Peregrine regulator scolded in past for taking brokers' word

WASHINGTON Wed Jul 18, 2012 7:07pm EDT

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WASHINGTON (Reuters) - The primary regulator of failed futures brokerage Peregrine Financial Group was criticized in a 2002 report for taking brokers at their word that they would clean up compliance problems.

The Commodity Futures Trading Commission report on the National Futures Association's performance came in the middle of a two-decade long fraud at Peregrine that was only disclosed last week.

"NFA's failure to obtain documentation demonstrating that member firms had corrected compliance problems identified during audits and investigations, or at least written agreements to correct violations, is troubling," the CFTC wrote in what was an otherwise generally upbeat review of the NFA's disciplinary program.

"Accepting oral representations that repetitive compliance problems will be remedied is a questionable practice," the CFTC added.

The NFA has been in the spotlight since Russell Wasendorf Sr, the founder of Peregrine, attempted suicide last week and left a note saying he duped regulators for roughly 20 years as he bilked futures customers of more than $100 million.

The FBI's complaint against Wasendorf said he used a P.O. Box to intercept bank statements and doctor them before sending them on to his own firm and the NFA.

Although the CFTC report on the NFA is a decade old, some of the shortcomings highlighted in the report arguably go to the heart of the NFA's oversight of Peregrine, also known as PFGBest.

The NFA and the CFTC over the years have both filed various enforcement actions against Peregrine.

One NFA disciplinary case dating back to 1996 alleged that Peregrine failed to properly calculate segregated funds and failed to maintain adequate segregated funds.

The brokerage agreed to settle with a $75,000 fine and did not admit or deny the allegations.

More recently, in February this year, the NFA fined PFGBest and several of its principals $700,000, alleging supervisory failures over guaranteed introducing brokers, which were used by PFGBest to help conduct its retail business.

Karen Wuertz, a spokeswoman for the NFA, said that prior to the CFTC's 2002 report, the NFA used to only ask for written corrective action plans from firms in the case of serious violations.

After the CFTC's report, the NFA changed its policy and now it routinely asks every firm to say in writing it will fix any problems uncovered in the audit, she said.

The report was one of the CFTC's periodic exams of NFA and other self regulatory organizations, or SROs, to ensure they are conducting proper oversight.

A more recent review completed in June 2010 looked at the NFA's process for registering and de-registering regulated firms. That report flagged concerns that the NFA had no procedures for validating firms' addresses and proper legal names.

Wuertz said the NFA has responded to and addressed all of the concerns brought up the CFTC. Other CFTC reviews of NFA's operations were not immediately available.

The collapse of Peregrine comes a little more than eight months after the implosion of futures brokerage MF Global, which was also policed by an SRO.

The spectacular failures of the brokerages have called into question the wisdom of the SRO model and whether it adequately protects customer funds.

Investigators are still piecing together why there is an estimated $1.6 billion shortfall of customer money at MF Global, which was directly policed by exchange operator CME Group Inc.

CFTC Chairman Gary Gensler has said his agency does not have the funds to regularly examine hundreds of brokerages, but has called for a reassessment of the role of SROs.

Debate over the self-regulatory system is likely to heat up in the coming weeks. The U.S. House Agriculture Committee said it plans to hold a hearing on July 25 about the oversight of the swaps and futures markets, in light of Peregrine and MF Global.

Dan Roth, president of the NFA, is expected to testify about oversight at several congressional hearings. (Reporting by Sarah N. Lynch; Editing by Karey Wutkowski and Tim Dobbyn)

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