The U.S. Commodity Futures Trading Commission (CFTC) has issued an Order filing and simultaneously settling charges against X-Change Financial Access LLC (XFA) of Chicago, Illinois, for failure to diligently supervise its employees’ handling of its customer accounts and failure to preserve complete records. At the time of the conduct charged, XFA was registered with the CFTC as a Futures Commission Merchant and is now registered as an Introducing Broker. (In 2015, XFA was barred from operating as a futures commission merchant, and was relegated to only operate as an introducing broker).
Specifically, the Order finds that, between at least January 2013 and January 2014 (the Relevant Period), a client registered as a commodity pool operator and commodity trading adviser (Client) engaged in an unlawful post-execution allocation scheme in which the Client disproportionately allocated profitable trades to the accounts in which the Client or the Client’s associates had a proprietary interest, and unprofitable or less profitable trades to customer or pool accounts. The Order finds that during the Relevant Period, XFA had no written policies or procedures concerning the post-execution allocation of bunched orders and did not train its staff on their obligations regarding the handling of such bunched orders. As a result, an XFA floor broker (Broker) processed the Client’s allocations despite various red flags indicating that the Client was not complying with CFTC regulations governing such allocations, the Order finds.
The Order also finds that during the Relevant Period, the National Futures Association issued two regulatory actions prohibiting the Client from soliciting funds or withdrawing money from managed accounts, and ultimately, banning the Client from trading. Despite these regulatory actions, the Client was nonetheless able to allocate trades to a new account in the name of the Client’s spouse (Spouse Account), and the Broker executed trades in the Spouse Account after the trading ban took effect. The Order finds that XFA’s failure to identify the relationship between the Client and the Spouse Account demonstrated the insufficiency of XFA’s policies and procedures regarding compliance with regulatory actions.
In addition to supervisory failures, the Order finds that XFA failed to preserve complete records of its orders subject to post-execution allocation and to preserve electronic records in native (i.e., as originally created) file format.
The CFTC Order requires XFA to pay a $150,000 civil monetary penalty and to cease and desist from further violations of the Commodity Exchange Act, as charged.
Separately, the NFA fined XFA $100,000. The NFA’s Business Conduct Committee (BCC) found that XFA, while registered as a futures commission merchant (FCM), failed to have adequate supervisory procedures to monitor for, and detect, unusual allocation activity and to prevent violations of a Member Responsibility Action issued by NFA. The BCC also found that XFA failed to maintain adequate and complete records.