The Commodity Futures Trading Commission filed an enforcement action against eFloor Trade LLC (EFT) and John Moore, for various recordkeeping and supervision failures, and Mr. Moore with making false statements to the Commission. EFT is registered with the CFTC as an introducing broker, while Mr. Moore is a registered associated person of EFT whom the CFTC claimed was responsible for supervising all of the firm’s employees and agents in all “aspects of their business.” According to the CFTC’s complaint filed in a federal court in New York, the majority of EFT’s business involved receiving trading instructions from third-party trading systems and placing orders for its customers who subscribed to the systems with future commission merchants for execution. The CFTC claimed that EFT failed to maintain and produce to the CFTC on request the trading instructions it received from the systems or records of orders it placed on behalf of its customers. The CFTC charged that EFT also failed to keep emails relating to its business, and that EFT and Moore failed to supervise the handling of its customers’ trading accounts. Among the evidence the CFTC cited is claiming that EFT and Moore failed to supervise was “EFT’s failure to adopt written procedures governing the handling of routine margin calls which occur when the carrying FCM demands additional funds or securities to be deposited in a trading account because the value of equity in the account has fallen below a required minimum.” Finally, the CFTC claimed that Mr. Moore testified falsely to the Commission when he advised the CFTC under oath that ETF maintained a spreadsheet that reflected customer orders, when it did not. The CFTC seeks an injunction, a fine and a permanent revocation of the registrations of defendants.

My View: CFTC Regulation 166.3 is a broadly drafted provision that has been used by the Commission in diverse circumstances (click here to access CFTC Rule 166.3). However, in this complaint is a worrisome suggestion that the CFTC may also consider it a failure to supervise trading accounts if a registrant does not memorialize in a written procedure an obligation imposed on it by contract or otherwise by a third party that is not grounded in a law or regulation. This is suggested by the CFTC’s EFT enforcement action because there is no existing regulation requiring introducing brokers to make margin calls on customers they introduce to futures commission merchants. Indeed, some FCMs preclude their IBs from making margin calls at all. Although a requirement that an IB call customers introduced to an FCM for margin under certain circumstances may be a measure imposed by a particular FCM, it seems a stretch to argue that the failure to memorialize that obligation into a procedure constitutes a violation of a registrant’s duty to supervise.