Edgevalencia, LLC, a guaranteed introducing broker, agreed to be permanently barred from National Futures Association membership in response to NFA charges in an administrative process that the firm assessed excessive commissions on its customers in connection with recommended gold bull-call option spreads, and failed to help their customers mitigate losses on their trades when their positions were losing money. According to NFA, between February 2012 and 2014, ELV had 28 customer accounts, none of which ever achieved a profit. During the period, ELV’s customers lost over US $700,000 while the firm collected over US $225,000 in commissions. Both Stephen Edge and Joseph Valencia, co-owners, principals and associated persons of ELV, agreed to be barred from NFA membership for five years, among other sanctions. The futures commission merchant that guaranteed ELV was not named in the NFA action.
Compliance Weeds: Under guarantee agreements that futures commission merchants are required to enter into with a guaranteed introducing broker to excuse such IB from complying with minimum CFTC capital requirements, a guarantor FCM must agree to be jointly and severally liable with the G-IB for all violations by the G-IB under relevant law “with respect to the solicitation of and transactions” involving all customer accounts introduced by the G-IB. (Click here to access form of guarantee agreement.) Under National Futures Association rule, an FCM is similarly responsible for all “acts and omissions” of a G-IB which violate NFA requirements. (Click here to access NFA Rule 2-23.) To help minimize potential liability, guarantor FCMs must effectively monitor G-IBs like branch offices. Although at least one annual on-site audit is required to be conducted by the guarantor FCM of its G-IB, more frequent inspections and monitoring should be undertaken. (Click here for an NFA interpretive notice regarding the supervision of G-IBs and branch offices.)