On Aug. 14, the U.S. Court of Appeals for the Seventh Circuit issued an opinion that addressed several important questions related to the protections on customer funds. The case involves the bankruptcy of Sentinel Management Group, a company registered as a futures commission merchant that specialized in managing investments for other FCMs. Shortly after filing bankruptcy in 2007, Sentinel obtained court approval to pay out almost $300 million to certain of its FCM clients. A year later, that payout was challenged by the trustee appointed to oversee the resolution of Sentinel on the grounds that the $300 million was the property of the estate, rather than the customers.
In January 2013, the U.S. District Court for the Northern District of Illinois issued an opinion siding with the trustee. The court effectively ruled that the funds had lost their statutory protection as customer segregated funds due to Sentinel’s alleged misconduct, and should instead be distributed “fairly” among Sentinel’s customers. (See "Sentinel Decision Could Erode Customer Protections" in the March 2013 issue of Futures Industry).
The district court ruling was challenged, and in August 2016 FIA submitted an amicus brief to the appeals court addressing the distribution of customer funds. Specifically, FIA argued that the segregated FCM customer funds at issue were entitled to a statutory trust under the Commodity Exchange Act, and that a trial court ruling misstated the law and misunderstood industry practice in holding otherwise.
On Aug. 14, the appeals court reversed the district court holding and directed the lower court to order payment of the funds to the FCMs. The court quoted the FIA brief that the lower court’s decision would allow “non-futures claimants in future FCM bankruptcies to litigate rights to futures margin account property, creating perilous delay and rendering unpredictable the return of futures customers’ assets."