FINRA and SEC hit SG Americas Securities with $3.1 million in fines over blue sheets mishap

For more than seven years, SG Americas Securities, LLC (SGAS) submitted inaccurate trade data (blue sheets) to the Financial Industry Regulatory Authority (FINRA). And now, those pigeons have come home to roost.

Just before Independence Day, FINRA announced it had fined SG Americas Securities $1.55 million for submitting inaccurate trade data. The regulator has ordered the firm to certify that it has conducted a comprehensive review and revised its related systems and procedures within 90 days of its settlement agreement. Added to that, in a related settlement, the Securities and Exchange Commission (SEC) has ordered SG Americas to pay an additional $1.55 million for also providing inaccurate blue sheet submissions to the SEC.

What is so important about blue sheets?

FINRA and the SEC regularly request blue sheets when investigating market manipulation and insider trading. Federal securities laws and FINRA rules mandate compliance. Blue sheets provide regulators with critical detailed information about securities transactions, including the security, trade date, price, share quantity, customer name, and whether it was a buy, sale, or short sale. This information is essential to regulators’ ability to discharge their enforcement and regulatory mandates.

“Incomplete and inaccurate blue sheet information in response to a regulatory request compromises our ability to identify individuals engaging in insider trading schemes, market manipulation, and other fraudulent activity. [It] ultimately interferes with our ability to protect investors,” says Jessica Hopper, Executive Vice President and FINRA’s Head of Enforcement. “Firms must invest the resources necessary to ensure that they are providing complete and accurate blue sheet data whenever requested.”

SG America’s lack of oversight is not a small matter

SG Americas Securities has been a member of FINRA since April 2004 and is a broker-dealer based in New York City. It is an indirect subsidiary of Société Générale S.A. and maintains five branch offices with approximately 830 registered professionals. Newedge USA, LLC was a member of FINRA from March 1996 to January 2015 and functioned as a broker-dealer and futures commission merchant. In January 2015, SGAS and Newedge merged, and Newedge terminated its FINRA membership and withdrew its broker-dealer registration.

From 2012 to 2019, Newedge and SGAS submitted approximately 8,400 inaccurate blue sheets to FINRA, misreporting information on nearly 4.2 million transactions. Moreover, Newedge did not maintain written procedures for validating blue sheet requests from January 2012 through January 2015. The SEC, FINRA, and other regulators request blue sheets to assist them in investigations focused on trading, including suspicious and insider trading. The firms’ failure to comply can impact a regulator’s ability to conduct an adequate review. Newedge and SGAS submitted approximately 8,400 inaccurate blue sheets to FINRA from 2012-2019, misreporting information on approximately 4.2 million transactions. These inaccurate blue sheet submissions were the result of errors with two of Newedge’s systems, and errors occurring with blue sheets processed at SGAS’s third-party vendor.

In mid-2015, FINRA discovered that individual blue sheet submissions by SGAS incorrectly reported whether customers bought or sold options and misreported the strike price of options trades. These deficiencies resulted from programming issues with a system SGAS inherited when it merged with Newedge. Additional errors ensued from problems with a second legacy Newedge system. Altogether, these issues resulted in Newedge and SGAS submitting blue sheets that incorrectly reported 13 different data fields, including:

1. whether individual options and equities transactions were a Buy, Sell or short sell;
2. the Strike Prices of options;
3. the Order Execution Times;
4. the Large Trader Identification Numbers – LTIDs;
5. the Net Amounts of the transactions; and
6. the Tax ID numbers of the customers.

As a result, from December 2012 to September 2017, SGAS and Newedge submitted approximately 2,197 inaccurate blue sheets to FINRA, misreporting information on nearly 611 thousand transactions.

Outside vendor errors also cost the companies

From 2014 through 2019, SGAS submitted blue sheets processed by an outside vendor which contained errors in 13 fields, reporting for example:

1. respondent’s LTID rather than its clients’ LTIDs were identified for certain transactions in average price accounts;
2. trades in some average price accounts were identified as proprietary when they were executed on an agency basis;
3. transactions for some accounts held by SGAS’s parent company used incorrect LTIDs;
4. transactions were reported as occurring on the wrong exchange;
5. some submissions failed to identify the clearing broker-dealer on the other side of a trade; and
6. the customer Tax Identification Number was wrong for specific trades.

As a result, of the errors in blue sheets processed by SGAS’s Vendor, from March 2014 through 2019, SGAS submitted approximately 6,264 incorrect blue sheet responses to FINRA, misreporting information on nearly 3.6 million transactions.

Newedge WSPs were MIA even before the merger

Beginning on December 1, 2014, Newedge failed to maintain written procedures for validating blue sheet requests before its merger with SGAS. And SGAS’ failure to address the issue makes it liable for noncompliance. For that reason, it is accepting the imposition of the following sanctions:

1. A censure; and
2. A fine of $3.1 million, of which half ($1.55 million) is paid to FINRA as part of the AWC and half ($1.55 million) paid to the SEC.

Where was compliance? Addressing other issues, perhaps. Nonetheless, this was still a costly omission. And that’s where Patrina comes in. For more than 25 years, Patrina has been helping compliance professionals like you stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, our 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.Let’s talk.