The National Futures Association on Monday announced a full review of its audit division to answer fierce criticism that it missed two decades of fraud at failed Iowa brokerage Peregrine Financial.
Additionally, the Wall Street Journal late on Monday reported that the NFA, which oversees mostly smaller, independent futures operations, and the CME Group, responsible for regulating most of the biggest brokers, will conduct a "sweeping review" of dozens of firms across the country.
Just hours after a former customer of Peregrine Financial called for a U.S. congressional investigation of the NFA, the industry group said it was retaining outside law firm Jenner and Block to review its general practices and their execution in the case of PFGBest, as Peregrine is widely known.
The brokerage's founder, Russell Wasendorf Sr., admitted last week to a 20-year fraud that has left an over-$200 million hole in client funds.
"NFA intends to identify and implement any regulatory oversight changes that may be necessary to improve the detection of fraud and protection of segregated customer funds," it said. The NFA was the firm's front-line regulator since 1992.
The review by the NFA and CME will require regulators to obtain independent bank verification that the customer funds that brokers claim to be holding are actually in their bank accounts, the Journal said.
Early last week problems at Peregrine came to light when Wasendorf admitted to tapping into sacrosanct segregated client funds.
He confessed, in a written note, to using little more than a rented post office box, Photoshop and an inkjet printer to dupe regulators with false bank statements.
"This is just the most glaring public display of incompetence at the NFA," Attain Capital Management, a Chicago-based introducing broker that had accounts at Peregrine Financial, said in a press release.
"We hereby call for the CFTC (U.S. government regulator Commodities Futures Trading Commission) and Congress to launch a thorough investigation into the practices, policies and people of the National Futures Association," the broker said.
The scandal has injected fresh urgency into the debate over how best to protect the cash and collateral that futures traders typically keep on account with their brokers. The NFA said the affair had dealt "a severe blow to the public's confidence in the financial integrity of the futures markets."
Attain said there needs to be an immediate review of how futures brokers are regulated, and that it would seek the "revocation" of the NFA's charter as a front-line regulator if it thought the action was necessary. CME Group, the largest futures exchange, said that the system of allowing brokers to hold their clients' cash needed rethinking.
The NFA has been criticized for missing a number of red flags at PFGBest, including an apparently one-person auditing firm run from a suburban Chicago home.
NFA's non-executive chairman, Chris Hehymeyer, said on Friday that the agency's own auditors eventually caught Wasendorf by pressing him to allow the NFA to verify the firm's bank account balances electronically.
The 64-year-old founder and owner of PFGBest attempted suicide in the parking lot of PFGBest's Iowa headquarters, just a day after finally acquiescing to the NFA. He left a signed confession along with a suicide note.
The NFA said its chairman had requested that the Special Committee for the Protection of Customer Funds, which includes public representatives from the board, undertake the review, with authority to retain other external experts as needed.
The NFA and CME review of brokers' bank accounts follows a similar series of spot checks conducted together with the CFTC in January, when the industry was given a clean bill of health.
The NFA and CFTC did not immediately respond to calls seeking comment.
ATTAIN SPEAKS FOR CUSTOMERS
Attain Capital Management has emerged as one of the loudest voices demanding the return of customer money from PFGBest, adding to calls for reforming the industry after the second futures broker scandal in nine months.
Attain put forward a number of proposals after the collapse of MF Global last year revealed that the wall separating customer funds from company funds might have been breached in the broker-dealer's dying days. Attain said more now needs to be done.
"The PFGBest scandal has changed the narrative ... from questioning not just whether we have the right rules and laws in place ... to whether we have the right people in place to insure the rules are being followed," Attain Capital said.
"We have the right as members of the NFA to question their abilities. Now is the time to demand integrity from our regulators."
Attain has requested help from the Commodity Customer Coalition (CCC), which was founded after MF Global's collapse to fight for the speedy release of customer money.
James Koutoulas, chief executive of Typhoon Capital Management and co-founder of the CCC, has indicated the group would be willing to provide assistance to PFGBest customers.
"At this stage, we are advising customers to gather their statements and prepare for a claims or account transfer process," a statement on the CCC website said.
Wasendorf Sr.'s son Russell Jr. was president of Peregrine.
(Editing by Steve Orlofsky)