Broker-Dealer Fined for Best Execution and AML Failures
Commentary by Jeff Ziesman
A broker-dealer settled FINRA charges for failing to comply with best execution obligations, failing to have adequate market access controls in place and failing to maintain a proper anti-money laundering ("AML") program.
According to the AWC, the firm failed to "consider all relevant execution quality factors, such as the likelihood of execution of limit orders, transaction costs, customer needs and expectations, and the existence of payment for order flow arrangements." FINRA said that the firm also (i) "failed to compare the execution quality of the firm's existing order routing arrangements to the execution quality of other markets," and (ii) introduced unnecessary intermediaries between itself and the best market. As a result, FINRA found that the firm failed to establish and maintain a supervisory system and written procedures to ensure compliance with its best execution obligations.
In addition, FINRA found that the firm failed to detect and investigate red flags for suspicious activity, including potentially manipulative trading by high-risk retail customers. FINRA found that the firm failed to establish and implement a written AML program which allowed customers to engage in potentially manipulative trades without sufficient review.
Further, FINRA found that the broker-dealer falsely answered "No" on its Customer Relationship Summary ("Form CRS") regarding legal or disciplinary history, despite multiple prior regulatory actions.
FINRA found that the broker-dealer violated SEA Section 17(a)(1) of the Exchange Act ("Records and Reports") and Rule 17a-14 ("Form CRS, for preparation, filing and delivery of Form CRS") and Regulation NMS Rule 606 ("Disclosure of Order Routing Information") and FINRA Rules 5310 ("Best Execution and Interpositioning"), 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the broker-dealer agreed to (i) a censure and (ii) an undertaking to hire an independent consultant to review and improve its best execution and AML compliance procedures. No monetary fine was imposed due to the firm's "current financial condition."
Commentary
According to the FINRA AWC, the firm's platform catered to retail investors who were "speculative and high risk only," and the firm provided self-directed trading to them through a web-based trading platform. FINRA found the firm's AML Program lacking in several respects: (1) the firm failed to reasonably review exception alerts for suspicious activity that were generated by its own and its clearing firms' automated AML surveillance systems, (2) despite catering to "speculative and high risk" investors, the firm failed to conduct upfront and ongoing monitoring to identify and report suspicious transactions and (3) while the firm permitted customers to simultaneously open accounts at two different clearing firms during the Relevant Period, it failed to appropriately question why customers would need accounts at different clearing firms.
These failures led to potential market manipulative activity, such as spoofing, layering, wash or cross trades, trading ahead of significant price movements and/or high-volumes of transactions in thinly-traded securities. With respect to customers who had separate accounts at two clearing firms, FINRA found numerous instances in which a customer engaged in opposite-side trades in the same security on the same trade date.
Notwithstanding these issues, FINRA declined to impose any fine, because the firm was hiring an independent consultant and the firm’s lack of financial resources.