by James Welsh on July 18, 2012
The implosion of Iowa-based Peregrine Financial Group has thrust a spotlight upon an industry regulatory organization that, while powerful in the world of futures commission merchants, may be little known to the general public: the National Futures Association.
Even financial novices have at least heard of the SEC, or FINRA, or the CFTC. But ask about the NFA – the National Futures Association – and you may get a blank stare.
Yet as the New York Times has pointed out, it was the National Futures Association, with offices in Chicago and New York, that appears to have missed signs of trouble at PFG when its founder, Russell Wasendorf, Sr., was admittedly falsifying financial statements and lying to regulators and clients for the better part of two decades.
And it was the National Futures Association that only belatedly reported that when the veil was drawn back at PFG, an estimated $215 million in customer money was discovered missing. Mr. Wasendorf, whose attempted suicide blew the lid off the scandal, is now facing criminal charges that will no doubt grow in severity.
It doesn’t stop there. On July 13, the Huffington Post published a Reuters report that the National Futures Association has been criticized for sending out recent college graduates to investigate the books and dealings of highly complicated transactions undertaken by futures traders.
The NFA’s mission is to oversee companies involved in extremely complex trading strategies, including futures and options, commodities, foreign exchanges, treasury bonds, and more. With no disrespect to the virtues of youth, it might seem appropriate to place such onerous duties into the hands of an examiner slightly more experienced than your typical 22-year-old with a freshly-minted accounting degree.
Having said all that, it must be noted that the National Futures Association, which had more than $45 million in unrestricted revenues in 2011, seems anxious to spend some money and move quickly to make up for possible errors of the past. Within days after taking an emergency enforcement action against Peregrine, it announced the hiring of a law firm to inspect its procedures in such cases as PFG, make sure they are being followed, and recommend any changes needed to improve fraud detection and protection of segregated customer funds.
The next day, the National Futures Association followed with another announcement: Beginning immediately, the balances of all customer segregated bank accounts at futures commission merchants will be confirmed through a Web-based electronic process. No more cooking the books behind closed doors, the way Russell Wasendorf did for 20 years.
The NFA regulates 4,200 firms and 55,000 individuals. It is difficult to imagine the SEC moving this quickly, no matter how dire an emergency may be.
And the law firm being hired is Jenner and Block, a national securities law specialist that has 450 attorneys and has been around since 1914. You don’t get that kind of service for the cost of a small-town DUI lawyer.
It might be said that in the case of the National Futures Association, expeditious action is being taken and things are looking up. This is a good thing, even if it does appear in a rear-view mirror.
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James Welsh is a financial writer specializing in compliance and securities fraud issues. He also authors the “Top 10” column at www.thestreetsweeper.org, and has held staff editing and writing positions at newspapers including The Times-Picayune of New Orleans and the Orange County (Calif.) Register.