WASHINGTON (Legal Newsline) - The Farr Financial Inc. of San Jose, Calif., has agreed to pay a $280,000 penalty with the U.S. Commodity Futures Trading Commission on charges that it failed to properly invest segregated funds and supervise investment activities.
Money, securities and other property are received from future commission merchant (FCM) customers in order to margin, guarantee or secure the customers' futures and options trades.
According to the Commodity Exchange Act and CFTC regulations, FCMs must separate customer funds from funds belonging to the FCM. Customer funds can be invested but only in investments detailed in CFTC regulation 1.25, such as obligations of the United States or subdivision thereof, guaranteed as to principal and interest, and other specified instruments that satisfy a general prudential standard consistent with preserving principal and liquidity for customer funds.
The CFTC order alleged from late 2007 through late 2010, Farr failed to comply with regulation 1.25 by investing customer funds in at least seven different accounts.
According to the CFTC, the illegal investments that violated regulation 1.25 were an investment in a money market mutual fund in which funds could not be withdrawn the next business day, five savings or money market deposit accounts, and a certificate of deposit whose issuer did not meet the then-existing credit requirements.
Farr employees and agents invested customer funds while not thoroughly supervised, which is in violation of regulation 166.3, the CFTC said. In addition, other failures of Farr were not implementing any written policies or procedures governing the opening and maintaining of customer segregated accounts and Farr did not provide adequate supervisory structure to ensure the proper segregation of funds, the CFTC said.
Other regulations that were allegedly violated include failure to prepare and maintain required records and miscalculating the amount of money required to segregate for customers, the order found.
Farr will pay the $280,000 civil penalty, and in addition, the final CFTC order will require Farr to cease and desist from further violations of the CEA and CFTC regulations.