It’s been more than five months since the revelation of PFG Best’s accounting fraud, and over a year since the collapse of MF Global. Despite the blatant failure of the NFA to carry out its duty, and despite the steps that have been taken to prevent a repeat of these regulatory failures, we haven’t seen the full implementation of reforms the industry needs.
That’s why Jeff Malec, CAIA and CEO of Attain, is contesting the 10-year tenure of John Vassalo by running for the Introducing Broker seat on the NFA Board of Directors. It’s establishment versus change. You’ve finished the first step – voicing your support to place Jeff on the ballot. Now, the voting is underway. If you’re an introducing broker who wants to see change at the NFA and you haven’t cast your ballot, we urge you to do so for Attain’s Jeff Malec.
Below we’ve reprinted his position paper, outlining his ideas on how to help repair the NFA and the futures industry’s reputation:
The past year or so has been difficult for introducing brokers and the futures trading clients they cater to. Just as many of us were beginning to recover from the MF Global fallout, another FCM scandal rocked investor confidence and highlighted many of the regulatory shortcomings we face today. We pay our dues every year and our customers pay NFA fees on every trade, but this is all we get for the millions in revenue the NFA takes in?
The current NFA board has stood by passively as regulatory confidence has deteriorated, and we deserve better. We deserve someone who believes individual investors are important to the futures industry, not just banks and institutional money. We deserve someone who is willing to push for change. I have spent my career fighting for better clarity and parity from our regulators, and if you will elect me, will continue this fight from within the NFA on the following issues.
In a post-MFG and PFG world, further protections for our clients against FCM failures is perhaps the most clear and pressing need for IBs and the customers we deal with on a daily basis. While many of the rules being written and instituted today will go a long way towards preventing another instance of FCM fraud, the institution of some form of safety net for investors is absolutely critical. Whether it is a liquidity facility modeled after Canadian protections or a SIPC-like insurance fund, we’ve all spoken with investors who have said they will not participate in futures markets until such a system is in place. If you elect me, I will fight tirelessly to see such a solution instituted.
The fact that in the year 2011, when we can access our bank accounts and make transactions from our cell phones, the NFA did not have electronic access to FCM bank accounts is an embarrassment. However, this is not the only technological realm in which the NFA is deficient. From the ORS system, to the platform for filing your 1FR-IB date – the NFA’s online system is a cumbersome relic. The NFA needs to enter the 21st century with its electronic solutions. As a Board member, I would campaign to move to a largely paperless regulatory regime, establish an electronic review record for audits to improve their efficiency, and begin an overhaul of the user interface for the NFA website.
NFA reviews of promotional material are vague at their best and unfair at their worst. Interpretation of the NFA rules and CFTC laws is constantly changing from one reviewer to the next, making it next to impossible for well-intentioned brokers to effectively compose marketing materials and strategies while staying compliant. As a result, many firms simply avoid marketing that could expand their business, stymieing industry growth. Further, some of the rules foster the distribution of inaccurate information (for instance, by the numbers, stocks are technically more risky than managed futures, but we can’t say that), and their inconsistent application often ends up favoring the largest member firms. This is one area where I have unique experience, as Attain has produced a weekly educational newsletter for the past decade, while currently managing a daily blog and active social media presence. If given the chance, I will argue for the issuance of a continuous stream of interpretive notices based on the interpretations being made by NFA staff on a day-to-day basis, so all NFA members are playing by the same rules. The current system is too inconsistent and too narrowly focused, only providing guidance for those members who submit their promotional material or are being audited.
Staffing Standards for Audit Teams
As IBs, we are subject to regular audits, but as many of us have experienced, the quality of these audits is compromised by a highly inexperienced auditing staff. We should not be responsible for explaining to auditors how orders are placed online or that the FCM handles AML responsibilities. There should be a minimum standard of knowledge for those coming in to audit our firms. If given the opportunity, I will argue to the NFA Board that we need higher staffing standards, including a minimum of 2-3 years of professional experience to be hired as an auditor, a required average of 5 years NFA experience per audit team, the creation of specialized audit teams (so that people who understand the hedging business audit hedging IBs, online trading experts audit online trading firms, and so on), and the institution of NFA member evaluations of auditors as a part of auditor job performance reviews.
Accountability When Things go Wrong
Why were there no high-profile firings or resignations following two of the worst customer fund breaches in the history of the industry – even after the PFG fraud highlighted the red flags missed by the NFA? Because there is no accountability. The NFA operates in a legal grey area as a quasi-regulatory body. They are a private entity, but in fulfilling the role of a self-regulatory organization for the futures industry, are not held to the same levels of transparency that a governmental organization is, while enjoying governmental protections in terms of recourse. Self-regulatory organizations only work in a world where the industry is capable of policing itself, but opaque regulatory behavior impedes our ability to participate in the process. If elected to the Board of Directors, I will argue for agency reforms to enhance transparency, including voluntary participation with FOIA requests, public distribution of all Board meeting minutes, and a quarterly public Q & A session. If the investing public is to trust our industry again, they need to know that we will hold our own accountable for mistakes and industry failures.
The time has come for change to visit the NFA, and I sincerely hope you’ll grant me the privilege of representing your interests on the Board of Directors. If you have any questions or concerns, please do not hesitate to reach out directly at firstname.lastname@example.org, or 312.604.0926. Thank you for your consideration.
About Jeff Malec
Mr. Malec holds the Chartered Alternative Investment Association (CAIA) designation, and has authored hundreds of white papers covering managed futures and automated trading systems. A Philosophy major from Union College, his career in the futures industry started in the famed bond pits of Chicago in the late 90’s, after which he pursued various ventures in the futures industry including trading clerk, prop trader, and futures broker, before founding IB Attain Capital in 2002.