The Commodity Futures Trading Commission charged INTL FCStone Markets, LLC with failure to adequately supervise the swaps trading activities of Gregory Evans, one of its former swap traders, and other members of its Kansas City energy group. Mr. Evans is alleged to have entered into 30 unauthorized bilateral swaps transactions with one customer from January through July 2013. The CFTC specifically claimed that FC Stone failed to (1) provide adequate oversight of Mr. Evans and the other members of the energy group; (2) maintain adequate policies and procedures to ensure that discretionary trading for customers was appropriate and adequately controlled; and (3) implement existing policies and procedures that required an individual with supervisory duties to work on the energy’s group swaps sales desk. The CFTC settled its action against FCStone with the firm’s agreement to pay a fine of US$ 200,000. Two months ago, the CFTC settled charges previously filed against Mr. Evans for his alleged unauthorized swap transactions. The alleged unauthorized trades were claimed to have caused approximately US $1.2 million in trading losses for the aggrieved customer that were later reimbursed by FCStone. The CFTC acknowledged FCStone’s cooperation in its review; its reimbursement of the customer; and its implementation of unspecified recommendations made the by Commission’s Division of Swaps and Intermediary Oversight. This was the first case that the CFTC has brought under its new express failure to supervise authority applicable to swap dealers and major swap participants. (Click here for further background on Mr. Evans alleged infractions in the article “FCM Broker Fined US $1.2 Million by CFTC for Unauthorized Swaps Trading for Customer” in the June 21, 2015 edition of Bridging the Week.)
Legal Weeds: In a complaint of first impression, FCStone was charged by the Commission with a violation of its new Rule 23.602(a), which requires all swap dealers and major swap participants to “establish and maintain a system to supervise, and shall diligently supervise, all activities relating to its business performed by its partners, members, officers, employees, and agents” (emphasis added). (Click here to access the full text of CFTC Rule 23.602(a).) This provision sets forth different standards than the CFTC’s traditional supervisory requirements for registrants under its Rule 166.3. That provision does not expressly require registrants to establish a supervisory system. It solely states that “[e]ach Commission registrant, except an associated person who has no supervisory duties, must diligently supervise the handling by its partners, officers, employees and agents … of all commodity interest accounts carried, operated, advised or introduced by the registrant, and all other activities of its partners, officers, employees and agents … relating to its business as a Commission registrant.” (Click here to access the full text of CFTC Rule 166.3.) However, in its FCStone Order, the Commission noted that Rule 166.3 “has been interpreted as requiring that, in order to establish a failure to supervise, the Commission establish that a registrant’s supervisory system was generally inadequate or that the registrant failed to perform its supervisory duties diligently” (emphasis added). Although it seems reasonable that a registrant should have robust policies and procedures to help ensure it can adequately oversee its business, this is different than saying the rule requires a supervisory system when, by its plain language, it does not. This incongruity seems clearer now that Rule 23.602(a), in fact, imposes such an express requirement.