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FINRA Fines Merrill Lynch $2.8 Million for Systemic Reporting, Books, and Records, and Related Supervisory Violations

Just last week, the Financial Industry Regulatory Authority (FINRA) announced it has fined Merrill Lynch, Pierce, Fenner and Smith Inc. $2.8 million for violations in its systemic trade reporting, Order Audit Trail System (OATS) reporting, books and records, and related supervisory violations that occurred over a period of several years.

Where there’s smoke…

We’ve written previously about FINRA and the other regulatory bodies executing “oversight by exception,” and this is one costly example.

FINRA is using trade reporting and OATS data as the “canary in the financial coal mine,” making it an integral part of its automated market surveillance program to detect manipulative activity and other potential violations of FINRA rules and the federal securities laws. FINRA will be looking at your books and records to conduct adequate policing.

System failure leads to costly fines

FINRA found that a system configuration error caused Merrill Lynch to, among other things, inaccurately report millions of trades to a FINRA Trade Reporting Facility in which purchases were reported as principal sales and agency crosses. Merrill Lynch also reported millions of trades it was not required to report.

Moreover, over nearly five years, the firm encountered a number of separate system errors that caused it to report millions of inaccurate reportable order events to OATS, including inaccurate timestamps, broker-dealer orders reported as customer orders and a failure to report millions of execution reports.

Worse still, FINRA also found that, for approximately three years, Merrill Lynch failed to record certain special handling instructions, as well as the correct receipt and route timestamps on order tickets, which caused millions of records to be inaccurate.

Garbage in is…

Thomas Gira, FINRA Executive Vice President and Head of Market Regulation, said, “A critical component of market integrity is the ability of regulators to rely on the accuracy of the information reported by broker-dealers. The failure to report accurate audit trail information adversely affects not only FINRA but other market participants and the investing public.”

FINRA also found that the scope of Merrill Lynch’s supervisory system with respect to, among other things, trade reporting, OATS reporting, and books and records, “was not reasonably designed.”

Without admitting or denying any wrongdoing, Merrill Lynch consented to the entry of FINRA’s findings.

So, what are you doing?

If you’re reading this, it’s because you are a Broker-Dealer, RIA, or FCM concerned about your firm’s compliance exposure. You know — whether it’s trading or non-trading exposure — you must create, implement, maintain, confirm, and review written supervisory policies and procedures to ensure regulatory compliance, reduce reputational exposure and avoid related financial consequences. If you are doing the right thing, you have implemented the necessary policies and procedures. Are you?

Stuff happens. It always happens. Just make sure it doesn’t happen to you! If you don’t have the bandwidth to be your own compliance, outsource. When your compliance function is under pressure to do more with less, you have options?

Let’s talk (212-233-1155). Ask about Patrina’s comprehensive compliance solutions and compliant data capture, file storage, and records archiving specifically designed for the financial services community.

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