CFTC fines R.J. O’Brien & Associates $600k for supervisory failures

The Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against R.J. O’Brien & Associates LLC (RJO) of Chicago, for failure to diligently supervise its employees’ handling of customer accounts and for violating the terms of a prior Commission Order.  At all relevant times, RJO was registered with the Commission as a Futures Commission Merchant.

The CFTC Order requires RJO to pay a $600,000 civil monetary penalty and to cease and desist from further violations of the Commodity Exchange Act, as charged.

Specifically, the Order finds that between at least January 2013 and January 2014 (Relevant Period), RJO failed to diligently supervise its employees to ensure that they properly processed bunched orders allocated post-execution, and that they appropriately monitored post-execution trade allocations for unusual activity.  These failures delayed the detection of a post-execution trade allocation scheme carried out by an RJO client (Client).

James McDonald, Director of the CFTC’s Division of Enforcement stated:  “Registrants stand as a first line of defense to prevent unlawful activity in our markets.  The Commission expects these registrants to fulfill their duties to monitor transactions like those at issue here for suspicious activity.  This ensures that wrongdoers will be identified and swiftly held accountable.”

During the Relevant Period, the Order finds, the Client, who was registered as a Commodity Pool Operator and Commodity Trading Adviser, took improper advantage of post-execution allocation, disproportionately allocating 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 the customer accounts or the Pool account.

The Order further finds that during the Relevant Period, despite the presence of red flags indicating that the Client may not have been allocating bunched orders in compliance with Commission regulations, RJO failed to make a reasonably sufficient inquiry into the Client’s allocation practices or take other appropriate action.  In addition, the Order finds that RJO failed to adhere to its internal protocols governing the processing of bunched orders, did not employ adequate compliance procedures to monitor, detect, and deter unusual activity concerning bunched orders allocated post-execution, and failed to supervise its employees processing bunched orders.  

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 able to open and operate a new account in the name of the Client’s spouse. In addition, following the first regulatory action, RJO processed numerous requests for withdrawals from the Spouse Account, and cleared trades executed in the Spouse Account after the Client was banned from trading.  The Order states that RJO’s failure to identify the relationship between the Client and the Spouse Account demonstrated the insufficiency of RJO’s policies and procedures regarding the opening of new accounts and compliance with regulatory actions.

In addition, the Order finds that these supervisory failures violated a 2013 Commission Order, in which RJO was charged with failure to supervise its employees in their processing of certain bunched orders, including the failure to employ adequate procedures to monitor, detect, and deter unusual activity concerning trades allocated post-execution. (See CFTC Order and Press Release, 6490-13, Jan. 2, 2013.)