An Instant Message from the CFTC: Preserve Communications – Enforcement Is Up!

by BakerHostetler
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The U.S. Commodity Futures Trading Commission (“CFTC”) released its annual enforcement review for 2014. The results—an impressive list of enforcement action success coupled with record fines.[1] There were over $3.27 billion in monetary sanctions imposed against companies and individuals.[2] According to CFTC Chairman Timothy Massad, “The CFTC is committed to aggressive enforcement and policing of our financial markets... the CFTC sends the message that the protection of customers and the integrity of the markets are paramount.”

In the wake of the 2007-2008 Financial Crisis and the subsequent enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), industry experts predicted a CFTC crackdown.[3] The Dodd-Frank Act expanded CFTC oversight to the previously unregulated swaps market—which is eight times larger and far more complex than the futures markets.[4] Further, earlier this year, President Obama proposed a 30 percent increase to the CFTC budget.[5] Although the CFTC continues to face resource deficiencies, its enforcement efforts are expected to trend up.[6]

Commodity Traders, Preserve Your Communications!

The CFTC’s Division of Enforcement opened more than 240 new investigations in fiscal year 2014.[7] From these the CFTC recently filed a lawsuit in federal court against a longtime Chicago Board of Trade (“CBOT”) Floor Broker and the Introducing Brokerage (“IB”) firm he used, Futures International, LLC.[8] The thrust of the charges in CFTC v. Futures International LLC, et al., is that defendants failed to comply with accurate record keeping and audit trail rules, failed to supervise trading, and engaged in unauthorized trading.[9]

These types of charges are not new to the CFTC quiver. However, one charge in the complaint is fresh to the world of CFTC enforcement. The CFTC has taken issue with the IB’s failure to retain records of its traders’ instant messenger communications. The case has yet to wind its way through the court system but will surely be watched as one that will provide guidance on preservation initiatives.[10]

As background, it is worth noting that with the advent of electronic trading and electronic means of communication, traders are relying more on instant messenger and social media to discuss real-time marketplace conditions. In the past, pit brokers engaged in open outcry trading and could read and feel the market through human interaction—now, they are relying on electronic communication including social media.

Over the past decade, more than 85 percent of trading shifted from the Chicago trading pits to electronic channels. “While the futures trading floors of the Chicago Board of Trade and Chicago Mercantile Exchange have remained open, there are fewer traders standing on them today.”[11] Just 10 years ago, tourists would gather in observation floors to gaze down at frenzied traders pushing and shoving themselves and the market through complex hand signals and yells.[12] Today the tourists are all but gone and the quiet hum of servers transmit trades.

CFTC Record Keeping Requirements

It is well known that CFTC Regulations 1.31 and 1.35 require IBs to maintain full and complete records relating to commodity futures and options transactions for a period of five years.[13] This record keeping requirement includes employees’ use of personal devices to communicate electronically.[14] Effective compliance is easier said than done. Preservation is complicated; traders communicate via phone, email, instant messenger, and social media. Moreover, some forms of social media, such as Snapchat, are designed to self-destruct within seconds of receipt.

The CFTC complaint filed against Futures International dismisses the notion that internet service provider records satisfy the CFTC preservation requirements. What this means is the CFTC expects IBs to have robust electronic record procedures that will preserve records for a five-year period. An IB that fails to meet CFTC requirements may find itself facing off against the CFTC in court or before an administrative judge.[15]

What Should an Introducing Brokerage Firm Be Doing?

The CFTC’s annual enforcement review and the recent complaint filed against Futures International signal another aggressive year of enforcement actions and a focus on methods of communication used by floor traders and IB firms.16 The CFTC is committed to ensuring market integrity and that includes regulating the preservation of all relevant communication, including instant messages and social media.17

The CFTC Enforcement Division obtained impressive results in 2014, and its aggressive policing of financial markets will continue.18 It is safe to assume the CFTC will focus on electronic record keeping over the next enforcement year. Trading Firms and individuals subject to CFTC regulation should ensure their compliance office is actively maintaining all its traders’ electronic communications.

[1] U.S. Commodities Futures Trading Commission, Mission & Responsibilities, www.cftc.gov.
[2] CFTC Releases Annual Enforcement Results for Fiscal Year 2014, www.cftc.gov, (Nov. 6, 2014).
[3] William Kane and Gillian Lindsay Whittlesey, BakerHostetler Discusses the Financial Industry Compliance Crackdown, Columbia Law School Blog, edition of Securities Mosaic® Blogwatch, (May 22, 2014).
[4] William Kane and Gillian Whittlesey, President Obama Requests 30 Percent CFTC Budget Increase as Financial Regulator Plans to Step Up Enforcement, BakerHostetler (March 6, 2014).
[5] Id.
[6] CFTC Releases Annual Enforcement Results for Fiscal Year 2014, www.cftc.gov, (Nov. 6, 2014).
[7] Id.
[8] Amended Complaint, CFTC v. Futures International LLC, et al., No. 1:14-cv-07877 (N.D. Ill. Oct. 9, 2014), ECF No.6; Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, Making Findings and Imposing Remedial Sanctions, In the Matter of: Kent Woods, CFTC No. 15-02 (Oct. 8, 2014 3:23 p.m.).
[9] Id.
[10] CFTC Orders Former CBOT Floor Broker Kent Woods to Pay $200,000 Penalty and Charges Introducing Broker Futures International LLC and Chief Operating Officer Amadeo Cerrone with Trade Practice Violations and Supervision Failures, www.cftc.gov, (Oct. 9, 2014).
[11] Lynne Marek, Floor Traders Cave, Settle Suit Against CME, Crain’s, (Sept.16, 2014).
[12] Id.
[13] 17 CFR § 1.31 and 1.35 (2014).
[14] Id.
[15] Jean Eaglesham, CFTC Turns Toward Administrative Judges, Fewer Cases Will Go Through Federal Court; Concern Over Trial by Jury, Wall Street Journal (Nov. 9, 2014).
[16] Id. at ¶ 40-42.
[17] CFTC Releases Annual Enforcement Results for Fiscal Year 2014, www.cftc.gov, (Nov. 6, 2014).
[18] CFTC Sanctions Rosenthal Collins Group for Supervision Violations, www.cftc.gov, (Nov. 13, 2014).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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