Nearly a year after MF Global raided customer accounts in a failed bid to survive, regulators moved this week to tighten restrictions for brokerage firms and to adopt new safeguards for client money.
The Commodity Futures Trading Commission voted unanimously to propose new customer protections aimed at closing loopholes, bolstering internal controls and forcing firms to provide more disclosures to their clients. The proposal, which may be changed over the next several months, comes as the futures industry suffers a crisis of confidence in the wake of the MF Global debacle.
“It is critical to enhance customer protection,†Gary Gensler, the agency's Democratic chairman, said on Tuesday. “We must do everything within our authorities and resources to strengthen oversight programs and the protection of customers and their funds.â€
In agreeing to advance the rules, the agency ended a lengthy stalemate that stalled the proposal for several weeks. Mr. Gens ler had called a public meeting for later this week, a move that would have forced the agency's Republican commissioners, who have raised some concerns about the effort, to cast a vote. But on Tuesday, he suddenly announced at a speech in New York that all five commissioners voted to propose the rules, which are now open for public comment.
The new wave of regulation reverses a prolonged period of hands-off regulation for the futures industry. For years, futures firms reveled in their reputation as trusted stewards of customer money.
But the near-spotless record was marred with the collapse of MF Global, the firm run by Jon S. Corzine, the former governor of New Jersey. When the firm declared bankruptcy last October, it came to light that MF Global employees tapped customer accounts to patch holes in a debt-ridden balance sheet. The breach, which left thousands of farmers and other clients without $1.6 billion of their money, ignited a nationwide uproar that inc luded Congressional hearings and multiple federal investigations.
The controversy resurfaced this summer when another futures brokerage firm, Peregrine Financial Group, collapsed after misusing customer money. The chief executive, Russell Wasendorf Sr., attempted suicide before ultimately pleading guilty to carrying out a nearly 20-year scheme.
In response to a flurry of concerns, the Commodity Futures Trading Commission scrambled to plug the regulatory gaps. The agency's commissioners portrayed the new proposal announced on Tuesday as a first step to restoring confidence in the markets.
“MF and Peregrine may have never occurred if these rules were in place,†said Bart Chilton, a Democratic commissioner at the agency.
The agency's plan largely tracks a proposal outlined in July by the futures industry's self-regulator, the National Futures Association. The group, now armed with the C.F.T.C.'s support, would move to close an arcane loophole that pe rmits firms to spend some money belonging to customers who trade abroad. The new rule would strike down the exemption, known as the “alternative calculation,†which contradicts a cornerstone of the industry to always segregate client cash.
Under the plan, futures firms must also turn over to regulators daily reports that calculate segregated customer balances. A firm would also need top executives to sign off anytime it wanted to move around 25 percent or more of the money sitting in a customer account.
In addition to supporting policies from the National Futures Association, the C.F.T.C.'s proposed rules would raise the standards for how such self-regulators examine brokerage firms. And for the first time, the rules would grant regulators direct electronic access to a firm's bank accounts. Mr. Gensler described this step as “bringing the regulators' view of customer accounts into the 21st century.â€
The proposal is part of broader federal effort to restore credibility to a much-maligned futures industry. In December, the trading commission limited how futures firms can invest customer money, largely barring them from using it to buy foreign sovereign debt.
Still, some officials questioned if the new proposal missed some critical aspects.
“While these measures are a good start, I believe that it is essential to focus on a comprehensive technological solution that goes beyond what the commission has proposed in this release,†Scott O'Malia, a Republican member of the agency, said in a statement.
Mr. Chilton has also championed an insurance fund for the futures industry, a policy that was locked out of Tuesday's plan. Mr, Chilton and some lawmakers have argued that farmers deserve a backstop akin to protections given to securities and banking customers.
“There's no reason futures customers shouldn't have similar protections,†Mr. Chilton said.
