Firm Settles Charges for Supervision Failures over Customer Orders
Commentary by Glen Barrentine
A firm settled FINRA charges for failing to supervise the execution timeliness of customer orders and for failing to reasonably supervise the accuracy of memoranda for electronic orders.
According to the AWC, during a sample three year period, external investment managers, financial advisers and customers entered nearly 300 million orders into the firm’s five electronic order systems. FINRA said that the firm performed validation checks on the orders before ultimately routing the orders to a market center for further handling and/or execution. However, FINRA found that the firm only reviewed the execution timeliness of orders processed from the time the orders were routed to the final execution time. FINRA said that the firm did not conduct a supervisory review of how long it took the firm’s electronic order systems to process and route the orders to a market center. By omitting this information, FINRA determined that the firm failed to supervise whether it made every effort to execute marketable customer orders that it received fully and promptly.
FINRA further found that the firm's WSPs were not reasonably designed to achieve compliance with SEC and FINRA recordkeeping requirements in so far as the firm did not conduct supervisory reviews to ensure the accuracy of information recorded on the firm’s order memoranda for retail brokerage equity orders the firm received electronically.
FINRA found that the firm violated FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision").
To settle the charges, the firm agreed to (i) a censure and (ii) to pay a $825,000 fine.
Commentary
It would be interesting to know the typical amount of time taken by the validation checks, which checks were presumably required under SEA Rule 15c3-5 ("Risk management controls for brokers or dealers with market access"). It would also be interesting to know whether that process was susceptible to delays. Absent delays, and assuming the validation process was not unreasonable in its duration, it could be argued that the time taken to validate the orders is just part of the regulatory cost of doing business and, therefore, should not count towards the “promptly” standard set forth in FINRA Rule 5310.01 ("Best Execution and Interpositioning".) The AWC does not supply that information.