FINRA Charges Firm for Charging Unfair Prices
Commentary by Glen Barrentine
A firm settled with FINRA for charging unfair prices in corporate and municipal bond transactions and for failing to establish and maintain a supervisory system reasonably designed to achieve compliance with its fair pricing obligations.
According to the AWC, FINRA found that the firm failed to consider the appropriate pricing information to determine the prevailing market price ("PMP") for the bond transactions. FINRA said that, in most of these transactions, the firm used inter-dealer bid or offer quotations to determine the prevailing market price when a contemporaneous inter-dealer transaction price was available. As a result, FINRA found that the firm caused its customers to pay more than they should have, or receive less than they should have, in transactions with the firm. This caused customer harm in the amount of $44,927.83.
FINRA further found that the firm's supervisory system, including its Written Supervisory Procedures ("WSPs"), were not reasonably designed to achieve compliance. FINRA stated that the firm's clearing firm offered a platform with the ability to automatically calculate the prevailing market price and that the firm's WSPs stated that representatives who wished to trade outside that platform would "be responsible for determining the method and calculation of the prevailing market price applied to the trade." FINRA said that the WSPs also required that "[a] firm compliance principal will periodically review ... the calculation of the [PMP]." FINRA found that a branch office of the firm traded outside the platform the clearing firm offered. FINRA found that the firm's compliance principal, tasked with reviewing that branch's four prevailing market price calculations, reviewed a daily blotter to assess transactions for fair pricing; however, the blotter did not include sufficient information to review the prevailing market price calculation. FINRA found that the firm compliance principal did not routinely review the prevailing market price calculation beyond checking for clerical errors.
FINRA concluded that the firm violated FINRA Rules 2121 ("Fair Prices and Commissions"), 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade") and MSRB Rules G-30 ("Prices and Commissions"), G-17 ("Conduct of Municipal Securities and Municipal Advisory Activities") and G-27 ("Supervision").
To settle the charges, the firm agreed to (i) a censure, (ii) a $90,000 fine and (iii) restitution to its customers of $44,927.83 plus interest.
Commentary
The AWC discussion regarding the firm’s supervisory failures and, in particular, the deficits in the firm’s WSPs highlight the need for procedures that go beyond the general (e.g., confirm that the prevailing market price is fair), as well as the need for appropriate training and supervision. Here the firm’s procedures did not seem to cover how the particular confirmation should have been made.
It also appears that the procedures failed to identify the documents and information necessary to make the needed confirmation. It appears there was no oversight of the compliance principal tasked with the review to ensure that the review was conducted appropriately. Finally, the compliance principal faced with deficient procedures and lacking the understanding necessary to the task, should have sought and obtained the guidance necessary to complete the task assigned.