Futures Markets:

Strengthening Sales Practice Oversight

GGD-91-41: Published: Apr 25, 1991. Publicly Released: Apr 25, 1991.

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GAO evaluated the Commodity Futures Trading Commission's (CFTC): (1) oversight of self-regulatory organizations' (SRO) compliance with sales practice requirements; and (2) monitoring of SRO sales practice audits.

GAO found that: (1) CFTC oversight of futures industry sales practices needed to be strengthened to provide investors with additional protection against sales practice abuses; (2) rule enforcement reviews (RER) provided only limited coverage of sales practice requirements and could be better planned and documented; (3) CFTC recommendations made as a result of RER were not always implemented or resolved; (4) CFTC did not regularly collect data on SRO audit compliance and results; (5) CFTC did not enforce existing audit requirements, resulting in gaps in audit coverage; (6) SRO audit guidelines were incomplete; and (7) the futures industry required full disclosure of commissions and fees, but did not regulate them.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: CFTC believes that the current requirements provide adequate protection to customers.

    Recommendation: The Chairman, CFTC, should require the National Futures Association (NFA) to collect and report to CFTC data on commission charges in the industry.

    Agency Affected: Commodity Futures Trading Commission

  2. Status: Closed - Implemented

    Comments: CFTC staff agrees that all SRO should be required to provide audit coverage of compliance with all sales practice requirements, but the final position of CFTC is not clear. CFTC worked with the Joint Audit Committee to ensure coverage of all aspects of sales practices in its audit programs.

    Recommendation: The Chairman, CFTC, should ensure that SRO sales practice audit guidelines provide coverage of compliance with all sales practice audit requirements.

    Agency Affected: Commodity Futures Trading Commission

  3. Status: Closed - Implemented

    Comments: CFTC has changed its branch office audit selection requirement to be "risk-based" because it might be more cost-effective. This may not be responsive, however, to the original GAO finding that the old requirement allowed many firms with branch offices to have none audited.

    Recommendation: The Chairman, CFTC, should improve branch office audit selection criteria to ensure that at least some branch offices of all firms requiring coverage are audited.

    Agency Affected: Commodity Futures Trading Commission

  4. Status: Closed - Implemented

    Comments: CFTC intends to clarify its requirements for sales practice audits. CFTC staff reviewed and revised industry audit guidelines to include additional procedures to audit futures and options sales practices and they have agreed to make this a continuous process.

    Recommendation: The Chairman, CFTC, should enforce requirements for sales practice audit coverage of all industry futures commission merchants, including coverage of both futures and options sales practices.

    Agency Affected: Commodity Futures Trading Commission

  5. Status: Closed - Not Implemented

    Comments: CFTC disagrees with the need for day-to-day monitoring of SRO compliance.

    Recommendation: The Chairman, CFTC, should direct SRO to provide CFTC with the information needed to: (1) monitor and assess SRO compliance with sales practice audit requirements; (2) analyze trends of sales practice violations disclosed by industry audits; and (3) review the timely resolution of those violations.

    Agency Affected: Commodity Futures Trading Commission

  6. Status: Closed - Not Implemented

    Comments: CFTC believes that SROs have been responsive to agency recommendations and that no action is necessary.

    Recommendation: The Chairman, CFTC, should either resolve disagreements over RER recommendations or use its legal and regulatory authority to require SRO to adopt recommendations for program improvements made as a result of RER.

    Agency Affected: Commodity Futures Trading Commission

  7. Status: Closed - Not Implemented

    Comments: CFTC disagrees with the need for standardized guidelines.

    Recommendation: The Chairman, CFTC, should prepare standardized sales practice RER guidelines that cover all sales practice requirements and include audit steps and documentation requirements.

    Agency Affected: Commodity Futures Trading Commission

  8. Status: Closed - Not Implemented

    Comments: CFTC believes that the current requirements provide adequate protection to customers.

    Recommendation: The Chairman, CFTC, should require NFA to adopt a rule requiring fair and reasonable commissions.

    Agency Affected: Commodity Futures Trading Commission

 

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