FCStone, LLC, a Commodity Futures Trading Commission-registered futures commission merchant, agreed to pay a fine of US $140,000 for allegedly not having adequate procedures to address the transfer of positions between customers’ accounts and for training its personnel when such transfers might be authorized. According to the CFTC, in May 2013, on one day, FCStone transferred gold and silver positions from the personal account to the corporate account of a precious metals supplier located in the United Arab Emirates. FCStone made this transfer, claimed the Commission, because the two accounts were controlled by the same person and had the same large trader number. The two accounts, however, had different beneficial ownership and different tax identification numbers, said the CFTC. According to the CFTC, “before it was contacted by the Commission concerning the matters addressed in this Order, FCStone revised its written procedures concerning the transfer of positions between customers’ accounts and, on approximately May 15, 2013, on its own and without being prompted by the Commission, updated its Compliance Manual” to specify when transfers between customer accounts might occur. FCStone was charged by the CFTC with failure to supervise. Separately, FCStone Australia Pty Ltd agreed to pay Aus $130,000 (approximately US $102,000) to the Australian Securities and Investment Commission for various risk and financial rules’ infractions. In settling with FCStone, ASIC noted that “none of the misconduct resulted in … any actual detriment to FCStone’s Clients or other Market Participants. There was no loss to investors.”
Compliance Weeds: Brokers should have written policies governing post-trade transfers among accounts. In general, transfers among accounts with different beneficial owners or different tax identification numbers should be prohibited absent a bona fide error in the initial trade crediting. Requests for transfers by clients or third party entities (e.g., introducing brokers or trading advisers) should ordinarily be in writing and formally approved by a manager at the broker before a transfer is effectuated. Repetitive requests for transfers should be particularly reviewed to determine if there is a pattern of transferring winning or losing trades to particular customers. In 2007, the CFTC fined MF Global Inc. US $2 million for transferring positions between client accounts of Philadelphia Alternative Asset Management Company LLC, a commodity pool operator, among other offenses. The transfers, it turned out, were fraudulent (click here to access the CFTC Order).