It’s going to be a long, hot, summer for Barclays Capital Inc. Just this month, the firm submitted a Letter of Acceptance, Waiver, and Consent to settle alleged violations of the Financial Industry Regulatory Authority’s (FINRA) Code of Procedures. The firm was censured, fined $600,000, and required to revise its supervisory system, including, but not limited to, its WSPs.
The Short Sales Section of FINRA’s Department of Market Regulation conducted a review of Barclay’s order making compliance during the period of July 1, 2009 through June 29, 2012, and short sale trade reporting during the period of February 28, 2011 through January 30, 2012. The regulators found that Barclay’s had violated SEC Rule 200(g) of Regulation SHO, FINRA Rules 2010 and 6182, and NASD Rule 3010.
That’s a lot of numbers, letters and rules to describe the following:
A programming error in a firm algorithm caused it to splice parent short sale orders into child orders marked as long sales. The regulators’ findings stated that as a result, the firm routed short sale orders and failed to properly mark the orders as short. The firm executed short exempt transactions and reported each of those transactions as non-exempt short sales in non-tape reports to the Trade Reporting Facility® (TRF®). The findings also stated that the firm’s Written Supervisory Procedures (WSPs) did not provide for supervision designed to ensure that the relevant algorithm marked orders in compliance with SEC Rule 200(g) and did not provide for supervision designed to ensure that short exempt transactions received from its broker-dealer clients were accurately reported.
Lots of missed oversight
According to the regulators’ findings, during the order marking review period, the programming error caused it to splice 16,665 parent short sale orders into 2,940,022 short sale orders mislabeled as long sales.
During the trade reporting view period, Barclay’s Capital executed more than a quarter of a million (777,217) short exempt transactions and reported each of those as non-exempt short sales in non-tape reports to the trade reporting facility. Moreover, the regulators reported that “the firm’s written supervisory procedures did not provide for supervision designed to ensure that the relevant algorithm marked orders in compliance with SEC Rule 200(g),” which was decommissioned on June 29, 2012.
What poor WSPs cost Barclay’s Capital
A lot of money and embarrassment and…A censure, a fine of $600,000, which includes $375,000 for SEC Rule 200(g) violations, $50,000 for FINRA Rule 6182 violations, and $175,000 for related WSP violations. Ouch!
Stuff happens. And when the SEC, FINRA or other regulatory bodies get involved and issue shaming reports, it can make for good “rubbernecking.” Until it happens to you.
Don’t be that firm. You know, as a Broker-Dealer, RIA, or FCM, you and your compliance team must create, implement, maintain, confirm, and review written supervisory policies and procedures to ensure regulatory compliance, reduce reputational exposure and avoid related financial consequences. FINRA Rule 3130 also requires broker-dealers test and report on the firm’s written supervisory procedures effectiveness annually, and to store those policies and procedures in accordance with 17(a)-4 requirements.
Are you watching?
If you are charged with compliance, you know you’re facing increased oversight which requires you to juggle more paper, more files, more data. Regulatory compliance requirements are getting more all-consuming and complying can often times feel like an undertaking without end. If your compliance function is under pressure to do more with less, what are the options?