Another crackdown on FX IBs in the US: NFA issues detailed complaints to two companies
Operating as an FX introducing broker in the United States is widely regarded as a business which requires a great deal of tenacity and has considerably more expenses and regulatory stipulations than any other jurisdiction. The National Futures Association (NFA), which regulates all IBs as well as brokerages that conduct retail business across all asset […]
Operating as an FX introducing broker in the United States is widely regarded as a business which requires a great deal of tenacity and has considerably more expenses and regulatory stipulations than any other jurisdiction.
The National Futures Association (NFA), which regulates all IBs as well as brokerages that conduct retail business across all asset classes, requires that the net capital adequacy that must be maintained at all times by FX IBs remains above $45,000 which must not be used for operational purposes or mixed with client funds.
Additionally, unlike in many jurisdictions, IBs in the United States are subject to regular and very detailed inspections by the NFA which take into account very macro aspects of their business. For this reason, a number of IBs have taken steps to move their target audience away from the United States during recent times, but those with high quality, well funded and organized businesses continued, attracting a discerning client base.
The NFA’s remit toward viewing the operations of IBs through a metaphorical microscope was highlighted again today, as the regulator has filed simultaneous complaints against three FX introducing brokers in different parts of the country.
Vankar Trading Corporation falls foul of capital adequacy and recordkeeping requirements
Vankar Trading Corporation is an FX IB and Swap Firm Member of the NFA, and is operated by John Spero Karvelas, based in Chicago, Illinois.
According to the NFA’s complaint which was filed this week, an examination into the operations of the company has been concluded. The examination began in July 2015 as the NFA believed that specific aspects of the conduct of the company was in violation of NFA rules, spurred by prior compliance issues that have resulted in previous fines totaling tens of thousands of dollars having been handed to Vankar Trading Corporation by the NFA.
During the 2015 exam of the firm, NFA reviewed Vankar’s capital calculations and noted deficiencies that necessitated adjustments which decreased Vankar’s capital by nearly $30,000 and caused the firm to be below its minimum adjusted
net capital requirement by nearly $10,000. The adjustments NFA made were as follows:
-The NFA reclassified a $25,000 receivable – which represented a capital contribution receivable from Karvelas – from a current asset to a noncurrent asset on Vankar’s balance sheet. NFA made this adjustment because the receivable was not secured by readily marketable collateral but by a real estate investment held by Karvelas and his father.
-The NFA also reclassified $5,000 from a current asset to a non-current asset. The NFA made this adjustment because this asset was a restricted asset. By reclassifying this asset, the 50% haircut that the firm had taken was eliminated which increased the firm’s excess net capital position by the amount of the haircut.
The NFA also made an adjustment for $9,144 in liabilities, which the firm had failed to record, which increased the firm’s liabilities. By reason of the foregoing acts and omissions, Vankar is charged with violating NFA Financial Requirements Section 5(a).
In addition to this allegation, the NFA also asserts that the examination found that Vankar’s books and records were inaccurate and incomplete in certain respects. For example, Vankar’s January and February 2015 net capital computations were inaccurate and required several adjustments, and the firm’s May 31 ,2015 balance sheet and general ledger reported balances that were inconsistent with those reported in its net capital computation for the same time period. In addition, Vankar failed to prepare a net capital computation for March 2015. By reason of the foregoing acts and omissions, Vankar is charged with violating NFA Compliance Rule 2-10.
NFA disapproves of salespeople employed by IBs working from their homes without registering as a branch office
Finally, the NFA asserts that Vankar allowed two of its associated persons (APs) to solicit customers from their homes rather than the main office. Moreover, Vankar failed to list these two home offices as branch offices or list the two APs who lived and worked at these offices as branch office managers.
Additionally, Vankar failed to conduct a branch office exam of its Tarpon, Florida branch office which was a significant omission on its part considering that the sole AP at that office, Barbara Cohen, was the subject of a Commodity Futures Trading Commission (CFTC) investigation.
The CFTC’s investigation focused on a website Ms Cohen maintained – which promoted hypothetical trading results without disclosing that such trading results were hypothetical- and on certain statements Cohen made to CFTC staff suggesting that such trading results were based on actualtrades.
As a result of the CFTC’s investigation, the CFTC charged Ms Cohen with making false statements to the CFTC and not disclosing that profitable trading results were based on hypothetical trading. The CFTC fined Cohen $140,000 for these violations.
Based on the CFTC’s investigation, of which Vankar and Karvelas were aware, Vankar should have undertaken a thorough and robust exam of Cohen’s office. Instead, the firm elected not to perform any exam of cohen’s Tarpon, Florida branch office let alone a thorough exam.
Vankar also failed to implement procedures to ensure compliance with NFA Bylaw 1101. Specifically, Vankar opened an account without performing any due diligence during the account opening process to ensure that the entity opening the account was not required to be registered as a commodity pool operator or was exempt from registration. This was not a new occurrence. ln 2013, Vankar did business with a unregistered entity that should have been registered as an IB with NFA.
Mr. Karvelas, as the president, a principal, and an AP of Vankar, exercised a controlling influence over Vankar’s activities and was responsible for supervising all aspects of the firm’s operations. However, as evidenced by the numerous deficiencies and rule violations alleged above, the NFA asserts that Mr. Karvetas and Vankar failed to adequately catry out their supervisory responsibirities, and if a fine is imposed, it could be up to $250,000 according to the NFA’s tariff.
Californian FX company AK Financial cited as management took loans from managed fund to pay personal and business expenses
Misappropriation of the stipulated net capital by IBs and FX firms in North America may well indeed be a serious breach of NFA rules, however borrowing money to pay personal and operational expenses from managed funds is very serious indeed, as it constitutes interference with assets under management, a major feature of the Dodd-Frank Act of 2010 which handed regulatory authorities laws to take a very tough stance on this following the demise of MF Global and Peregrine Financial Group, both of which collapsed and took several million dollars worth of client monies with them.
The second firm in this week’s purge by the NFA is AK Financial and its owner Andi Kim, from Los Angeles, California.
The NFA’s complaint against AK Financial states that aside from its FX business, it operated one commodity pool, the Aldebaran Fund LP (AFLP), which, at its peak, had six participants.
AFLP’s December 31,2014 certified Annual Report reported a receivable balance in the amount of $4,400 due from AK Financial (AFLP’s CPO and General Partner) for a Ioan AFLP made to AK Financial.
According to Mr. Kim, AK Financial had borrowed the $4,400 from AFLP to pay firm expenses including compensation to him as well as his personal expenses such as rent, health insurance, and internet charges. Mr. Kim subsequently repaid the $4,400 to AFLP.
In addition to the $4,400 !oan, AK Financial and Kim took additional loans from AFLP totaling $10,500. Specifically, from January through May 2015, Mr. Kim took monthly loans of approximately $2,000 per month which were used to pay AK Financial’s business expenses and his personal expenses. AK Financial repaid AFLP for these loans but Mr. Kim has not yet reimbursed AK Financial for his share of these loans.
The NFA commenced an exam of AK Financial on July 13,2015 and determined that, in addition to the loans alleged above in the amount of $4,400 and $10,500, AK Financial borrowed an additional $7,640 from AFLP by having AFLP reimburse participants $2,000 in upfront fees they were improperly charged, which AK Financial should have reimbursed, and pay $5,640 of AK Financial’s expenses which, according to the disclosure document, should have been paid by AK Financial.
The circumstances surrounding the $2,000 in upfront fees are as follows. AK Financial charged $2,000 in upfront fees to AFLP. However, instead of AFLP paying these upfront fees, two participants of AFLP bore the total cost of these upfront fees which Kim deposited in AK Financial’s bank account. Mr. Kim assured these two participants that they would be reimbursed the upfront fees that they paid when they redeemed their interests in the AFLP.
However, the NFA states that when Mr. Kim reimbursed these two participants the $2,000 in upfront fees, he used AFLP’s funds – not those of AK Financial, which was the recipient of the upfront fees paid by the two participants of AFLP : to pay the reimbursements. This constituted an improper advance or loan from AFLP to AK Financial of $2,000.
With respect to the $5,640 in expenses that AFLP paid, they were paid in contravention of AFLP’s pool disclosure document which required, in pertinent part, that AK Financial pay all expenses of AFLP up to $25,000 during the first 12 months of AFLP’s operations. Therefore, AK Financial was required to pay the $5,640 in expenses of AFLP – which included $3,000 for AFLP’s 2014 audit and tax filing, $2,600 in NFA fees and dues, and $40 in bank fees, as they were under $25,000 and incurred during AFLP’s first twelve months of operation.
However, instead, AK Financial had AFLP pay these expenses which constituted an advance or loan to AK Financial of $5,640. The NFA advised Kim that AK Financial was required to reimburse AFLP for the additional $7,640 it received in advances and loans for the upfront fees it reimbursed and the expenses it paid on behalf of AK Financial. However, Mr Kim represented that neither he nor AK Financial had the financial wherewithal to repay AFLP.
Additionally, between March 2014 and July 2015, Kim took a total of six personal loans ranging from $2,600 to $10,000 from AFLP, which was his primary source of “income” during this time. Three of these loans appear to be still outstanding.
The principal amount of these outstanding loans is $20,000 and they have annual interest rates ranging from 8% to 20%. The NFA concurs that neither Mr. Kim nor AK Financial apparently is in a financial position to repay these loans.
According to the NFA, Mr. Kim is responsible for AK Financial’s operations while his colleague Mr. Yu is the financia! backer of the firm. Mr. Kim conducted all trading for AFLP, solicited and communicated with AFLP’s participants, prepared and distributed AFLP’s disclosure document and AK Financial’s account statements, and submitted all required regulatory filings to the NFA. Further, Kim had full authority to transfer funds out of AFLP’s operating bank account and was the individual who created and/or facilitated the loans and advances from AFLP to AK Financial.
By reason of his position at the firm, Mr. Kim had a duty to diligently supervise the firm’s operations and activities to ensure that they complied with NFA requirements. However, as evidenced by the numerous impermissible loans and advances that were made by AFLP to AK Financial, it is apparent that Mr Kim failed to adequately carry out his supervisory responsibilities. A decision is yet to be made, however Mr. Kim has been requested to respond to the complaint, which, if upheld could result in a substantial penalty and suspension of NFA membership.