FINRA Fines Firm for Inadequate Customer Trading Controls
A broker-dealer settled FINRA charges for inadequate controls on market access risk, manipulative trading and anti-money laundering.
On market access risk, FINRA found that the firm (i) set client credit limits without considering their financial condition, (ii) "did not assess the reasonableness of aggregate credit limits for clients with multiple accounts;" (iii) "adjusted credit limits by applying a different standard cushion based on the firm's average growth rate over the prior five years, rather than the client's financial condition (and then failed to monitor whether the limits remained appropriate); and (iv) allowed personnel to approve clients' requests for temporary credit increases "without first reviewing them for reasonableness." FINRA also found that the firm failed (i) "to implement reasonable erroneous order controls, including: "a reasonable pre-trade price deviation control for rejecting orders priced more than a certain percentage away from a reference price," (ii) "a reasonable pre-trade [average daily trading volume] control;" and (iii) a reasonable maximum order rate and duplicate order rate limits."
On manipulative trading, FINRA found that the firm (i) used unreasonably designed parameters to detect and prevent wash sales, layering, and spoofing, (ii) "failed to allocate sufficient resources to reviewing surveillance alerts, (and failed to adequately train employees to review alerts;) (iii) "adopted unreasonably narrow sampling methods to determine which alerts to review" and failed to "investigate the surveillance alerts it reviewed." FINRA found that the firm relied on automated surveillance systems that generated thousands of alerts monthly but often assigned just one undertrained employee to review them. FINRA said the firm reviewed only "approximately four percent" of its spoofing alerts, leaving about 96 percent unreviewed. FINRA found that the firm adopted overly narrow alert review thresholds, only reviewing alerts where a client generated "three or more alerts in one security in a single day, or six or more alerts in one security in a single week."
On anti-money laundering, FINRA found the firm (i) failed to detect, investigate, and respond to suspicious trading in at least 15 low-priced securities; (ii) failed to establish any due diligence program for correspondent accounts it maintained for foreign financial institutions and (iii) had a AML testing program that did not detect and "cause the reporting of suspicious trading in low-priced securities."
As a result, FINRA determined the firm violated SEA Rules 15c3-5(b), (c)(1)(i), (c)(1)(ii), and FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 3310 ("Anti-Money Laundering Compliance Program") and 3110 ("Supervision").
To resolve the matter, the firm agreed to (i) a censure and (ii) pay a $300,000 fine—of which $75,000 is payable to FINRA, with the remainder paid to three securities exchanges on which the firm had traded.