Firm Settles FINRA Charges for Unreviewed Communications and OTC Market Violations
Commentary by Steven Lofchie
A broker-dealer settled FINRA charges for failing to review electronic communications and improperly managing its over-the-counter sponsorship and market making businesses.
According to the AWC, the firm allowed its designated principals to conduct reviews of their own electronic communications over an approximately seven-year period. FINRA determined that the company's written procedures did not identify who was responsible for reviewing these communications, resulting in thousands of messages sent or received by principals going unreviewed.
FINRA found the company operated an over-the-counter sponsorship business subject to the requirements of Rule 15c2-11 ("Initiation or resumption of quotations without specific information,") without assigning anyone to oversee the principal handling the operations. FINRA also found that the company operated its market-making business for years without implementing procedures to address specific quotation exceptions and recordkeeping requirements. FINRA noted that this lack of oversight allowed the principal to use another employee's login credentials to submit forms, creating the false appearance that another individual was handling the filings. Further, FINRA determined that the firm failed to detect multiple false responses sent to the regulator and dozens of misleading emails sent to issuers.
FINRA found the company violated FINRA Rule 3110 ("Supervision") by failing to establish and maintain a reasonably designed system and written procedures to oversee electronic communications. FINRA also found the company violated Exchange Act Rule 15c2-11 (see above) and FINRA Rule 6432 ("Compliance with the Information Requirements of SEA Rule 15c2-11") by failing to reasonably oversee its over-the-counter sponsorship and market making businesses to ensure compliance with quotation and information review requirements.
The firm accepted a censure and a $125,000 fine.
Commentary
It is not uncommon, at smaller firms in particular, that principals may seek to avoid review of communications or of their trading accounts. This is an obvious violation, although it may be difficult for compliance officers to correct.