On 23 September 2024, the US Commodity Futures Trading Commission (CFTC) issued an enforcement order against Piper Sandler Hedging Services LLC for violating the United States Commodity Exchange Act (US CEA) and related US CFTC regulations. The settlement followed an extensive investigation into Piper Sandler’s failure to maintain and preserve required business records, including communications by senior employees conducted through unapproved methods such as personal text messages. The violations pertained to recordkeeping requirements under Section 4g of the US CEA and US CFTC regulations 1.31, US CFTC regulations 1.35, and US CFTC regulations 166.3. The enforcement action is against the deficiencies in the firm’s supervisory systems, which allowed employees to use unauthorized channels for business communications, resulting in significant breaches of federal recordkeeping laws.
The case is based on Piper Sandler’s long-standing failure to ensure that employees, including senior-level staff, complied with company policies regarding the use of approved communication channels. Employees at various levels used personal devices to conduct business without preserving the communications for the required time period, thus violating US CFTC’s recordkeeping rules.
During the period between 2019 and 2024, employees at Piper Sandler communicated using unapproved methods, including personal devices, to discuss matters related to their business as a registered entity under US CFTC’s purview. The firm’s policies explicitly prohibited such practices, but the supervisory systems in place failed to detect and prevent these violations. These breaches affected not only the firm’s compliance with internal policies but also with US CFTC’s mandated recordkeeping requirements for businesses dealing in commodity interests.
Despite knowing that personal text messages and unapproved communications methods were being used, Piper Sandler did not take adequate steps to correct the situation, even at senior management levels. This systemic failure to enforce compliance further exacerbated the firm’s violations. As a result, Piper Sandler was unable to maintain hundreds, if not thousands, of business-related communications that were legally required under the US CFTC’s recordkeeping regulations.
Piper Sandler violated Section 4g of the Commodity Exchange Act, which mandates the preservation of all relevant communications concerning quotes, bids, trades, and other critical business matters. Additionally, the firm failed to diligently supervise its employees, which is a violation of Regulation 166.3. The lack of a robust supervisory framework allowed employees to circumvent communication protocols, leading to non-compliance with federal recordkeeping laws.
Piper Sandler consented to the findings and agreed to pay a $2 million civil penalty. As part of the settlement, Piper Sandler is required to undergo extensive remedial actions, including a review of its supervisory systems, training programs, and technological measures aimed at ensuring compliance with US CFTC recordkeeping regulations. The firm must also adopt stringent measures to monitor and prevent the use of unauthorized communication methods and certify compliance on a regular basis.
The US CFTC imposed conditions on Piper Sandler’s future operations which includes quarterly certifications from employees regarding their adherence to communication preservation protocols and a review of any disciplinary actions taken against employees who violate the firm’s policies. The firm is also required to provide periodic reports to the US CFTC outlining its progress in addressing the recordkeeping failures. Piper Sandler must retain relevant records for at least six years, with the first two years being in an easily accessible format, to ensure ongoing compliance with federal regulations.
US CFTC Commissioner Caroline D. Pham dissented from the order in her statement stating: “Once again, the CFTC has no evidence that a violation of CFTC recordkeeping rules for introducing brokers (IBs) actually occurred. And, this case also piggybacks off the SEC’s investigation and swerves out of the CFTC’s lane into the securities markets. Records relating to securities or other business activities of a parent company or affiliate under other agencies’ rules are out-of-scope for the CFTC’s jurisdiction and rules for IBs. That is why other agencies have their own enforcement authority over their own statutes and their own registrants. I must respectfully dissent because of the lack of evidence that a CFTC violation occurred and because I cannot support the CFTC’s double-dipping on SEC violations.”
(Source: https://www.cftc.gov/media/11311/enfpipersandlerhedgingservicesorder092324/download, https://www.cftc.gov/PressRoom/SpeechesTestimony/mersingerstatement092324, https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement092324)
