Firm Settles Charges for Incorrectly Processing Corporate Actions
Commentary by Glen Barrentine
A firm settled Nasdaq Stock Market charges for failing to timely process reverse stock splits and a warrant causing customers to trade using inaccurate information.
According to the AWC, the firm used three independent data vendors to source information on corporate actions, including reverse stock splits. The firm’s written supervisory procedures provided for a manual review if two data sources could not confirm a piece of information. Nasdaq found that two deficiencies delayed or prevented the firm from correctly processing five reverse stock splits. As a result, the firm sent orders to the market at erroneous prices based on pre-reverse split information in certain instances and, in two instances, customers sold shares that they did not own. Nasdaq said the firm also did not promptly address a known system issue that rejected pre-approved reverse stock splits from taking effect.
Nasdaq found that the firm’s procedures were not reasonably designed, which caused the untimely processing of three reverse stock splits. The firm's procedures were deficient in that they (i) did not contain information about what the manual review should entail when an issue was escalated, or what actions should be taken to verify a corporate action coming from only one data vendor or if information from multiple vendors conflicted and (ii) did not prevent customers from trading based on inaccurate account information if the firm did not timely process a corporate action. Nasdaq also found that the firm did not adequately monitor trading in the pre-market following a corporate action to verify that it had processed the corporate action correctly. Nasdaq said the firm failed to address these gaps in its supervisory procedures, despite having "experienced instances where corporate actions could not be confirmed automatically." Further, Nasdaq determined that the firm employed certain erroneous order controls with respect to warrants under some circumstances, including a reference price filter.
As a result, Nasdaq found that the firm violated SEA Section 15(c)(3) ("Registration and regulation of brokers and dealers") and Rules 15c3-5(b) and 15c3-5(c)(1)(ii) ("Risk management controls for brokers or dealers with market access"); and Nasdaq Rule General 9, Sections 20(a) ("Supervision") and 1(a) ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the firm agreed to (i) a censure and (ii) pay a fine in the amount of $475,000.
Commentary
Mistakes happen - even with the best of procedures. The firm’s problem here, however, and the reason for Nasdaq’s enforcement action, stem from the fact that the mistakes relating to the pricing of reverse stock splits kept happening. This included the firm’s failure to address a known problem relating to stock splits for almost an entire year, which problem was responsible for two of the pricing issues, and by the failure, in some cases, of firm personnel to resolve inconsistent data received from its data source and to monitor pre-market trading to confirm that it had correctly processed the corporate action.
The takeaway here is that known problems must be addressed more quickly, and a process should be in place to ensure that firm personnel promptly resolve data inconsistencies.