A broker-dealer settled FINRA charges for over-tendering shares into a partial tender offer.
According to FINRA, the broker-dealer incorrectly calculated the net long positions for "individual trading units" within the firm rather than for the firm as a whole in violation of SEA Rule 14e-4 ("Prohibited transactions in connection with partial tender offers"). This allowed the firm to avoid netting off trading units having short positions against units having long positions. As a result, FINRA charged the broker-dealer with failing to maintain an adequate supervisory system under FINRA Rule 3110 ("Supervision") and FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the broker-dealer agreed to a (i) censure, (ii) $50,000 fine and (iii) disgorgement of $28,014.
Commentary
In its 2018 Risk Monitoring and Examination Priorities Letter, FINRA placed violations of SEA Rule 14e-4, primarily in the context of options, into the spotlight for the first time in nearly a decade. In the 2019 Risk Monitoring and Examination Priorities Letter, FINRA stated its intention to continue educating firms about the requirements of SEA Rule 14e-4 and to evaluate firms' compliance. In 2019, the SEC brought their first actions in over twenty years relating to violations of SEA Rule 14e-4.
This enforcement action comes on the back of another recent enforcement action and clearly emphasizes that FINRA has moved from education to enforcement. Firms should review their existing policies and procedures relating to partial tender offers and ensure that (i) calculations of "net long position" in a security account for all relevant options and (ii) calculations are made across the firm, rather than independently for aggregation units.
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