Sanctions Imposed for E*TRADE Entities’ Self-Reported Record Retention Violations
In In Re E*TRADE Securities LLC and E*TRADE Clearing LLC, No. 17-07 (CFTC Jan. 26, 2017), the U.S. Commodity Future Trading Commission (CFTC) accepted a settlement offer (“Offer”) from E*TRADE Securities LLC and E*TRADE Clearing LLC (collectively “E*TRADE Entities”) regarding self-reported violations of CFTC record retention and supervision requirements. The CFTC found both entities violated supervisory duties and failed to preserve and maintain audit trail logs for customers. As a result, the CFTC mandated future compliance with retention policies and payment of a civil fine. E*TRADE agreed to enter into the Order without admitting or denying any of the findings or conclusions therein.
According to the Order, the E*TRADE Entities learned as a result of an internal review conducted in January 2014 that they had not preserved certain customer electronic audit trail logs. E*TRADE Securities used a third-party vendor to generate these logs on a monthly basis. The vendor stored each record for a ten-day period and allowed E*TRADE Securities to download and save the information. The vendor informed E*TRADE Securities of this retention policy by email, however, E*TRADE Securities employees did not take additional steps to preserve audit logs.
E*TRADE Securities began downloading information daily from the third-party vendors once it discovered the retention error and attempted to recover the missing log data. In the same time frame, E*TRADE Clearing learned its internal database did not store audit logs automatically. E*TRADE Securities could not recover audit logs from October 2009 through October 2011, and from June 2012 through December 2012. Both companies could not recover audit logs from March 2013 through January 2014. E*TRADE Securities updated its Manual in March 2015 to reflect the record keeping requirements. Both entities “self-reported” the recordkeeping violations to the CFTC.
Section 4g(a) of the Commodity Exchange Act (CEA), 7 USC §6g(a), requires every person registered as a futures commission merchant (FCM), introducing broker (IB), floor broker, or floor trader to keep books and records available for inspection of transactions, and customer and commodity positions. Similarly, Regulation 1.31, CFR § 1.35(a)(1), mandates that FCMs and IBs keep full and complete records of pertinent data and memorandum of all transactions “relating to its business of dealing in commodity futures.” Under 17 CFR § 1.35(a)(3)(ii), registrants must have written operational procedures to ensure proper electronic document retention. Commission Regulation 166.3, 17 CFR § 166.3 requires registrants to develop deterrent and detection procedures to identify CEA violations. Lastly, according to FC Stone, LLC, CFTC No. 15-21 2015 WL 2066891 (May 1, 2015), registrants must diligently supervise all business activities of its officers, employees, and agents.
The CFTC determined the E*TRADE Entities’ permanent loss of more than three years of records, attributable to a failure to ensure proper record retention, violated both Section 4g(a) of the CEA and Regulations 1.31(a) and 1.35(a). The Order also identified two breaches of Regulation 166.3: the E*TRADE Entities’ failure to implement reliable procedures to retain audit trail logs, and E*TRADE Securities’ failure to address the third-party vendor’s notice regarding retention periods.
For the above reasons, the CFTC directed the E*TRADE Entities to immediately end any record retention violations and ordered payment of a $280,000 civil monetary penalty. The Order recognized the E*TRADE Entities’ cooperation in this matter.
The primary materials for this case may be found on the DU Corporate Governance website.