Broker-Dealer Fined for Order Routing Disclosure and AML Failures

A broker-dealer and its Chief Compliance Officer ("CCO") settled FINRA charges for inaccurate public disclosures on order routing practices and gaps in the firm's AML program.

According to the AWC, during the relevant period, the firm published quarterly reports under Rule 606 ("Disclosure of Order Routing Information") containing inaccurate information as to its handling of non-directed customer orders for National Market System ("NMS") securities. FINRA found that the firm's reports misstated data, including: (i) the proportion of orders routed as market or limit orders, (ii) primary execution venues, (iii) financial incentives or fees received by the firm and (iv) the firm's relationships with execution venues. FINRA attributed the inaccuracies to the firm's reliance on a third-party vendor for report generation, which the firm continued to use even after the vendor disclosed limitations in accurately processing the firm's trade data.

Further, FINRA found that the broker-dealer and its CCO failed to establish an adequate supervisory system to ensure accurate Rule 606 disclosures. FINRA found that the firm's written supervisory procedures assigned review responsibility to the CCO, but the procedures lacked specifics on how to verify report data or address identified discrepancies. FINRA said the CCO's review was limited to randomly checking a small sample of trades, which FINRA found was insufficient given the high volume of trades conducted. 

FINRA also found that the firm failed to monitor multiple transactions tied to ten accounts that raised "red flags," including trades across accounts held by related parties, substantial dollar volumes in thinly traded securities and transactions by customers previously associated with regulatory violations.

As a result, FINRA determined that the broker-dealer violated Regulation NMS Rule 606(a) ("Disclosure of Order Routing Information") and FINRA Rules 3110 ("Supervision"), 2010 ("Standards of Commercial Honor and Principles of Trade") and 3310 ("Anti-Money Laundering Compliance Program").

To settle the charges, the broker-dealer agreed to (i) a censure and (ii) pay a $195,000 fine. The CCO agreed to (i) pay a $5,000 fine and (ii) a 45-day suspension.