July 28, 2021

Firm Settles Charges for Supervisory and Risk Management Control Violations

A firm providing execution and routing services to broker-dealers settled FINRA and NYSE Arca charges for failing to establish, document and maintain a supervisory system, including written supervisory procedures ("WSPs"), and for certification failures regarding the firm's regulatory risk management controls.

In separate Letters of Acceptance, Waiver, and Consent ("AWC"), FINRA and NYSE Arca found that the firm failed to:

  • supervise for manipulative trading, including potential layering, spoofing, wash and pre-arranged trades, marking the close, and odd-lot manipulation;

  • establish reasonably designed price controls that would prevent the entry of erroneous orders and orders exceeding their pre-set credit thresholds;

  • review the effectiveness of its risk management controls as part of its annual certification process;

  • implement a reasonably designed AML program for the detection and reporting of potentially suspicious transactions; and

  • provide annual certification in compliance with SEA Rule 15c3-5 ("Risk management controls for brokers or dealers with market access") and FINRA Rule 3130 ("Annual Certification of Compliance and Supervisory Processes").

The regulators found (i) occurrences of potentially manipulative trading through the firm's market participant identifiers, (ii) instances of potentially suspicious transactions that were not reasonably detected and reported, and (iii) the entrance of hundreds of millions of orders that were not subjected to adequately designed risk management controls or post-trade supervisory reviews.

FINRA and NYSE Arca concluded the firm violated, among other things: the risk management control provisions in Section 15(c)(3) of the Exchange Act, including SEA Rules 15c3-5(b), (c)(1)(i), (c)(1)(ii), (c)(2), (e), (e)(1) and (e)(2); FINRA Rules 3110 ("Supervision"), 3120 ("Supervisory Control System"), 3130, 3310 ("Anti-Money Laundering Compliance Program") and 2010 ("Standards of Commercial Honor and Principles of Trade"); NASD Rules 3010 and 3012; and NYSE Arca Rules 11.18(b) and (c), and their predecessors, NYSE Arca Equities Rules 6.18(b) and (c).

To settle the charges, the firm agreed to (i) a censure, (ii) a $1.25 million total fine, and (iii) to retain an independent consultant to review compliance with SEA Rule 15c3-5 and related self-regulatory organization rules as outlined in the AWCs.