In a 3-2 vote, the CFTC has fined introducing broker (IB) Piper Sandler Hedging Services LLC $2m for recordkeeping violations.

The CFTC’s charges come in the wake of a parallel SEC action that netted Piper Sandler for recordkeeping violations along with 26 other firms. The SEC’s order saw the company pay a $10m fine.

According to a CFTC press release, Piper Sandler employees, including personnel at senior levels conducted unpreserved off-channel business communications from at least 2019 to the present. This even included employees tasked with maintaining regulatory compliance.

The off-channel communications also violated Piper Sandler’s internal policies and procedures, the CFTC said.

Commissioners dissent: what exactly is a “business record”?

Commissioners Caroline Pham and Summer Mersinger each dissented against issuing the fine.

Mersinger expressed concern that there was not enough forward-looking clarity with respect to how the CFTC pursued recordkeeping enforcement, and that the agency should have referred to statutory language in its order.

Mersinger claimed that the order’s acknowledgement that off-channel business communications had occurred was “conclusory,” and did not necessarily provide granular indications that a firm had run afoul of CFTC regulations or the Commodity Exchange Act.

The CEA requires that only certain types of business communication must be preserved depending on the type of entity.

For instance, CEA Section 4g(a) states that IBs must keep records for “such transactions and positions … as may be required by the Commission,” Mersinger noted.

Likewise, Mersinger stated that CFTC “Regulation 1.35 requires preservation of records related to transactions and has never, or at least for the past 86 years, contained a general mandate to preserve all records.”

Conversely, the off-channel business communications described in the order did not necessarily relate to transactions or positions.

“These generic references… fail to describe the substance of the communications at issue or to explain the kind of record that serves as the basis for the alleged violation,” Mersinger said.

Mersinger further argued that the definition of “business communication” used against Piper Sandler was overly expansive and withholds compliance clarity.

“I fear this particular case sends the message that everything is a business record, even if such a conclusion has no foundation in the Commodity Exchange Act…”

“…the mere existence of business-related communications occurring through unofficial channels is not necessarily a violation. The threshold inquiry is whether an entity failed to preserve a record they were required to preserve,” she stated.

Similar concerns were raised in Pham’s dissent: “Once again, the CFTC has no evidence that a violation of CFTC record-keeping rules for introducing brokers (IBs) actually occurred,” she asserted.

Pham further contended that the CFTC’s fine was “piggybacking” off of the SEC’s parallel action, and that punishing an IB for securities-related records was outside the CFTC’s normal regulatory ambit.

This argument echoes Pham’s dissent in the CFTC’s recordkeeping enforcement action against another IB, Cowen and Co. issued last month.

Rule violations

For the recordkeeping violations, the CFTC charged Piper Sandler with violating:

• Section 4g of the Commodities Exchange Act; and
• CFTC Regulations 1.31 and 1.35.

For related supervisory failures, the CFTC charged Piper Sandler with violating:

• CFTC Regulation 166.3.