BGC Gets $3m Fine for Supervision, Reporting and Record Keeping Failure
26 November 2019: The US Commodity Futures Trading Commission took action against BGC Financial, a futures industry voice broker and registered futures commission merchant (FCM), for numerous supervision, reporting, and recordkeeping violations spanning five years.
From at least 2014 to March 2019, BGC failed to establish an adequate supervisory system and to diligently perform its supervisory duties with respect to its traditional and block trading futures brokerage businesses. Among other things, BGC lacked adequate procedures or processes in such areas as the creation, maintenance, and retention of audit trail data and failed to follow its policies and procedures regarding brokers’ use of personal cell phones to conduct firm business. Also, in two instances, BGC branch managers were unaware of their designation in BGC’s FCM Manual as the designated supervisory manager for several brokers at their respective branch. BGC’s failure to supervise contributed to its other violations of its recordkeeping, reporting, and other obligations.
In particular, the order found that BGC had multiple voice recording or retention failures, resulting in BGC’s failure to capture verbal bids, offers, orders, and other important trade communications. For example, in 2016, BGC lost nearly four months of voice recordings for thousands of brokered block trades. Additionally, BGC took more than two months to complete an initial production of audit trail data for a sample of 100 block trades requested by the CFTC Division of Enforcement due to its difficulty identifying and compiling the audit trail. The order found that, upon learning of repeated voice recording and other recordkeeping failures, BGC failed to meaningfully alter its policies and procedures.
BGC also failed to adequately disclose in its 2015 and 2016 Chief Compliance Officer (CCO) reports material noncompliance issues related to voice capture and retention and to sufficiently describe the connection of those issues to identified remediation efforts. As a result, the CFTC was unable to accurately evaluate the noncompliance issues and remediation efforts.
The order found that BGC failed to notify the CFTC of numerous formal investigations by other regulatory bodies and was delinquent by months, and even years, in notifying the CFTC of other required events. For example, BGC failed to notify the CFTC of a Securities & Exchange Commission (SEC) investigation until more than four years after BGC was aware of it and only after a $1.25m settlement was reached.
The detail on multiple BGC failures
On multiple occasions during the Relevant Period, BGC failed to record or retain voice recordings. As a result, BGC failed to capture verbal bids, offers, orders, and other important trade communications for periods of up to four months; and on at least four such occasions, multiple broker lines were simultaneously impacted. Most significantly, BGC lost all voice recordings from February 5, 2016, through the end of May 2016, for thousands of trades brokered by its Sugar Land (Texas) block trading desks, which accounted for approximately half of all BGC’s block trades during that time.
BGC did not require brokers to prepare written order tickets for brokered block trades. Instead, BGC primarily relied on electronic communications, voice recordings, and electronic trade record systems to satisfy its audit trail obligations. However, BGC’s systems did not create a written record of order receipt time as required.
In late 2016, the Commission’s Division of Enforcement requested that BGC produce audit trail for 100 random block trades brokered by BGC during the prior twelve months. BGC produced complete audit trail for less than half of these trades due to missing voice recordings and its inability to locate trade related documentation. In addition, in response to Division requests, BGC could not produce copies of certain agreements with its clearing firm or copies of give-up screening agreements with its customers’ clearing firms.
BGC took more than two months to complete an initial production of audit trail for the 100 random block trades requested by the Division due to its difficulty identifying and compiling the audit trail. BGC’s failure to keep a separate written record reflecting order receipt time for brokered block trades exacerbated production delays because BGC had to review voice recordings and/or electronic communications in an attempt to provide this information.
Additionally, BGC took months to produce a complete customer list to the Division and was delayed in producing a complete trade blotter for its traditional futures desks due to exporting systems issues. BGC also took more than six months to produce backup documentation for its CCO annual reports.
BGC failed to notify the Commission of numerous formal investigations by regulatory entities related to trade reporting and supervision issues. Since January 2014, BGC entered into at least eight settlements with the Financial Industry Regulatory Authority and settled CME, ICE Futures, and Nodal Exchange matters, for which no notices of the investigations were ever filed with the Commission. During its 2016 exam, National Futures Association notified BGC that it needed to file Regulation 1.12 notifications. In response, BGC filed its 2014 and 2015 FINRA cycle exam reports, but later committed other violations of this regulation. Specifically, BGC filed copies of its 2016 and 2017 FINRA cycle exam reports with the Commission several weeks late and filed notice of its 2017 change in CEO over nine months late. BGC also failed to timely notify the Commission of an SEC investigation that resulted in a $1.25m settlement for willful books and records violations. Despite knowing it was under formal investigation by the SEC since at least early 2014, BGC did not notify the Commission of the investigation until after the SEC’s settlement order was entered over four years later, on July 17, 2018.
BGC failed to take reasonable steps to ensure establishment of written policies and procedures reasonably designed to remediate noncompliance issues. BGC’s written policies were insufficient to ensure BGC’s compliance. BGC did not have written procedures reasonably designed for dealing with all noncompliance issues. Further, when noncompliance issues occurred, BGC did not take reasonable steps to create and implement policies and procedures related to their remediation.
BGC failed to take reasonable steps to ensure compliant recordkeeping and proper handling of notifications to the Commission. Additionally, BGC did not take reasonable steps to ensure proper and timely reporting of block trades.
BGC did not have a sufficient process in place to test for successful capture and retention of voice communications across all of its traditional and block trading futures brokerage desks. Additionally, BGC lacked sufficient information about, and access to, voice recording systems to allow effective detection of voice recording failures. Upon learning of these repeated voice recording failures, BGC also failed to meaningfully alter its policies and procedures to prevent or detect future failures.
Further, BGC had insufficient processes to ensure prompt identification and retrieval of audit trail as required. BGC’s deficiencies were demonstrated when BGC took more than two months to produce available audit trail for the 100 trades requested by the Division. Upon learning of these deficiencies, BGC also failed to meaningfully alter its policies and procedures.
As an FCM, BGC was required to submit annual CCO reports to the Commission discussing its FCM operations and compliance. The Commission relies upon CCO reports when assessing a firm’s compliance. BGC submitted a CCO report for the 2015 calendar year on or about March 29, 2015, an amended CCO report for the 2015 calendar year on or about September 20, 2016, and a CCO report for the 2016 calendar year on or about March 30, 2017. The CCO Reports included a section describing any material noncompliance issues the firm experienced over the course of the reporting period and the remedial efforts taken by the firm to address such issues. BGC failed to adequately disclose material noncompliance issues and its remedial efforts to address such issues in its CCO Reports. Specifically, BGC failed to adequately disclose material noncompliance issues related to voice audit trail capture and retention. BGC also failed to sufficiently detail the connection of these issues to remediation efforts described in the reports. As a result, BGC’s noncompliance issues and its remediation efforts could not be accurately evaluated by the Commission.
In its 2015 CCO Report, BGC identified a 2015 ICE fine as a material noncompliance issue, but provided no details regarding the underlying facts that led to the fine or any remedial efforts undertaken as a result. A portion of the ICE fine that BGC determined was a material noncompliance issue in the 2015 Report related to ICE’s finding that BGC failed to produce voice recordings for six block trades brokered by its Sugar Land branch office. BGC provided additional detail, but failed to disclose in the report that BGC: (1) believed the missing voice files were likely the result of brokers brokering trades on uncaptured or otherwise unrecorded lines, such as personal devices; and (2) instituted remedial efforts by distributing a memo to brokers advising them of BGC’s policy against the use of personal devices to broker trades.
In its 2016 report, BGC failed to adequately disclose other material noncompliance issues related to voice recording losses at the firm. As discussed above, BGC lost voice recordings for trades on its Sugar Land block trading desks in early 2016. In late 2016, these same desks had another voice recording failure in which recordings for two weeks of trades were not captured due to a software bug. BGC’s 2016 report was deficient. First, the report failed to make clear that two separate and independent instances of voice recording failures occurred in 2016. Second, the report did not adequately set forth the method of identification, cause, and scope of the voice recording failures. Third, the report failed to clearly disclose that the loss related to one of these failures stemmed, in part, from deletion of back-up tapes. In short, BGC failed to disclose sufficiently in the 2016 report the facts and circumstances surrounding the Sugar Land voice recording losses.
As evidenced by BGC’s failures described above, BGC failed to establish and maintain an adequate supervisory system. BGC lacked sufficient policies and procedures to prevent or detect its failures in areas such as audit trail and trade practices. BGC also failed to diligently supervise and ensure that its enacted policies and procedures were followed.
BGC set forth general policies in its FCM Manual, however, it lacked follow-on procedures or processes for ensuring compliance with those policies. For example, BGC had written policies about recordkeeping, but lacked follow-on policies and procedures to address the creation, maintenance, and retention of audit trail. Further, during the Relevant Period, BGC did not have adequate trade review or testing processes to confirm full audit trail capture.
Additionally, BGC had written policies against improper trade practices; however, adequate procedures and processes to detect front-running, prearranged trading, or wash sales were not in place across its traditional and block trading futures brokerage desks. Branch managers were tasked with reviewing daily random samples of order tickets for compliance with BGC’s FCM Manual and applicable rules and regulations. Yet some BGC branch managers did not receive adequate instruction or training on what their review should include or how BGC expected them to monitor against improper trade practices. In short, BGC did not have an adequate process for providing all branch managers with information necessary to conduct a review for improper trade practices. BGC also did not have sufficient review or testing processes to check whether improper trading practices were occurring at BGC.
BGC failed to diligently supervise compliance with its policies and procedures. For example, BGC brokers did not follow BGC’s FCM Manual and broker training materials relating to the creation of audit trail and block trade reporting. In 2015, BGC undertook to remediate deficiencies in audit trail and block trade reporting (late reporting and misreporting of block trades), which were previously identified by ICE and that were the subject of its 2015 ICE fine, through training on BGC’s policies and procedures and exchange requirements. However, BGC continued to misreport and late-report block trades. Specifically, BGC misreported or late reported to the exchanges nine out of a sample of thirty-five block trades brokered by BGC in 2016.
BGC’s FCM Manual also expressly precluded its brokers from using personal cell phones to conduct firm business. Notwithstanding that BGC conducted specific training on this policy in 2015, some BGC brokers utilized personal devices to broker trades that were not subject to recording by the firm’s records systems. One BGC branch manager indicated that he used his personal cell phone to broker trades and assumed others under his supervision did as well. Further, at least one of the 100 random block trades requested by the Division was brokered via text message on a personal cell phone by another BGC branch manager.
Finally, BGC also violated its own policies related to broker supervision and monitoring. BGC branch managers did not effectively perform the supervisory duties assigned to them in BGC’s policies and procedures. BGC’s FCM Manual sets forth Designated Supervisory Managers (“DSMs”) and the area supervised. For branch offices, the DSM was the branch manager who was responsible for supervising the branch. During much of the Relevant Period, however, branch managers at two BGC branches were unaware that they were the DSM for several brokers at their respective branch. Further, even though BGC’s policies and procedures provided that branch managers are primarily responsible for monitoring brokers’ trading activities, this monitoring was ineffective. Some branch managers did not review (or did not have ready access to) pre-trade and trade communications and other documents necessary to confirm proper reporting or brokering of trades. Branch managers’ failure to effectively monitor broker trade activity was evidenced by BGC’s continued misreporting and late-reporting of block trades.