Firm Settles Charges for Reg NMS Reporting Violations
Commentary by Glen Barrentine
A firm settled FINRA charges for erroneously reporting order routing data and failing "to disclose material aspects of its relationship with [execution] venues."
FINRA found inaccuracies and omissions in the firm's quarterly and monthly reports. FINRA found that the firm:
- incorrectly classified customer market and limit orders as "other" orders when routed as mid-point peg orders to alternative trading systems;
- provided hyperlinks to pricing tier schedules for execution venues instead of explicitly disclosing applicable tiers and fees in quarterly reports;
- omitted immediate-or-cancel mid-point peg orders, resulting in the exclusion of approximately one billion transactions from monthly reports; and
- failed to update execution venue names in reports after venue acquisitions.
FINRA charged the broker-dealer with violations of Regulation NMS Rule 605 ("Disclosure of order execution information") and Rule 606 ("Disclosure of order routing information") and FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the firm agreed to a (i) censure and (ii) $175,000 fine. FINRA said the firm implemented corrective measures, including updating its reporting practices and disclosures, to address the identified deficiencies.
Commentary
To add a bit of color, FINRA brought the issue relating to mid-point peg orders to the firm's attention in September of 2022, but the firm failed to remedy its reporting of these orders until April of the following year, that is, more than six months later. Possibly, it was not feasible for the firm to have updated its systems and reports any quicker than that, though it is also possible that FINRA thought the firm should have fixed this problem more promptly. The other issues raised in the AWC seem minor and, possibly, absent the mid-point peg order issue, would not, on their own, have justified the bringing of this action.
These more minor issues do, however, reflect both a lack of attention to details as a result of the failure to update venue names and a failure to comply with guidance published by the Division of Examination with respect to hyperlinks. Such guidance was published in November 2022 but not implemented until more than a year later in January 2024.
Firms should have a process in place to review guidance issued by the SEC and FINRA and ensure that their procedures and processes are compliant with the updated guidance. While it is difficult to say how quickly this review and implementation process should occur, such reviews should be conducted either on an ongoing basis or quarterly.