Are you making money? Or paying fines?

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November 15, 2017
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Are you making so much money that you can afford even the smallest of regulator-issued fines? Really? Here’s a better idea of you’re already okay with throwing away perfectly good money…why not do the right thing, be compliant, and give a $1 million to charity! Now that’s an investment in political capital and reputation management with guaranteed ROI!

WSP OOPS!

Yeah. Really. Oops. Earlier this fall, Financial Industry Regulatory Authority (FINRA)issued a Letter of Acceptance, Waiver and Consent (AWC) in which J.P. Morgan Securities LLC was censured, fined $1.1 million, and required to revise its Written Supervisory Procedures (WSPs), in addition to providing a written report regarding the implementation and performance (to date) of its revised WSPs. The Letter was issued in response to FINRA’s findings that the firm undertook a Code-Split to create separate order management systems (OMS) for its institutional cash clients and for its retail clients.

The findings stated that in implementing the Code-Split, the firm failed to account for certain filters in the firm’s prior OMS which resulted in the over-advertisement of trade volume. As a result, it erroneously captured volume that had already been advertised on a trade date when it later swept for volume that was delayed for advertising, based on client preference, on trade date plus three (T+3).

The firm’s prior system also did not filter out replicated parent-child order volume. As a result, an institutional client trade that was advertised appropriately on a particular trade date would be submitted again for advertisement, and in the case of some parent-child orders, more than once, on a T+3 basis.

As additional institutional clients were moved to the new OMS, a process that occurred over a four-month period, the impact of the over-advertised T+3 volume increased. J.P. Morgan Securities likely overstated its advertised trade volume by billions of shares through Bloomberg and AutEx. Ultimately, the firm voluntarily removed billions of shares that it advertised, including advertisements related to actual executions, but not until after the relevant trade dates.

The findings also stated that the individual who conducted reviews of the accuracy of advertised trade volume did not have access to firm-wide execution volume because of information barriers. Thus, firm-wide execution volume was not readily accessible to the individuals conducting reviews of the accuracy of advertised trade volume. This inhibited J.P. Morgan Securities’ members’ ability to adequately know the trade volume for any security to ensure any advertisement of such volume was accurate. The firm also failed to have any supervisory system, including WSPs, in place to review the accuracy of trade volume advertised on a T+3 basis. The firm’s supervisory deficiencies adversely affected the firm’s ability to adequately review the accuracy of its trade volume advertisements.

Fines + more fines

J.P. Morgan Securities agreed to accept the censure, and a fine of $200,000 for its supervision violations and an additional fine of $900,000 for violating FINRA rules 5210 and 2010. A charitable donation would have been a better investment.

Compliance is so much cheaper!

Stuff happens. But why risk the exposure when keeping your organization on the “straight and narrow” can be so “cheap and easy?” Let’s talk (212-233-1155). Ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.

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