October 10, 2012
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced the Farr Financial Inc. (Farr) of San Jose, Calif., agreed to pay a $280,000 civil monetary penalty to settle CFTC charges that it failed to properly invest customer segregated funds and failed to diligently supervise those investment activities. Farr is currently registered with the CFTC as an introducing broker and was registered as a futures commission merchant (FCM) during the period relevant to the settlement.
FCMs receive money, securities, and other property (funds) from their customers to margin, guarantee, or secure the customers’ futures and options trades. Under the Commodity Exchange Act (CEA) and CFTC regulations, FCMs are required to segregate customer funds from funds belonging to the FCM, and can invest customer funds only in investments enumerated in CFTC regulation 1.25, such as obligations of the United States, any state (or subdivision thereof), obligations fully guaranteed as to principal and interest by the United States, and other specified instruments that satisfy a general prudential standard consistent with the objectives of preserving principal and maintaining liquidity for customer funds.
During the period from late 2007 through the end of 2010, Farr invested customer funds in at least seven different accounts that failed to comply with the requirements of regulation 1.25, the CFTC order finds. These investments included (1) an investment in a money market mutual fund from which funds could not be withdrawn by the next business day as required by regulation 1.25, (2) five savings or money market deposit accounts, which are not permitted investments under regulation 1.25, and (3) a certificate of deposit whose issuer did not meet the then-existing credit rating requirement of regulation 1.25, the order finds.
Furthermore, Farr failed to diligently supervise its employees and agents in violation of regulation 166.3, the order finds. Farr failed to implement any written policies or procedures governing the opening and maintenance of customer segregated accounts and failed to implement an adequate supervisory structure to insure the proper segregation of funds, according to the order.
Farr also violated several other regulations involving customer funds, including failing to prepare and maintain certain required records and miscalculating the amount of money it was required to segregate for its customers, according to the order.
In addition to imposing the $280,000 civil monetary penalty, the CFTC order requires Farr to cease and desist from further violations of the CEA and CFTC regulations, as charged.
The CFTC thanks the National Futures Association for its assistance in this matter.
CFTC staff members responsible for this case are Theodore Z. Polley III, Ken Hampton, William P. Janulis, Scott Williamson, Rosemary Hollinger, and Richard B. Wagner of the CFTC’s Division of Enforcement, and Tom Bloom and Kurt J. Harms of CFTC’s Division of Swap Dealer and Intermediary Oversight.
Last Updated: October 10, 2012