Broker-Dealer Fined for LOPR Reporting Violations
Commentary by Steven Lofchie
A broker-dealer settled FINRA charges for failing to report OTC options positions to the Large Options Position Reporting system ("LOPR").
In a Letter of Acceptance, Waiver and Consent, FINRA found that the broker-dealer:
- misclassified the counterparty to certain transactions as a broker-dealer instead of a bank, which incorrectly exempted the transactions from LOPR reporting;
- failed to report transactions where the broker-dealer acted as an intermediary between U.S.-based customers and foreign broker-dealer affiliates; and
- failed to identify discrepancies in the LOPR system's "country" field and the counterparty's "country of origin" designation, resulting in the counterparty being incorrectly labeled as a foreign entity, and thereby exempting the transactions from LOPR requirements.
FINRA determined that due to the misclassifications and reporting failures, certain positions were over the applicable OTC position limit. FINRA stated that in the majority of such instances, the broker-dealer went over the limit on one side of the market while the customer was over the limit on the other.
FINRA also found that - from January 2014 through October 2020 - a lack of adequate supervisory policies designed to control position limits for conventional equity options contributed to the broker-dealer's reporting failures. The broker-dealer's supervisory system (i) was unable to distinguish reportable from non-reportable transactions, (ii) could not determine whether or not transactions had been reported and (iii) was not designed to identify instances where positions were over the applicable limits.
As a result, FINRA concluded the broker-dealer violated FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade"), Rule 2360(b)(3) and (b)(5) ("Options"), and Rule 3110 ("Supervision").
To settle the charges, the broker-dealer agreed to (i) a censure, (ii) a $5,000,000 civil monetary penalty and (iii) undertakings to improve its supervisory policies regarding LOPR reporting.
Commentary
One question that this enforcement action raises is whether the position limits are set far too low. According to the action, in some instances the firm and its client were significantly over the limit, yet it does not appear that any harm resulted. Wouldn't that indicate that the limits should be raised?