On Friday, Russell Wasendorf Sr., founder of failed brokerage firm PFGBest, was arrested on fraud charges related to the bankruptcy of its Peregrine Financial Group unit and a missing $215 million in customer funds.
Coincidentally, hours later, the Commodity Futures Trading Commission approved rules intended to protect investor funds from misappropriation that were prompted by the similar collapse of MF Global and disappearance of $1.6 billion from its client accounts .
The CFTC-approved rule changes, submitted by the National Futures Association (NFA) target customer funds held by futures commission merchants (FCMs).
The rules require FCMs to strengthen their controls over the treatment and monitoring of funds held for customers trading on U.S. contract markets (segregated accounts) and for funds held for foreign futures and foreign option customers trading on foreign contract markets (Part 30 secured accounts).
Among the rules:
- FCMs must hold sufficient funds in Part 30 secured accounts to meet their total obligations to customers trading on foreign markets. This will be calculated under the net liquidating equity method representing the total account balance owed to customers. FCMs will no longer be allowed to use the alternative method, which allowed them to hold a lower amount of funds representing the margin on their foreign futures.
- FCMs must maintain written policies and procedures governing the maintenance of excess funds in customer segregated accounts and Part 30 secured accounts;
- Any withdrawals that are in excess of 25 percent of the excess segregated or Part 30 secured funds that are not for the benefit of customers must be pre-approved in writing by senior management. FCMs must also file notice with NFA of any withdrawal of 25 percent or more of the excess segregated or Part 30 secured amount funds that are not for the benefit of customers.
- FCMs must file segregation and Part 30 secured amount computations on a daily basis with the NFA. Detailed information must be provided regarding the depositories holding customer funds and the investments made with customer funds as of the 15th and last business day of each month.
- FCMs must file with the NFA additional monthly net capital and leverage information.