A firm settled FINRA charges for failing to (i) establish a reasonable supervisory system over potentially manipulative activity and customer credit limits, (ii) document review of the firm's market access risk management controls and (iii) accurately transmit information to the Order Audit Trail System ("OATS").
In a Letter of Acceptance, Waiver and Consent, FINRA found that the firm:
- did not have written supervisory procedures ("WSPs") that described how to use real-time monitoring features and post-trade reports to identify potentially manipulative trading activity;
- employed only one individual to manually review trade blotters, which FINRA stated was unreasonable, given that the firm routed an average of 10 million orders per day;
- could not document supervisory reviews it claimed to have conducted; and
- established parameters that excluded certain potentially manipulative trading activity (e.g., wash trades, spoofing, layering, etc.).
FINRA stated that the firm could not reasonably assess customer credit limits because the firm's WSPs did not require firm personnel to conduct due diligence regarding the customer's business, financial condition or trading patterns or to document such decisions. FINRA also found that the firm's WSPs did not (i) provide reasonable guidance to the Chief Compliance Officer and Chief Operating Officer for their quarterly reviews of customer credit limits, or (ii) describe the process for intraday changes to a credit limit and the factors to consider in making such a change.
FINRA found that the firm did not document its review of the overall effectiveness of risk management controls in connection with market access or maintain evidence from its CEO certification process as required under SEA Rule 15c3-5 ("Risk Management Controls for Brokers or Dealers with Market Access").
Further, FINRA found OATS reporting issues, including that the firm used incorrect (i) account type codes, (ii) special handling codes and (iii) codes in receiving department ID fields. FINRA also found that the firm failed to conduct its reviews of OATS submissions as described in its WSPs.
As a result of these findings, the firm violated NASD Rule 3010, FINRA Rules 3110 ("Supervision"), 2010 ("Standards of Commercial Honor and Principles of Trade") and 7450 ("Order Data Transmission Requirements"), and SEA Rules 15c3-5(c)(1)(i) and (e).
To settle the charges, the firm agreed to (i) a censure and (ii) a $310,000 fine ($187,500 paid jointly to FINRA and Investors Exchange, Inc. for violations of SEA Rule 15c3-5, $90,000 for violations of FINRA Rule 7450, and $32,500 for supervisory violations relating to FINRA Rule 7450).
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