On August 19, 2015, the CFTC announced that it simultaneously filed and settled charges against provisionally registered swap dealer FCStone Markets, LLC for failure to diligently supervise swap traders in its Kansas City Energy Group. This is the first enforcement action against a swap dealer (SD) for violations of CFTC Regulation 23.602 (17 CFR 23.602), which requires that SDs and major swap participants (MSPs) diligently supervise their employees and establish and maintain systems to facilitate supervision (see Practice Note, The Dodd-Frank Act: Final Internal Business Conduct (IBC) Rules Swap Dealers and MSPs: February 2012 IBC Reporting and Recordkeeping Rules: Internal Compliance Duties for SDs and MSPs). Pursuant to the order, the CFTC imposed a civil monetary fine of $200,000.

The order alleges that, between January 2013 and July 2013, FCStone often obtained verbal authorization to exercise discretionary futures trades when FCStone's own compliance procedures required written authorization to enter discretionary trades on behalf of customers. The CFTC also determined that FCStone lacked adequate procedures to monitor discretionary trading. Additionally, while FCStone's procedures required that an individual with supervisory duties work on swaps sales desks, trading activities were not closely monitored, which allowed a single trader to enter over 30 unauthorized discretionary trades in a nondiscretionary account, which amounted to customer losses of approximately $1.2 million.

In a separate instance, an employee transferred $20 million in gold and silver positions from an individual's account to a corporate account because the individual controlled both accounts. However, the accounts had different tax IDs and the corporate account was only 98.5% owned by the individual.

Late last year, the CFTC also issued an order (RCG order) against the Rosenthal Collins Group, LLC (RCG) under CFTC Regulation 1.66 (17 CFR 166.3), which prohibits failing to diligently supervise an associated person (AP) (see The Dodd-Frank Act: Requirements for Swap Dealers and MSPs Checklist: Obligations with Respect to Associated Persons). This provision differs from CFTC Regulation 23.602, which focuses primarily on employee supervision by SDs and MSPs. In the RCG order, the CFTC alleged that a supervisor was conducting its supervisory responsibilities out of the office of a separate futures commission merchant (FCM), which was prohibited by RCG's own supervisory policies. The CFTC issued a civil penalty for that and other violations in the amount of $2.5 million.

These actions further evidence the CFTC's shift from rulemaking to compliance and enforcement, as the regulator turns its attention to the next phase of derivatives market regulation in the Dodd-Frank era.

Compliance programs that address both current regulatory concerns and those that emerge as an entity grows are vital. These matters should serve as notice that the CFTC is able to identify noncompliance with a firm's own compliance procedures, which raises a red flag with the CFTC.