The Commodity Futures Trading Commission (CFTC) has announced that it has issued an order settling charges against CHS Hedging, LLC, a Minnesota based futures commission merchant, for recordkeeping deficiencies and failure to obtain customer authorizations before entering trades for customers.
The order requires CHS Hedging, LLC, to pay a $650,000 civil monetary penalty, accounting for the business’s self-reporting and cooperation in connection with the Enforcement Division’s investigation.
Audio comms not retained
The order says that from June 21, 2019, to Sept. 2, 2023, CHS used at least three different recording platforms to make or keep audio recordings of communications by its associated persons (APs) with CHS customers.
At various points during that time, the CFTC said, these platforms suffered from deficiencies or other issues resulting in CHS’s failure to make or keep approximately 3,000 audio recordings of its APs calls with CHS customers. These calls would have included communications concerning quotes, solicitations, bids, offers, instructions, trading, and/or prices leading to transactions in commodity interests, the agency alleged.
The CFTC said customer calls on one of the recording platforms – the CHS’s SmartTap recording platform – were not recorded due to platform deficiencies. While some of those incidents resulted in a small number of calls being lost and were caused by isolated events such as a software patching, other incidents were more significant and potentailly impacted thousands of calls according to the CFTC.
Another example of the failure of the SmartTap plug-in was an incident that followed a reboot of CHS’s server after a software update, with the plug-in not fully restarting after the reboot, which impacted 638 calls.
After discovering each of these recording problems CHS took remedial steps to correct the deficiencies.
Unauthorized trading
The CFTC’s order also alleged that during this time, CHS, through three of its APs, placed 75 trades for seven customers without a power of attorney and without obtaining specific information from customers about the quantity and/or precise commodity interest to be purchased or sold.
One of the APs was a supervisor who likewise had placed 25 trades in two different customer accounts without first receiving a specific verbal authorization for each trade or obtaining a written authorization permitting the AP to trade on a discretionary basis. CHS terminated the supervisor’s employment over the transgression.
After discovering the unauthorized trading by its APs, CHS conducted remedial training for all APs with respect to taking and placing trades and conducting weekly reviews of telephone discussions between APs and customers.
Rule violations
The CFTC said CHS failed to make or keep approximately 3,000 audio recordings for the required one-year period set forth in CFTC Rule 1.31(b)(2) and 1.35(a)(1)(iii).
And the CFTC said the firm had violated CFTC Rule 166.2 by placing 75 trades for seven customers without a power of attorney and without obtaining specific information from customers about the quantity and/or precise commodity interest to be purchased or sold.
Saving audio files
The CFTC has stressed the importance of properly recording and retaining the appropriate, business-related audio files as stipulated under its rules and (quite typically) within the policies of the firms it oversees.
The agency settled charges last August against Goldman Sachs for violating the cease-and-desist provision of a prior settlement agreement in connection with a failure to properly record and retain mobile device calls made by its traders at the onset of the Covid-19 pandemic, in violation of these recordkeeping rules.
Goldman was ordered to pay a $5.5m civil monetary penalty. Many of the problem with the recordings had arisen due to the frequent failure of a vendor’s services that Goldman relied on to record such phone calls.
