The U.S. derivatives industry’s front-line regulator is entangled in a dispute with one of its board members who says the group held flawed director elections that compromise its independence.

The National Futures Association (NFA), an industry-funded overseer, is clashing with James Koutoulas over his allegations that the group tried to cover up the fact that it never nominated a slate of directors who joined the board last year. Koutoulas said the market’s main federal regulator, the Commodity Futures Trading Commission (CFTC), is investigating his claims after he filed a whistle-blower complaint.

The NFA has reviewed the allegations and concluded they’re not true, Christopher Hehmeyer, who chairs the group’s board, said in an interview.

The NFA, whose directors are primarily made up of finance executives, has gained much more authority as a market cop in recent years after it began policing the swaps-trading units of Goldman Sachs Group Inc., JPMorgan Chase & Co., and other firms. As its oversight expands, the dust-up over the election is shining a spotlight on the NFA’s effectiveness as a regulator.

“There is no independent governance there,” Koutoulas, chief executive officer of Chicago-based Typhon Capital Management LLC, said in an interview. “It’s a huge responsibility being a self-regulatory organization, and someone needs to regulate the regulators.”

CFTC spokesman Steve Adamske said the agency is aware of Koutoulas’s complaints. He declined to comment further.


Self-Policing Problems

The NFA has been trying to shore up confidence in its role as a regulator. The CFTC and members of Congress questioned whether the industry was equipped to police itself after customer funds went missing when MF Global Holdings Ltd. collapsed and Peregrine Financial Group Inc. engaged in a fraud that no one detected for two decades.

Koutoulas won a seat on the NFA board in 2013 after campaigning for greater protection of customer money following the downfall of the two brokerages. He is running for re-election this month.

The current dispute between the NFA and Koutoulas began in January 2014 when the group was considering public directors for its board. Because of a flawed process, Koutoulas says, the slate up for election wasn’t nominated. A board member wrote in an e-mail the day after one meeting that he had nominated the directors.

The content in the board member’s e-mail wasn’t true, according to Koutoulas.

“It’s just their custom and practice to never admit a mistake, and if they do make a mistake they just obfuscate,” he said.

Hehmeyer, who runs a high-frequency trading firm, released a Dec. 30 statement rebutting Koutoulas’s allegations. Skadden, Arps, Slate, Meagher & Flom LLP, which was hired by NFA’s board to analyze Koutoulas’s claims last January, said the NFA acted properly and in accordance with its rules.

Koutoulas said the NFA has also tried to bar board members from publicly discussing their votes and from criticizing other directors by instituting an August “gag order.”

Hehmeyer, in the interview, said the change was a “clarification of our policy that we’ve always had.” He said in a Dec. 22 statement that Koutoulas’s allegations are “irresponsible and the type of campaign nonsense one expects from Washington, not from an NFA board member.”

Ballots for the NFA election are due Jan. 20. Koutoulas said he’s confident of winning re-election. “I’m not going to make up something and ruin my reputation to get re-elected,” he said.

(Bloomberg LP, parent company of Bloomberg News, has contracted with the NFA for regulatory services for its swap-trading platform.)

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