Release: #4269-99 (CFTC Docket No. 99-12)
For Release: May 24, 1999
CFTC FILES AND SETTLES ACTION AGAINST REFCO, INC. FOR ORDER-TAKING AND RECORDKEEPING VIOLATIONS AND FOR FAILING TO SUPERVISE
Company Ordered to Pay $7 Million, Including $1 Million To Fund An Industry Study, And to Cease And Desist From Further Violations, and to Conduct an Internal Review Concerning Refco's Compliance Policies and Procedures
WASHINGTON -- The Commodity Futures Trading Commission (CFTC) today announced that it issued an order, simultaneously instituting and settling an administrative proceeding, finding that Refco, Inc. (Refco), a registered futures commission merchant, violated provisions of the Commodity Exchange Act (CEA) and CFTC regulations. The CFTC order finds that Refco failed to comply with CFTC regulations regarding order-taking and recordkeeping in handling customer orders, in violation of section 4g of the CEA and regulation 1.35(a-1)(2). The order also finds that Refco failed to administer a proper supervisory system and failed to investigate indications of improper handling of trades, in violation of CFTC regulation 166.3. Refco consented to issuance of the order without admitting or denying the findings contained in it.
The CFTC ordered the company to cease and desist from further violations of those provisions of the CEA and to pay a total of $7 million, of which $6 million will be paid immediately as a civil monetary penalty. The remaining $1 million will be used to fund a study of issues associated with order transmission and entry procedures for exchange-traded futures and options and the diligent supervision of the order transmission and entry process by commodity professionals. The study will be overseen by representatives of the National Futures Association and the Futures Industry Institute, among others. This is the first CFTC order ever to contain such a provision.
The order also requires Refco to conduct an internal study by its new General Counsel to review and make recommendations concerning its compliance policies and procedures related to its handling of trades by its trading floor and back office personnel as may be necessary to conform such procedures to the requirements of the CEA, the CFTC regulations and exchange rules, and to prevent recurrence of the type of conduct discussed in the order.
According to the order, the matter arose out of trade allocations by a registered introducing broker (IB). The order states that, from at least January 1995 through December 1995, the IB typically placed orders for thousands of treasury bond futures and options contracts per day for his customers through Refco, and the IB placed a substantial number of such orders without providing account identification to Refco. After the orders were executed, according to the order, the IB assigned those trades to customer accounts, directing positions as the IB chose, and sometimes moved trades between accounts after trades had been assigned and cleared. In connection with the IB's trading, the order finds that Refco failed to comply with CFTC regulations regarding order taking and recordkeeping in handling customer orders, in violation of section 4g of the CEA and CFTC regulation 1.35(a-1)(2).
The order also finds that Refco violated CFTC regulation 166.3 by failing to administer a proper supervisory system to oversee the process of order taking and the receipt and changing of customer identification on orders. In addition, the order finds that Refco had indications of the improper handling of trades which it failed to investigate properly, in violation of CFTC regulation 166.3.
Geoffrey Aronow, the Director of the Division of Enforcement, commented on the order and settlement:
"This settlement culminates a critical aspect of this matter. It demonstrates the Commission's commitment to impose substantial sanctions when confronted with serious recordkeeping and supervision failures. It also provides for an innovative effort to further the development and promotion of good practices and conduct in the industry through the funding of a study conductd by industry experts. We hope that this study will promote industry practices that provide a higher level of customer protection and market integrity. If so, this settlement will have an impact felt well beyond the parties involved in the years ahead. I am very proud of the work of the staff of the Division in bringing this aspect of this investigation to such a successful conclusion."
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