United States: Broker Dealer Settles FINRA Charges For TRACE Reporting And Order Ticket Marking Violations

A broker-dealer agreed to settle FINRA charges for failing to (i) report transactions in TRACE-eligible securities, and (ii) mark order tickets for securities transactions as "solicited" or "unsolicited."

The TRACE reporting violations arose because the firm failed to re-report rejected TRACE reports. The order ticket marking violation arose because the firm failed to amend the "N.A." default setting on the order ticket system provided by the firm's clearing broker to reflect whether a trade was "solicited" or "unsolicited."

According to the Letter of Acceptance, Waiver and Consent, Stonecrest Capital Markets, Inc. consented to a censure and to pay a fine of $15,000.

Commentary / Mark Highman

A threshold question, which was not addressed in this enforcement action, is whether a securities transaction is required to be marked as "solicited" or "unsolicited" under Exchange Act Rule 17a-3 and, if so, under what circumstances. This question arises because Rule 17a-3(a)(6) does not itself require a broker-dealer to indicate on an order ticket whether a trade was "solicited" or "unsolicited." However, as this enforcement action shows, there is clearly a regulatory expectation for firms to indicate on order tickets whether a trade was solicited or not.

While a securities transaction that a firm recommends to a retail investor would generally be considered "solicited," it is a separate question whether a transaction with an institutional investor should be considered "solicited," particularly where the institutional investor certifies to the firm that it makes independent trading decisions in accordance with FINRA's institutional suitability requirements, and is thus not relying on the firm's recommendations. In this case, the broker-dealer would not be subject to any additional suitability obligation, and so marking the order ticket as "solicited" would not serve any regulatory purpose.

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