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NIBA – Compliance Alert – NFA Recordkeeping Actions

Introducing Brokers are seeing the impact of the CFTC’s and NFA’s investigations into “off channel communications”. Since December 2021, the CFTC has imposed $1.117 billion in civil monetary penalties on 20 financial institutions for their use of unapproved methods of communication, in violation of CFTC recordkeeping and supervision requirements.  Off channel communications are communications that are subject to the firm’s recordkeeping obligations, but are made on a communication channel not monitored and preserved by the firm.  The classic example is the use of WhatsApp or Apple Messaging for business related communications.  There are two recent matters relating to Introducing Brokers and off-channel communications.

In the first matter, NFA’s business conduct committee accepted an offer of settlement from Houston Texas based Introducing Broker Bosworth Brokers LLC and two associated persons, Dennis Bosworth and Andrew Gizienski.  In settling the matter, BBL and Gizienski each agreed to pay $100,000 and Gizienski and Bosworth were deemed ineligible to serve on an NFA panel for three years.  The settling parties agreed that using an unapproved, unmonitored communication platform to communicate with customers violated the following NFA Rules:

  • Rule 2-4 by failing to observe high standards of commercial honor;
  • Rule 2-10(a) for failure to maintain written communication records; and
  • Rule 2-9(a) for failure to supervise.

In the second matter, Interactive Brokers settled a similar matter with the CFTC for $20,000,000.  Interactive Brokers Corp is a registered introducing broker and Interactive Brokers LLC is a registered futures commission merchant.  According to the CFTC “from at least 2019 to the present, Interactive Brokers failed to stop its employees, including those at senior levels, from communicating using unapproved communication methods, including messages sent via personal text and WhatsApp.”  Interactive Brokers agreed that their conduct violated the following laws and rules:

  • Section 4(g) of the Commodity Exchange Act – for failing to keep records;
  • Rule 1.31 for failing to keep regulatory records;
  • Rule 1.35 for failing to keep records in a required manner; and
  • Rule 166.3 for failing to effectively supervise its commodities business.

From the IB perspective, members should consider:

  • A review of their policies to ensure that (i) the policy forbids off channel communications; (ii) the policy is being followed; and (iii) the policy calls for effective discipline;
  • Training on recordkeeping obligations and the importance of using firm approved communication channels;
  • An annual certification that employees have and will limit business communications to approved channels;
  • Expanding approved channel monitoring to include Apple Messaging or WhatsApp;
  • Spot checking of employees personal devices, especially when supplied by the business; and
  • Lexicon searching to catch channel hopping – “let’s take this off-line” or “text me”.

Author Scott Diamond is an attorney with the Law Firm of Ballard Spahr who focuses on derivatives regulation and is on NIBA’s Toolbox Committee.  Ballard Spahr has been focusing on representing financial firms in the off-channel communications sweeps.  Scott can be reached at (917) 660-1340 and [email protected].