R.J. O’Brien & Associates Fined $750,000 in Two Settlements with US Regulators

The client allocated profitable trades to accounts where he had an interest, and less profitable trades to pool accounts.

R.J. O’Brien & Associates LLC, the oldest and largest independent futures brokerage and clearing firm in the United States, will pay $750,000 in two separate settlements with the CFTC and NFA over claims of inadequate supervision and the violation of prior regulator orders related to a client’s trade allocation scheme.

According to the CFTC, between 2013 and 2014, a client of RJO executed bunched orders on behalf of its customer and proprietary accounts but took improper advantage of post-execution allocation.

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Specifically, the unnamed client, who was registered as a Commodity Pool Operator and Commodity Trading Adviser, allocated profitable trades to accounts where he had a proprietary interest, and less profitable trades to customer or pool accounts. The alleged misconduct violates the regulator’s rules requiring such allocations to be “fair and equitable,” with no accounts receiving consistently favorable or unfavorable treatment.

Red flags and previous ban orders

As a registered trader, the unnamed client was allowed to bunch and allocate trades on behalf of multiple customers, but profits or losses must be distributed fairly. R.J. O’Brien & Associates LLC, which was registered as a futures commission merchant during the period at issue, was supposed to monitor trades for unusual allocation activity, but it didn’t, the CFTC found.

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Despite various red flags, RJO’s employees allowed the client’s activities to continue. Even after the NFA issued two orders that banned the client from soliciting funds and ultimately banned him from trading altogether, the client continued the unfair allocation scheme from an account in the name of his spouse.

The CFTC alleged that RJO was at fault for failing to conduct proper training for its employees and implement policies for the post-execution allocation of bunched orders.

“RJO’s failure to identify the relationship between the Client and the Spouse Account demonstrated the insufficiency of RJO’s policies and procedures regarding the opening of new accounts and compliance with regulatory actions,” explains the watchdog.

In turn, a spokesperson of R.J. O’Brien & Associates” commented to Finance Magnates: “R.J. O’Brien has a firm commitment to meeting the highest levels of compliance and supervisory activity throughout the organization. It’s at the core of who we are as a company. Our firm was in no way involved in the underlying misconduct identified in this matter by the NFA, as is clear from the NFA decision and CFTC Order. RJO has diligently undertaken extensive efforts – particularly since the actions identified in the order – to invest in, and continually improve upon, our processes and systems. Among more than a dozen of the newest enhancements are detailed procedures developed with input from every department in the organization, and clearly delineated responsibility for following through on these procedures; enhanced technology; a new account management system; and revised account maintenance policies. We also have more than doubled our compliance and legal staff in recent years to keep pace with the changing regulatory environment. RJO cooperated with the regulators on this matter and is pleased to move beyond it.”

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