Broker-Dealer Settles FINRA Charges for Mismarking Short Sales
A broker-dealer settled FINRA charges for mismarking short sale orders as "long."
In a Letter of Acceptance, Waiver, and Consent, FINRA found that many of the mismarked orders were sent to an alternative trading system, and that the orders were auto-generated to hedge exposure resulting from the broker-dealer's execution of equity swap transactions with clients. FINRA concluded that the broker-dealer mismarked the orders due to the broker-dealer's failure to "include a single line of code that was designed to copy the long or short mark from a parent sell order and affix it to the instantaneously created 'child sell' order(s) that were routed to the market."
FINRA also stated that the broker-dealer misapplied order-marking logic to sale orders routed to the broker-dealer by a foreign affiliate, causing such sale orders to be incorrectly marked as "short." FINRA noted the broker-dealer rectified both errors after being notified by FINRA.
In relation to the broker-dealer's mismarking of short sale orders, FINRA found that such mismarking led to the broker-dealer (i) filing inaccurate trade reports and (ii) maintaining inaccurate order memoranda. Additionally, FINRA found that because the broker-dealer's related supervisory system only reviewed the accuracy of order marks for parent orders, and did not confirm proper order marking for child orders, the broker-dealer did not establish and maintain a supervisory system reasonably designed to comply with Regulation SHO's order-marking requirements and FINRA rules concerning accurate trade reporting and order memoranda.
As a result of its mismarking of short sale orders as long, FINRA concluded that the broker-dealer violated Regulation SHO Rule 200(g) ("Definition of 'short sale' and marking requirement"), Exchange Act Section 17(a) ("Records and Reports"), Exchange Act Rule 17a-3 ("Records to be made by certain exchange members, brokers and dealers") and in addition, FINRA Rules 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade") for failing to implement supervisory procedures designed to ensure regulatory compliance. FINRA also stated that the broker-dealer violated FINRA Rules 4511 ("General Requirements"), 6182 ("Trade Reporting") and 6624 ("Trade Reporting Short Sales of OTC and Restricted Equities") for filing inaccurate trade reports and maintaining inaccurate books and records as a result of mismarking its sale orders.
To settle the charges, the broker-dealer agreed to a (i) censure and (ii) $3,000,000 fine, $1,147,500 of which is payable to FINRA.