FINRA Suspends Broker for Failing to Detect Mismarked Trades

FINRA suspended a broker for failing to properly supervise two traders who mismarked positions.

According to the AWC, the Head of a US Repurchase Agreements Desk ("Repo Desk") did not review the marked to market positions entered by the traders, nor did he reasonably investigate or respond to red flags indicating that the traders were mismarking their positions. FINRA said the broker/supervisor was aware that "market events could have reduced the value" of the traders’ "forward start reverse repurchase positions," but did not observe a corresponding decline in profit and loss. FINRA noted that one of the traders informed the broker/supervisor that "his marks were incorrect" and assured the broker/supervisor that the marks would be corrected, but failed to do so. FINRA said the other broker "did not check the marks in the system" nor take any steps to ensure accurate marks going forward.

FINRA also found that the market value of the traders’ positions continued to decline, but due to mismarking, millions of dollars in unrealized losses were not reflected in the Repo Desk’s profit and loss. FINRA stated that one of the traders eventually disclosed "the full scope of the unrealized losses," prompting the supervisor to escalate the issue to senior management. FINRA stated that after the firm corrected the marks, it terminated one trader and permitted the other to resign.

FINRA determined that the supervising broker violated FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision") and NASD Rule 3010 ("Supervision").

The supervising broker consented to (i) a two-month suspension from associating with any FINRA member in all principal capacities, (ii) a $5,000 fine, and (iii) a requirement to complete ten hours of continuing education concerning supervisory responsibilities.