Broker-Dealer Fined for Failing to Timely Process Reverse Stock Split

An online broker-dealer settled charges with NYSE Arca for failing to timely process a reverse stock split causing customers to trade using inaccurate information.

In a Letter of Acceptance, Waiver, and Consent, NYSE Arca stated that the broker-dealer did not verify the correct effective date of a reverse stock split of a publicly traded company after receiving different effective dates from two different data sources. The Exchange found that the firm's policies and procedures provided for a manual review if two data sources could not confirm a piece of information. According to NYSE Arca, the manual review did not verify the correct effective date, and after the later of the two effective dates had passed, the broker-dealer had still not processed the reverse stock split. NYSE Arca found that the broker-dealer allowed the customers to trade in their accounts based on the inaccurate pre-split information. NYSE Arca found that the customers who had sold more shares than they owned as a result of the non-split adjusted information were required to cover those sales, many of which were at a loss.

As a result, the Exchange determined that the firm violated NYSE Arca Rule 11.1(b) for failing to process the reverse stock split in a timely manner, and Rules 11.18(b) and (c) for failing to implement a supervisory system that prevented customers from trading based on inaccurate account information and for failing to develop guidance for the manual review process when two data sources could not verify a piece of information.

To settle the charges, the broker-dealer agreed to a (i) censure and (ii) $295,000 fine.