August 6, 2021

Firm Settles FINRA Charges for Systems Compliance and Integrity Violations

Steven Lofchie Commentary by Steven Lofchie

An inter-dealer broker settled FINRA charges for non-compliance with SEC Regulation SCI ("Systems Compliance and Integrity") after the broker failed to determine that its alternative trading system ("ATS") was subject to the regulation.

FINRA found that the firm, in its calculations to determine whether its ATS qualified as an SCI entity, incorrectly applied the average daily share volume in national market system stocks instead of the average daily dollar volume. In a Letter of Acceptance, Waiver, and Consent, FINRA stated that this misinterpretation of the threshold test led the firm to believe it was not required to adopt Regulation SCI policies. As a consequence, the FINRA found that the firm violated Regulation SCI Rule 1001 ("Obligations related to policies and procedures of SCI entities").

FINRA also determined that the firm did not:

  • file material changes to its SCI systems in quarterly reports or conduct annual SCI reviews, in violation of Regulation SCI Rule 1003 ("Obligations related to systems changes; SCI review");
  • designate SCI ATS members necessary to implement the entity's business continuity and disaster recovery plans should the plans be activated, in violation of Regulation SCI Rule 1004 ("SCI entity business continuity and disaster recovery plans testing requirements for members or participants"); and
  • keep the required related books and records, in violation of Regulation SCI Rule 1005(b) ("Recordkeeping requirements related to compliance with Regulation SCI").

The firm's conduct was also deemed to constitute violations of FINRA Rules 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade").

To settle the charges, the firm agreed to (i) a censure and (ii) a $250,000 fine.

Commentary

Given that the firm clearly violated Regulation SCI, there is simply no need for FINRA to throw in a charge of a violation of FINRA Rule 2010. It has already reached the point that every violation of any FINRA Rule is also a violation of Rule 2010; now is it going to be the case that any violation of an SEC Rule also violates Rule 2010?

Historically, the purpose of Rule 2010 (or its predecessor) was to allow FINRA to charge essentially an ethical violation even when it was not clear that any written rule had been violated. The Rule seems no longer to serve that purpose. It is simply a throw-on to every other case; the Rule should just be retitled "Prohibition against Breaking Other Rules."

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