September 22, 2022

Broker-Dealer Fined for Insufficient AML and Market Access Controls

A broker-dealer settled FINRA charges for failing to (i) implement reasonably designed AML policies, (ii) identify and respond to potentially manipulative trading and (iii) establish sufficient market access controls and procedures.

In a Letter of Acceptance, Waiver, and Consent, FINRA found that from September 2016 to December 2020, the broker-dealer did not maintain an adequate AML program tailored to its business model that could have detected potentially suspicious transactions in domestic and foreign-based retail accounts. During that time, the broker-dealer maintained direct and omnibus accounts domiciled outside of the United States and had traders located primarily in China, Russia and Eastern Europe. FINRA determined that despite the volume and high risk of these accounts, the broker-dealer (i) did not dedicate sufficient resources to reviewing red flags, (ii) erroneously ignored certain alerts, believing that those alerts did not indicate manipulative activity, (iii) unreasonably relied on a manual review of data to detect red flags and (iv) failed to provide explicit criteria to document and assess the validity of red flags.

FINRA also found that certain customers were allowed market access to an alternative trading system and multiple exchanges without prior screening and without proper financial risk management controls. In particular, the broker-dealer failed to implement erroneous order controls that took into consideration individual characteristics of a security, such as average daily trading volume control. FINRA stated that the broker-dealer also failed to regularly review the erroneous order controls.

As a result, FINRA determined that the broker-dealer violated Exchange Act Section 15(c)(3) ("Registration and regulation of brokers and dealers") and SEA Rule 15c3-5 ("Risk management controls for brokers or dealers with market access"), as well as FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade"), Rule 3110 ("Supervision") and Rule 3310(a) ("Anti-Money Laundering Compliance Program"). To settle the charges, the broker-dealer consented to a censure and a civil monetary penalty totaling $850,000 (of which $95,625 was allocated to FINRA and the rest was paid to settle charges with other exchanges). The broker-dealer also agreed to various undertakings, including the retention of an independent consultant to comprehensively review the broker-dealer's policies, systems, procedures and training related to its AML program.