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The NFA has fined Direct Hedge, a Danish firm, $70,000 for failing to keep required communication records, and registering a required individual. With the NFA arguing that the firm failed to diligently supervise the firm and its employees, this serves as yet another reminder for firms to double check NFA expectations are met.
Direct Hedge is a registered introducing broker and swap dealer, operating as an execution-only introducing broker. It specializes in brokering block futures and bilateral over-the-counter swap contracts using a proprietary electronic trading platform. The platform did not execute trades automatically and the firm’s associated persons posted executed trades onto the platform.
Following an examination in 2021, the firm was charged with multiple violations of NFA bylaws, including failing to maintain full and complete records of all transactions relating to its business of dealing in commodity interests, failing to adequately supervise its associated persons and failing to register its associated persons. The NFA alleged that the failure to supervise was evident by the firm’s execution of a pro forma annual questionnaire, without conducting adequate due diligence on the principal’s responses to the questionnaire. Had the firm attempted to substantiate its responses, the failure would have been detected.
Meeting NFA books, records and associated person requirements
NFA members must comply with NFA Compliance Rule2-10(a) that requires all members to maintain adequate books and records necessary and appropriate to conduct business. Among other requirements, the books and records must include policies and procedures related to client transactions and e-communications. Each member is also required to maintain in English version of:
- Any documents filed with the CFTC and/or NFA.
- Promotional material, including disclosure documents and website intended for viewing by customers located in the US and its territories.
- Written policies and procedures required by CFTC and/or NFA.
- Foreign-language documents, records and financial information in US dollars.
NFA members must also comply with NFA Bylaw 301(b), which requires members to register anyone associated with a member of NFA, otherwise known as an associated person (AP). An AP is an individual who solicits orders, customers or customer funds, or who supervises those engaged in activities. Books and records kept within the NFA system (ORS) must be updated immediately when there is a change of AP.
NFA members are also required to supervise employees and agents in the conduct of their business, and demonstrate appropriate levels of diligence which can be conducted by the Chief Compliance Officer or delegated to the broader compliance team.
This case serves as a reminder for all NFA Members to review your books and records, confirm that you have English versions of all policies and procedures (if appropriate) and visit the ORS system to double check if all APs listed in the system are accurate.
Prior to your next annual self-questionnaire, you should review all NFA policies and procedures, understand the compliance duties and supervision activities and ensure procedures are not only in place, but well documented too.
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