Financial Regulation and Compliance. Kotz H. David

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where it believes that investors have been harmed. FINRA investigations are non-public and confidential, and firms and individuals are entitled to be represented by counsel. To conduct its investigations, FINRA requests documents and takes sworn testimony from firms and associated persons. FINRA may also contact customers and other individuals who are not within FINRA's jurisdiction to learn about the member firms' activities and who may provide information voluntarily to FINRA. FINRA then analyzes the evidence it obtained, reviews the applicable law, and makes a preliminary determination of whether or not a violation appears to have occurred. If FINRA determines that rules have been violated, it will resolve whether the conduct merits a recommendation of formal disciplinary action. If the violation is of a minor nature where there is an absence of customer harm or detrimental market impact, the matter may be settled with an informal disciplinary action. Otherwise, FINRA will proceed through a more formal route by commencing a full-blown Enforcement proceeding. In 2014, FINRA brought 1,397 disciplinary actions against registered individuals and firms, levied fines totaling more than $134 million, and ordered restitution of more than $32.3 million to harmed investors.20

      FINRA also provides investor education through the implementation of programs like BrokerCheck, which gives investors a quick way to check a broker's disciplinary and professional background. In FINRA's Market Data Center, investors can find information and data on equities, options, bonds, and mutual funds.21 FINRA's Trade Reporting and Compliance Engine (“TRACE”) system helps investors monitor their bond investments by providing them with timely and accurate pricing information for corporate and Agency bonds.22 FINRA also has a dispute resolution forum, which is the largest in the country for the securities industry, handling nearly 100 percent of securities-related arbitrations and mediations from more than 70 hearing locations – including at least one in all 50 states, London, and Puerto Rico.23

      1.4 THE COMMODITY FUTURES TRADING COMMISSION (CFTC)

      The SEC's counterpart for futures exchanges and brokers is the CFTC. The CFTC is an independent Agency of the United States government that regulates futures and options markets. The stated mission of the CFTC is “to protect market participants and the public from fraud, manipulation, abusive practices, and systemic risk related to derivatives – both futures and swaps – and to foster transparent, open, competitive and financially sound markets.”24 The CFTC states that it carries out this mission by “polic[ing] the derivatives markets for various abuses and works to ensure the protection of customer funds.”25

      In carrying out this mission, the CFTC polices the derivatives markets for various abuses and works to ensure the protection of customer funds. The CFTC also oversees designated contract markets, swap execution facilities, derivatives clearing organizations, swap data repositories, swap dealers, futures commission merchants, commodity pool operators, and other intermediaries.

      The CFTC is composed of three major divisions: Market Oversight, Clearing and Intermediary Oversight, and Enforcement. The CFTC's Division of Market Oversight ensures that the futures markets are operating efficiently without manipulation and fraud. These tasks are executed first by reviewing and analyzing the very diverse group of instruments and products to ensure that they are not susceptible to manipulation. Market Oversight also conducts active market and trade practice surveillance of trading activity on designated contract markets (known as “DCMs”), like the New York Mercantile Exchange. Traders establishing positions on DCMs are subject to reporting requirements so the CFTC can evaluate position sizes to detect and deter manipulation. Market Oversight monitors the activities of large traders, key price relationships, and relevant supply and demand factors for the estimated 1,400 active futures and option contracts in the country to ensure market integrity. In addition, CFTC surveillance economists prepare weekly summary reports for futures and option contracts approaching their expiration periods.

      The CFTC's Division of Clearing and Intermediary Oversight ensures the financial integrity of transactions on the markets regulated by the CFTC. This division attempts to establish that the intermediaries managing these funds are properly registered, perform appropriate recordkeeping, have adequate capital, employ fair sales practices, and protect the funds their customers invest. Intermediaries overseen by the CFTC include futures commission merchants (“FCMS”), including banks and broker-dealers with specialized futures operations, as well as stand-alone futures trading houses.26

      The CFTC's Division of Enforcement investigates and prosecutes violations of the federal laws governing commodity trading by individuals and firms who are engaged in activities that directly or indirectly affect commodity futures and option trading on domestic exchanges. These federal laws prohibit fraud and abusive practices in solicitations of futures or options, such as falsely guaranteeing profits, minimizing risk, and misrepresenting performance history. In addition, the CFTC is authorized to bring enforcement actions for misappropriating customer funds, and often refers matters to criminal authorities.27

      The CFTC administers the Commodity Exchange Act (“CEA”), 7 U.S.C. section 1 et seq., which prohibits fraudulent conduct in the trading of futures contracts. The CEA also establishes a comprehensive regulatory structure to oversee the volatile futures trading markets. The CEA requires all FCMs to register with the CFTC, unless they qualify for a particular exemption.28 CFTC regulations promulgated pursuant to the CEA also require all registered FCMs to be a member of a Futures Association.29

      1.5 THE NATIONAL FUTURES ASSOCIATION (NFA)

      The National Futures Association (“NFA”) is the industry-wide, self-regulatory organization for the U.S. futures industry and the “designated” regulatory organization for non-clearing FCMs.30 The NFA screens all firms and individuals wishing to register with the CFTC and become members of the NFA. Applicants must meet fitness requirements to determine if they have ever been disciplined or subject to regulatory proceedings in the past, and must provide fingerprint cards for Federal Bureau of Investigation (“FBI”) background checks. In addition, individual registrants must pass proficiency testing requirements. The NFA has the authority to deny, revoke, suspend, restrict, or condition the registration of any firm or individual.

      The NFA has adopted a comprehensive set of rules covering the business conduct of its members, including sales practices, recordkeeping, reporting, risk disclosure, discretionary trading, disclosure of fees, and minimum capital requirements.

      Pursuant to its examination or audit program, the NFA is required to examine FCMs on an annual basis if they hold customer funds.31 As part of these examinations or audits, the NFA examination may include all the FCM's procedures, books, and records associated with its commodities business, including, but not limited to:32

      ■ Corporate records.

      ■ Anti-money laundering policies and practices.

      ■ Sales practices.

      ■ Supervisory procedures.

      ■ Account opening documents.

      ■ Order tickets.

      ■ Bunched order allocations.

      ■ Margin policies.

      ■ Promotional material.

      ■

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