BGC Financial LP, a futures commission merchant that acts as a voice brokerage entity, agreed to pay a fine of US $3 million to resolve charges by the Commodity Futures Trading Commission that, from at least March 2014 through March 2019, the firm had multiple regulatory breakdowns related to the handling of certain ordinary futures and block trades that entailed verbal communications.
During this time, claimed the CFTC, BGC failed to record or retain voice recordings for periods of up to four months. On four occasions, said the CFTC, this failure involved multiple broker lines simultaneously, and on one occasion – February 5 through the end of May 2016 – the firm lost all voice recordings for “thousands of trades” by traders on its Sugar Land, Texas block trading desks. As a consequence, in late 2016 when the CFTC’s Division of Enforcement requested the audit trail for 100 random block trades during the prior 12 months, BGC produced complete records for less than half of the relevant trades.
Additionally, claimed the CFTC, BGC failed to notify it as required of multiple formal investigations by other regulatory bodies (click here to access CFTC Rule 1.12(m)) and one change in senior management (click here to access CFTC Rule 1.12(l)). The firm was also charged with failure to comply with a requirement that, in its 2015 and 2016 chief compliance officer annual reports, it should have identified certain material noncompliance issues related to records retention and disclosed its plan to remediate such issues, as well as failure to supervise.
Last month, the CFTC and the New York Attorney General fined BGC and GFI Securities LLC an aggregate US $25 million out-of-pocket for purportedly misleading customers to believe that certain bids and offers involving foreign exchange options were executable when they were not and that certain trades had taken place, when they had not. (Click here for background in the article “Two Interdealer Brokerage Firms Settle With CFTC and NY Attorney General for US $25 Million Out-of-Pocket Fines for Alleged Fraud in FX Options Transactions" in the October 6, 2019 edition of Bridging the Week.) In July 2018, BGC agreed to pay a fine of US $1.25 million to the Securities and Exchange Commission for inadvertently deleting audio files containing communications of eight registered representatives requested by the SEC and for not accurately documenting and maintaining records of various employees’ gifts and expenses. (Click here for background in the article “Broker-Dealer Fined US $1.25 Million for Inadvertently Deleting Audio Tapes Subject to SEC Request and for Not Keeping Accurate Records of Salespersons’ Expenses” in the July 22, 2018 edition of Bridging the Week.)
BGC was also required to continue use of a compliance consultant for at least two years as part of its CFTC settlement in order to identify and remediate potential material deficiencies in its compliance with legal and regulatory obligations.
Legal Weeds: The CFTC appears to be cracking down on delayed and/or incomplete productions in response to its request for records.
In addition to this case against BGC, in September 2019, the Commission fined Merrill Lynch, Pierce, Fenner & Smith Incorporated US $300,000 to resolve allegations that it failed timely to produce complete audit trail data for a customer in response to three requests in 2015.
According to the CFTC, ML maintained the audit trail data regarding orders and executions as an FCM and executing broker for the relevant unnamed customer. However, the CFTC said that despite its Division of Enforcement’s agreement to limit the scope of the 2015 requests, ML did not produce complete audit trail data for the customer until January 2018. The FCM made some interim productions, but the data was incomplete, including containing unpopulated fields. ML recognized this problem in December 2017 and by the following month, produced the missing audit trail data. According to the Commission, ML’s almost three-year delay and data incompleteness were because the firm “lacked an adequate supervisory system to ensure the required records were properly kept and promptly produced.”
Among other things, the CFTC claimed that ML did not have a process to identify account numbers or order entry operator identification numbers; defendant’s staff solely relied on their memories when searching for data. (Click here for a copy of the relevant settlement order.)