Broker-Dealer Settles Nasdaq Charges for Failing to Supervise Foreign Omnibus Accounts
Commentary by Steven Lofchie
A broker-dealer settled Nasdaq charges for failing to maintain a supervisory system designed to prevent potentially manipulative trading in omnibus accounts maintained for foreign broker-dealers.
In the Letter of Acceptance, Waiver and Consent ("AWC"), Nasdaq determined that while the firm's surveillance system detected potentially manipulative activity from foreign introducing brokers, the firm sometimes closed exception reports without taking reasonable action to prevent further trading by the ultimate beneficial owners. Nasdaq also found that when the firm decided to restrict trading, it unreasonably relied on unaffiliated foreign introducing brokers to implement those restrictions, without adequate safeguards to confirm the restrictions were actually imposed. In addition, Nasdaq found that the firm failed to incorporate unique identifier logic into all major exception reports until August 2023, which hindered its ability to consider the trading and compliance history of ultimate beneficial owners.
Nasdaq determined the firm violated Nasdaq Rule General 9, Section 20(a) ("Supervision") and Nasdaq Rule General 9, Section 1(a) ("Standards of Commercial Honor and Principles of Trade"), regarding the observance of high standards of commercial honor and just and equitable principles of trade.
To settle these charges, the firm consented to a censure and a fine of $900,000.
Commentary
This enforcement action illustrates one of the most challenging problems that broker-dealers face in surveilling for manipulative trading: how is it possible to detect improper trading in an omnibus account for numerous undisclosed principals, when the broker-dealer has no definitive means to know which trades are for the same or related investors? It is a difficult problem, unless the foreign broker-dealer, through which the trades are submitted, is reasonably transparent and is fully committed to partnering in the detection of improper trading patterns. That is often not the situation in which the U.S. broker-dealer finds itself.