $233,425.70 in restitution.
Commentary
This disciplinary action is a little hard to understand. First, it is not obvious that firms should be expected to have in place procedures on accounts subject to a restraining order. Second, if the purpose of the freeze was to minimize losses, it is not clear why the firm should be punished for allowing the account positions to be liquidated and turned into cash. Doesn't that reduce the risk of the positions?