FINRA Fines Broker-Dealer for Failing to Detect Pre-Arranged Trading

A broker-dealer settled FINRA charges for failing to detect a pre-arranged and manipulative trading pattern involving municipal securities trades between two institutional customers.

In a Letter of Acceptance, Waiver and Consent, FINRA stated that the customers directed a firm representative to buy from one customer and then sell the same bonds to the other customer at prices that were agreed to by the customers. FINRA said that the "customers would trade the bonds back and forth sometimes at increasing prices that were between three and twelve points above the prevailing market price."

FINRA found that the firm failed to identify these manipulative trades due to an inadequate supervisory system that entrusted a single reviewer for hundreds of transaction reviews. In addition, FINRA found that the firm's supervisory system failed to provide a method for associating transactions with customers who were potentially related. FINRA stated that the policies failed to provide a supervisor with guidance for identifying and reviewing trades for pre-arranged trading.

FINRA determined that the supervisory failures violated MSRB Rule G-27 ("Supervision"). To settle the charges, the broker-dealer agreed to (i) a censure, (ii) a fine of $50,000 and (iii) undertakings to remediate the supervisory issues.