FINRA Fines Firm Over Deficient Documentation on Risk Controls

A firm settled FINRA charges for inadequate risk-management controls and related supervisory failures. 

According to the AWC, the firm routed client orders through multiple interconnected internal systems before sending them to the market. The firm maintained various layers of risk management controls intended to prevent erroneous orders. FINRA observed that the firm’s written procedures did not describe the basis for its control settings and lacked records explaining the rationale for those thresholds. In the absence of documentation showing that the thresholds were appropriate, FINRA determined that certain limits appeared too high to serve their intended purpose. 

In addition, FINRA found that under the firm’s soft-block review process, reviewers received alerts when certain controls triggered soft blocks, but the firm did not document how reviewers should evaluate these alerts, when overrides were permissible, or how to record the rationale for releasing orders into the market. Because these reviews lacked structure and contemporaneous documentation, FINRA concluded that the firm’s controls were not reasonably designed. (FINRA noted that the firm eventually decommissioned the platforms containing these deficient controls.)

FINRA also determined that the firm failed to establish, document, and maintain a system reasonably designed to review the effectiveness of its risk management controls and supervisory procedures. FINRA found that the firm's procedures did not adequately describe what needed to be reviewed or how the reviews should occur. FINRA stated that the firm also failed to document how it determined certain control thresholds or why those thresholds were appropriate, resulting in unreasonable annual evaluations of both individual risk controls and the firm’s overall system of risk management controls.

FINRA concluded that the firm violated SEA Section 15(c)(3) ("Registration and regulation of brokers and dealers"), SEA Rule 15c3-5 ("Risk management controls for brokers or dealers with market access"), and FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision"). 

To settle the matter, the firm agreed to (i) a censure and (ii) an $84,375 fine (resolved simultaneously with similar matters for a total fine of $675,000).