Subsequent to NIBA’s letter to the membership regarding PFG’s bankruptcy, we’ve had additional in-depth conversations with senior officials at the regulatory agencies and at the PFG trustee’s office. Here is what we’ve learned.
1. There are statutory limitations which restrict the scope of the NFA’s spending, and would seem to prevent the NFA from providing the assurance or adequate security to the PFG trustee which would be similar to what the CME Group provided to the MFGI trustee. Specifically, Section 17 of the Commodity Exchange Act (CEA) sets the standards for registered futures associations. This section was added to the Act in 1974, when Congress created the CFTC. The language of Sec. 17 was, for the most part, lifted from the statute that allowed for the creation of NASD, and there is little legislative history on Sec. 17 in general, and a futures associations’ authority to impose fees in particular. However, the language of the statute itself sheds light on the limitations of NFA’s authority to impose fees. Sec. 17(b)(6) requires that “the rules of the association provide for the equitable allocation of dues among its members, to defray reasonable expenses of administration.” In its March 16, 1981 application to the CFTC, NFA stated with respect to dues and assessments, that “the dues and assessments are intended solely to defray the start-up and projected expenses of operating NFA, which expenses are reasonable in light of the association’s regulatory responsibilities.” The language in both the statute and in NFA’s applications raises serious questions with regard to NFA’s authority to use any revenue generated by the assessment fee for purposes of providing the necessary assurance or adequate security referenced in CFTC Reg. 190.08(d)(5) to the PFG trustee.
2. PFG customers’ futures and options positions were held in an omnibus account at Jefferies Bache LLC, which, therefore, does not have information regarding PFG’s underlying customers. Unlike in the MFGI situation, where positions were transferred from one FCM to another, PFG’s customers’ positions were all liquidated in the omnibus account. On August 10th, PFG’s Trustee, Ira Bodenstein, stated on the “PFG Trustee’s Website” that prior to making a distribution, he must ensure that any distribution goes to the correct customers in the correct amounts. Any distribution would, of necessity, rely on the books and records of PFG. This requires that the Trustee be satisfied that he can rely on the accuracy and integrity of those books and records to the extent they identify customesr, and set forth the balance due to such customers. The Trustee stated that this is especially important in a case that started because of a “fabrication” of certain of PFG’s books and records. Based on information received from law enforcement and regulatory authorities, the Trustee said that he is investigating the validity of the customer account statements, and he must complete that investigation prior to any provisional distribution to customers. Mr. Bodenstein stated that he is working with all deliberate speed, and hopes to complete the initial investigation within the next few weeks.
For additional information, see pfgchapter7.com or contact the NIBA - Melinda Schramm, melinda@futuresrep.com or John Jensen, jjensen@hwfi.com
