FINRA Fines Firm and CCO for Failing to Protect Non-Public Research
A firm and its chief compliance officer settled FINRA charges for (i) improper access by traders to non-public research, (ii) supervisory failures on outside brokerage accounts, (iii) trade reporting failures and (iv) inaccurate customer confirmations.
According to the AWC, traders were able to access draft research reports before publication. FINRA said that research analysts routinely circulated pre-publication drafts to trading personnel for input on recommendations, and research content was discussed in internal meetings and chatrooms without oversight. FINRA concluded that the firm failed to restrict the flow of non-public information between research analysts and trading personnel, and found that the CCO, despite being aware of these practices, failed to implement controls to prevent improper information sharing.
FINRA stated that the firm's policies required associated persons to disclose outside business accounts and required the CCO to review duplicate statements. FINRA found that the CCO relied on a manual process, reviewing only a small subset of accounts each month without tracking which statements were requested or obtained. Further, FINRA found that the CCO failed to review any outside brokerage accounts at all for over a year, allowing multiple employees to trade in securities covered by the firm's research department without detection. FINRA concluded that the firm failed to ensure that all statements were received, reviewed and documented and that the CCO failed to create and implement a supervisory system to adequately review outside brokerage accounts held by associated persons.
FINRA found that the firm failed to report any eligible fixed-income transactions to the Trade Reporting and Compliance Engine, and for five years, it did not report municipal securities transactions to the Real-time Transaction Reporting System. FINRA said the firm had no policies addressing these reporting obligations, and no supervisory reviews were conducted to ensure compliance.
FINRA found that nearly half of customer confirmations contained incomplete information, including missing execution capacity disclosures and timestamps. FINRA said the firm's procedures required a quarterly review of a sample of confirmations, but did not specify responsible personnel, documentation requirements, or corrective measures for inaccurate confirmations.
As a result, FINRA determined that the firm violated FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision") and MSRB Rules G-14 ("Reports of Sales or Purchases") and G-27 ("Supervision"). The CCO violated FINRA Rules 5280 ("Trading Ahead of Research Reports"), 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision")
To settle the charges, the firm agreed to (i) a censure, (ii) pay a $215,000 fine and (iii) an undertaking to certify that it has implemented a compliant supervisory system. The CCO agreed to (i) a one-month suspension from acting in a principal capacity and (ii) pay a $5,000 fine.