Firm Fails to Institute Procedure for Bunched Orders
The fines can be hefty for breaking CFTC regulations or NFA rules. We have seen a large number of actions both with the SEC and the CFTC as well as with the NFA. Below is another example of a group who has been fined for failing to supervise its employees. I think maybe even more importantly the group below got into trouble for not having written policies regarding “bunching” client orders.
Yesterday I wrote a post about hedge fund bunched orders and I specifically stated how important it is for managers to understand how bunched orders are allocated to their separately managed account clients. I discussed how it is important from a disclosure standpoint and that each manager should have the broker’s back office or compliance group review the disclosures regarding bunched orders so that the manager is sure that the disclosure is accurate. Evidently the broker below did not have managers who followed this protocol. I would imagine that it is likely that managers had a broad statement that gave them the ability to allocate trades to client accounts in their own discretion. In the future broad statements like these are going to become less prevalent and specific statements regarding the actual allocation procedures will become the industry best practice, if not the industry standard.
For Release: March 26, 2009
CFTC Sanctions ADM Investor Services, Inc. $200,000 For Failing To Diligently Supervise Its Employees
Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) today simultaneously filed and settled charges against ADM Investor Services, Inc. (ADMIS) for violating rules governing post-execution allocations, maintenance of books and records, and supervision of its employees. The CFTC order sanctioned ADMIS with a $200,000 civil monetary penalty, among other things.
The CFTC entered an order on March 26, 2009, which finds that during 2002 to 2004, ADMIS, a Chicago-based registered futures commission merchant, failed to diligently supervise its employees concerning post-execution allocations of bunched orders.
According to the order, ADMIS had no written policy or procedures concerning post-execution allocations of bunched orders. To the extent ADMIS had unwritten procedures concerning such allocations, ADMIS on certain occasions failed to implement those procedures, the order finds. Additionally, ADMIS allowed an account manager to conduct post-execution allocations days after orders were originally executed and failed to maintain records that identify orders subject to the post-execution allocations. Finally, the order finds that ADMIS prepared, but failed to keep, forms related to such allocations.
Post-execution allocation is a procedure where an account manager is permitted to bunch customer orders together for execution, and to allocate them to individual accounts at the end of the day. Bunching of orders involves an account manager placing trades for two or more customers at the same time in the same order. By allowing all customers the opportunity to have their orders bunched, customers may receive better execution and better pricing of their orders. After the bunched orders are executed, an account manager must assign the trades to customers’ accounts, a process known as allocation. The allocation must be made in a manner that is fair and equitable.
The order also requires ADMIS to implement enhanced procedures to assure adherence to rules governing post execution allocation of trades.
The CFTC wishes to thank the National Futures Association for its cooperation in this matter.
The following Division of Enforcement staff was responsible for this case: W. Derek Shakabpa, Eliud Ramirez, Nathan Ploener, Manal Sultan, Lenel Hickson, Jr., Vincent A. McGonagle, and Stephen J. Obie.
Last Updated: March 26, 2009