Introducing broker Tullett Prebon FS fined $150,000

US derivatives market regulator the National Futures Association (NFA) has announced that it has ordered New York based introducing broker Tullett Prebon Financial Services LLC (TPFS) to pay a $150,000 fine.

The Decision, issued by NFA’s Business Conduct Committee (BCC), is based on a Complaint issued by the BCC and a settlement offer submitted by TPFS, in which it neither admitted nor denied the allegations.

The Committee found that TPFS failed to keep full, complete and systematic records of all transactions relating to TPFS’s business of dealing in commodity interests. The Committee also found that TPFS failed to supervise its employees’ recordkeeping activities and failed to review and supervise its associated persons’ communications.

TPFS provides intermediary services to institutional customers by, among other things, brokering swaps and block futures transactions in fixed income securities and their derivatives, financial index securities and their derivatives, and other products.

TP ICAP Americas Holdings Inc. (TP ICAP Holdings) and six individuals are listed in NFA’s Online Registration System (ORS) as principals of TPFS. TP ICAP Holdings and four of TPFS’s individual principals are also principals of Tullett Prebon Americas Corp. (TPAC), an affiliate of TPFS.

Like TPFS, TPAC is an IB Member and approved swaps firm that brokers swaps and block futures transactions.

TPFS and TPAC also utilize the same compliance procedures manual and share compliance personnel. To illustrate, the individual who serves as the head of futures compliance for TPFS is a compliance officer of TPAC. Similarly, the individual identified as Americas head of compliance for TPFS holds the same position at TPAC.

TPFS has not been charged previously in an NFA or CFTC disciplinary action. However, in September 2019, TPAC was the subject of a CFTC order that levied an $11 million civil monetary penalty and imposed certain undertakings on the firm for its failure to implement procedures reasonably designed to supervise voice brokers’ conduct on an interest rate swaps desk at the firm.

As alleged below, NFA commenced an exam of TPFS in early 2020 that found recordkeeping and supervisory deficiencies, where the nature of TPFS’s supervisory shortcomings resembled certain findings that were the subject of the CFTC’s 2019 order against the firm’s affiliate, TPAC.

NFA commenced an examination of TPFS in March 2020. As part of the exam, NFA requested voice recordings of telephone calls associated with a January 7, 2020 block trade, where one TPFS AP brokered the “buy” side and another TPFS AP brokered the “sell” side of the trade.

However, TPFS was unable to produce the voice recordings NFA requested because the firm had failed to retain the voice recordings for either AP involved in the January 7, 2020 block trade.

According to TPFS, the firm set the recording retention period for these two APs and three other APs of the firm — each of whom broker futures and securities transactions — to 96 hours when TPFS moved brokers in September 2018 from offices in Jersey City, New Jersey to its current New York City office.

TPFS failed to detect this recordkeeping violation until early 2020, after NFA requested the January 7, 2020 voice recordings in connection with its exam of the firm.

By reason of the foregoing acts and omissions, TPFS is charged with violating NFA Compliance Rule 2-10(a).

Each Member is obligated to diligently supervise the Member’s employees in the conduct of their commodity interest activities for or on behalf of the Member. However, NFA’s 2020 exam found that TPFS failed to establish and maintain an adequate system to supervise its APs’ recordkeeping activities and communications.

The retention error alleged in Count | illustrates deficiencies with TPFS’s supervision of its APs’ recordkeeping activities since the issue went undetected by TPFS for approximately 18 months, until the firm discovered it during NFA’s 2020 exam.

The duration of the error demonstrates that TPFS failed to perform adequate testing after completing the 2018 office move to ensure the firm properly retained voice recordings for the five affected APs or perform any other review of the APs’ recordings during this 18-month period.

The firm also failed to detect or ignored an error on a telecommunication report the IT Department utilized during the 2018 office move since the report listed the incorrect retention period of 96 hours for one of the affected APs.

According to the January 2020 compliance procedures manual that TPFS, TPAC, and their affiliated IBs utilize, the IT Department is responsible for monitoring the operation of the voice recording system to ensure proper functionality. However, the procedures manual is silent on which department is responsible for ensuring that employees who are required to keep voice recordings under CFTC and NFA Requirements make and retain those recordings.

TPFS also acknowledged that the firm did not have a written policy to check voice systems regularly until around January 2020. In addition to TPFS’s deficient program to oversee employees’ recordkeeping activities, the firm utilized inadequate procedures to review and supervise APs’ communications.

For APs’ oral communications, TPFS only reviews voice recordings if an issue is noticed in a written communication (e.g., IM, chat). Otherwise, the firm does not perform periodic independent reviews of APs’ oral communications.

TPFS’s policy presumes incorrectly that detecting no issues in an AP’s written communications means there are no issues with the AP’s oral communications. In addition, the firm’s policy disregards an undertaking imposed against TPFS’s affiliate (i.e., TPAC) in the CFTC’s 2019 order, discussed above, which required increased random reviews of voice-brokering activities to enhance TPAC’s supervisory program of the desk involved in the order.

NFA’s exam also found that TPFS utilized inadequate supervisory procedures to review APs’ electronic communications since the firm failed to adopt and implement written procedures regarding the oversight of those communications, to include the identity of the person responsible for conducting the review, and a description of the process, scope, and frequency for reviewing communications.

TPFS represented to NFA during the exam that the firm and its “TP ICAP” affiliated IBs began drafting revised written supervisory procedures in December 2019. However, TPFS apparently has not yet adopted and implemented the revised procedures since NFA has not received a copy of the procedures, despite instructing TPFS more than one year ago to provide them within 10 days after implementation.

By reason of the foregoing acts and omissions, TPFS is charged with violating NFA Compliance Rule 2-9(a).

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