Yesterday’s bombshell news out of the PFGBest case related to the Wasendorf admission that he had misappropriated funds to pay for regulatory fees, which, as we detailed, gives us hope of a clawback. But that’s not all that hit the wires yesterday.

First up, the NFA announced that they had retained the law firm Jenner and Block to conduct a review of their audit procedures. We’ve already had a couple of people reach out to ask us if we believed this was adequate, or felt that the Congressional investigation we’ve been calling for is still necessary. No doubt about it – we still want the investigation. There are a couple of things to consider here. First off, in a strange twist of fate/coincidence/<insert vague and sarcastic language here>, Jenner and Block was also the firm that worked as legal counsel for the Sentinel case years back. Though the public outrage over the failure of regulators to detect the fraud was just as palpable then, Jenner and Block never suggested any action against them.

The second curious component of this NFA announcement is that it’s technically a review of audit practices. As we have detailed, the PFGBest scandal and its implications for the NFA are far wider in scope, with serious questions being raised about red flags that were missed and how Russ Wassendorf, Sr.’s role on the FCM committee may have impacted how they were treated by regulators. For instance, it’s fairly common practice for NFA members to be required to respond to NFA directives by end of business on the day of notification, or, in generous cases, by the end of a work week. Yet, PFGBest was able to delay authorization of electronic account balance verification for months. Issues like this, the NFA’s hiring practices, and more would appear to fall outside the scope of this Jenner and Black review. That’s where we need Congress and the CFTC to step up.

But the CFTC was making headlines of their own yesterday, as Gensler testified before Congress regarding the development of swaps regulation. Of course, there was no way the subject of PFGBest would be avoided, but it was how the Chairman responded to those questions that didn’t get enough attention or scrutiny, in our opinion.

“Just like the local police cannot prevent all bank robberies, however, market regulators cannot prevent all financial fraud.”

Here’s the problem. If you want a relevant use of this metaphor, then the police officers saw a man dressed in black, with a ski mask on, carrying bags of money, and asked him if the money was his. When he said, yes, they let him go. On several occasions. Despite reports of a bank robbery coming in over the radio. This comment, paired with NFA non-executive Chairman Chris Hehmeyer’s attempt to claim the NFA was responsible for exposing PFGBest fraud and should be applauded (because reading a suicide note after the fact takes such intensive work), was borderline laughable.

Gensler went on to say that regulators must “do better,” and stated:

“The recent events at Peregrine highlight the necessity of looking at the decades-old system of SROs [Self-Regulatory Organizations] as first-line regulators and the commission’s role in overseeing SROs.”

Alright, point well taken. Except, he also said:

“Swap dealers, for the first time, will register and begin to come under comprehensive regulation.  This includes implementing already completed external and internal business conduct standards that will lower their risk to the economy and promote confidence in their integrity… Based upon completed registration rules and the recently completed joint rule further defining the term “swap,” we anticipate dealers will begin registering with the National Futures Association (NFA) in the early fall.”

In other words, despite the fact that the NFA, after over thirty years in the industry, failed to detect over twenty years (2/3 of their regulatory reign) of simplistic fraud, and that there have been serious questions raised regarding how they could have missed so many red flags, we are now going to be relying on them to oversee a more opaque and complex set of markets in brand new regulatory territory.

Because that sounds like a great idea, right?

This is why we’re so insistent that a full investigation of the NFA take place. We’re not calling for board resignations or immediate revocation of their charter because the one constant in this entire situation has been that we don’t have all the facts on the extent of the problems within the NFA. Clearly, the CFTC and Congress don’t have a full grasp on the situation either, or they wouldn’t be entrusting a whole new realm of oversight to them. This investigation is critical to establishing that baseline of understanding, and the development and implementation of reforms that actually address the issues moving forward.

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