Global Access Advisors, LLC, an introducing broker, was subject to enforcement actions by both the Commodity Futures Trading Commission and the National Futures Association over its handling of a commodity trading advisor and commodity pool operator – Newport Private Capital LLC – that unlawfully allocated bunched orders to proprietary accounts, harming customers. The firm was also charged with permitting payments to be made to the wife of the principal of Newport Private – Jonathan Hansen – in a new account opened after such time that the NFA issued an order (a so-called “Member Responsibility Action”) expressly prohibiting such payments.

Glenn Swanson, an associated person and a principal of GAA, was also subject to enforcement actions by the CFTC and NFA related to his handling of the Newport Private relationship. Kenneth Packard, another principal of GAA and its chief marketing and sales officer, was also named in the same NFA enforcement action, while John Schwaebe, the sole AP in a branch office of GAA was named in separate NFA enforcement action. NFA implied that Mr. Schwaebe was the principal facilitator at GAA of Mr. Hansen's allegedly fraudulent allocations and the opening of the account for Mr. Hansen's wife.

The CFTC said that GAA and Mr. Swanson did not conduct sufficient inquiry after questionable activity regarding Newport Private and its principal was brought to their attention, including the CTA’s late allocations, the NFA’s order against the CTA and the opening of the spouse account after the order.

GAA and Mr. Swanson settled both the CFTC and NFA actions by agreeing to pay, jointly and severally, a fine of US $300,00 to the CFTC and US $200,000 to NFA. Mr. Packard agreed to remit a separate fine of US $35,000 to resolve his legal proceeding with NFA, while Mr. Schwaebe resolved his NFA proceeding by agreeing not to re-apply as an NFA member for seven years and not to become a principal of an NFA member for 9 years. GAA withdrew Mr. Schwaebe's AP registration in May 2014.

Two futures commission merchants previously resolved CFTC enforcement actions related to this matter.(For background, click here to access the article “CFTC and NFA Sanction FCM for Handling of Post-Trade Allocations by Trading Manager” in the August 5, 2018 edition of Bridging the Week.)

Compliance Weeds: Typically, upon receipt, futures commission merchants, introducing brokers and members of contract markets must immediately prepare a record that identifies the specific customer placing an order and the time the order is received, among other information, if the order cannot immediately be entered into an exchange's trade matching engine. (Click here to access CFTC Rule 1.35(b)(1).)

However, an exception to this requirement exists for qualified bunched orders. Among other things, the person placing the order for post-execution allocation must have been granted written discretion by the customer and the order placer must be an eligible account manager (e.g., CTAs, Securities and Exchange Commission-registered investment advisers, and futures commission merchants; click here to access the definition of EAM in CFTC Rule 1.35(b)(5)). Allocations must be made as soon as practicable after an entire transaction is executed but by no later than the end of the trading session for futures; allocations must be fair and equitable; and the allocation methodology must be sufficiently objective to allow for independent verification of the fairness of the methodology by regulators and outside auditors. Certain recordkeeping requirements also apply.

FCMs processing customers’ allocated trades for an EAM have an additional express, affirmative obligation to take “appropriate action” if they have actual or constructive knowledge that allocations for its customers are fraudulent.(Click here for further background in Interpretive Guidance by the National Futures Association.)

As of October 1, 2018, CME Group will impose new requirements on suspense accounts maintained by FCMs to facilitate the post-trade allocation of bunched trades and other reasons. (Click here for background in the article, ”No Suspense Anymore – CME Group Clarifies Suspense Account Requirements in New Guidance” in the December 17, 2017 edition of Bridging the Week.)