FINRA states that during a relevant period the firm relied on a number of third-party automated surveillances to assess potentially manipulative activity – including wash trading and pre-arranged trading – which were found to be deficient in several aspects. 

BAML have submitted a letter of Acceptance, Waiver and Consent (AWC) in order to propose a settlement of the alleged rule violations from FINRA. Importantly through this, the respondents “accept and consent to the findings without admitting or denying them”. 

A condition has also been included that, if accepted, FINRA will not bring any future action against the respondents based on the same factual findings. 

In addition, BAML has consented to a $3 million fine, a censure, and that within 180 days of the date of the acceptance of the AWC, a member of BAML’s senior management will certify that the firm has remediated the identified issues and implemented a supervisory system. 

Specifically, BAML has violated FINRA rules 3110(a), 3110(b), and 2010.

FINRA confirmed that overall, between 2015 to present, “the firm did not review approximately 155 alerts representing approximately 700 potentially manipulative equity trades and approximately 1,000 alerts representing approximately 125,000 potentially manipulative options trades.”

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The results are set to be published for public comment, and according to the SEC, the revised plan must: include a date by which it will become fully effective, alongside a prescribed timeline and periodic progress reports; require that all those involved be subject to the plan’s conflicts-of-interest and confidentiality policies; include specialised provisions regarding the sharing of protected information; and outline rules regarding the use of subcommittees.

The US Securities and Exchange Commission (SEC) ordered exchanges to submit new plans for governance of market data back in May 2020, in a bid to overhaul control over the equity consolidated tape and address conflicts of interest concerns.

The regulator at the time directed equity exchanges and the Financial Industry Regulatory Authority (FINRA) to propose a National Market System plan, to produce the public consolidated tape and disseminate the data.

Speaking at the time, Jay Clayton, chair of the SEC, stated: “Today’s action reflects careful analysis and deliberation on modernising and improving access to equity market data and, as a result, our equity market structure more generally.

“Today’s Commission action is based on extensive input from a broad range of investors and market participants and reflects the commitment of the women and men of the SEC to fairness in our markets and the interests of investors.” 

They have now moved forward, and last Friday ordered the filing of a new NMS plan “to replace the three existing national market system plans which govern the public dissemination of real-time, consolidated equity market data for national market system stocks”. 

Read more: What is Reg NMS and could it be beneficial for Europe?

Under the current regime, exchange groups which include Nasdaq, NYSE and Cboe, hold total control and voting rights related to the production and dissemination of data– which has over time led market participants to believe that venues hold an unfair monopoly on the critical market data.

The conflict of interest specifically stems from the entities’ interest in maximising the viability of the data products they sell, and their regulatory responsibilities in overseeing the NMS plans.

Speaking in the most recent announcement from 1 September, the SEC explained: “Developments in technology and changes in the equity markets have heightened the inherent conflicts of interest […] This has raised concerns about whether the existing NMS plans for equity market data continue to fulfil their regulatory purpose to ensure the availability of information with respect to quotations for and transactions in securities. 

“Today’s order addresses conflicts of interest inherent in the current governance structure of the existing equity data plans and is designed to improve the efficiency of NMS plan operations and the responsiveness of the plan to the concerns of market participants that are not self-regulatory organisations.”

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“Under current rules, proprietary trading firms which are solely members of an exchange are subject to less rigorous oversight and operate in a less transparent manner than firms that are current FINRA members and that are required to report their Treasury trades,” explained commissioner Jaime Lizárraga.

”Today’s [23 August] amendments remedy this lack of transparency by levelling the playing field between current FINRA members that report their Treasury trades and non-FINRA members that aren’t required to.”

Previously some firms were able to engage in unlimited proprietary trading of securities off-member-exchange without FINRA oversight – at the time this related to National Association of Securities Dealers (NASD), FINRA’s predecessor.

However, as chair of the SEC Gary Gensler explained in a statement this week, markets have undergone drastic developments since the rule was first introduced in 1976.

“Today [23 August], many broker-dealers conduct significant cross-exchange or off-exchange activity. Yet, some of today’s broker-dealers continue to rely on an exemption from national securities association registration that’s older than the cell phone era. This has led to a regulatory gap whereby a number of firms that have cross-market, monthly trading volume valued in the hundreds of billions of dollars are exempt from national securities association oversight.”

Gensler further added: “I support this adoption because I believe it will modernise the rule to enhance cross-market and off-exchange oversight for some of the most active participants in the capital markets.”

Commissioner Caroline Crenshaw highlighted that the decision will extend FINRA’s oversight to potentially dozens of broker-dealers. 

The rule has divided the market, with conflicting opinions on the benefits of such a move.

Lizárraga said: “These amendments bring transparency to off-exchange activity and level the playing field for firms that provide liquidity on and off-exchanges […] overall, these reforms promote markets that are fairer, more efficient and transparent, and also more resilient and stable, with lower spreads that benefit retail investors.”

However, whilst some, like Gensler and Lizárraga, highlight key benefits including increased transparency and strengthened oversight in the treasury markets, others question the effect it may have on liquidity.

Commissioner Mark Uyeda on 23 August stated his staunch opposition to the rule, pinpointing the substantial downside risk these amendments pose, explaining that “it could result in a reduction in liquidity, particularly in sectors of the market that can least afford it”.

He added that the amendment also includes a conflict-of-interest angle: “The Commission’s findings in favour of a mandatory expansion of FINRA membership are based largely on FINRA’s own submission. But FINRA has a conflict of interest here as these amendments would benefit FINRA in terms of increased revenues.”

Once the final rule is published in the federal register – taking effect 60 days from posting – firms will have a year to comply.

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The Financial Industry Regulatory Authority (FINRA)’s head of enforcement, Jessica Hopper, who has served with the US brokerage regulator for the past 18 years, is to step down on 3 February. She will be replaced in the interim by deputy head of enforcement Christopher Kelly as acting head, during the process of selecting a permanent replacement.

FINRA is a private body, overseen by the SEC, which regulates brokerage firms and exchange markets. Self-regulatory for its members, it writes and enforces rules for the sector as well as examining for compliance with federal securities laws. The agency also provides surveillance and regulatory services for the equities and options markets and administers TRACE (the FINRA-developed Trade Reporting and Compliance Engine), which facilitates the mandatory reporting of over-the-counter transactions in eligible fixed income securities. 

Hopper has been executive vice president and head of enforcement since January 2020, after being named acting head of enforcement in September 2019. She joined FINRA in 2004 as an enforcement attorney, before being promoted to vice president in charge of the regional enforcement program in Washington DC and, in 2016, becoming deputy head of enforcement.  

During her tenure the department brought enforcement actions for a broad range of violations of both FINRA rules and federal securities laws and regulations: including excessive trading, supervision; anti-money laundering, Reg SHO, best execution of customer orders, customer protection rule, operational failures, reporting requirements, test cheating and failures to provide information in connection with an investigation. She also spearheaded the integration of two separate enforcement teams within the organization (one handling disciplinary actions related to trading-based matters found through Market Regulation’s surveillance and examination programs, and the other handling cases referred from other regulatory oversight divisions including Member Supervision) which contributed to both greater efficiency and enhanced transparency.  

The agency also issued record sanctions on member firms for systemic supervisory failures under her aegis: including a $57 million fine to Robinhood Financial in 2021 for its role in the meme stock saga, which saw the firm hit with $12.6 million in restitutions to its customers. 

Read more – Meme stock market event: the super-broker gamification business model challenges market infrastructure and risk management

In 2022, the enforcement department also fined Credit Suisse $9 million for numerous operational failures, as well as slapping Deutsche Bank Securities with a $2 million penalty for best execution violations. 

“Jessica has contributed immensely to FINRA’s mission to protect investors and ensure market integrity,” said FINRA president and CEO Robert W Cook.  

“With Jessica at the helm, the Department of Enforcement returned millions of dollars to wronged investors, vigorously pursued complex cases throughout significant market disruptions, and completed a reorganisation that has fostered an even more efficient and effective enforcement program. I thank Jessica for her steadfast commitment to our mission and her long, exceptional service to FINRA.” 

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According to the watchdog, the bank failed to conduct reasonable reviews of execution quality for its customers’ electronic equity orders.

FINRA found that between January 2014 and February 2019 Barclays Capital routed all of its customers’ orders to its owned and operated alternative trading system, LX, prior to routing to any competing venues unless customers had opted out of this routing preference.

The watchdog said the bank – even when faced with internal data that showed that fill rates in LX were “inferior” to some competing venues – failed to consider alternate routing arrangements. Said reports reportedly showed that LX delivered a lower fill rate than the average fill rate of competing venues for every quarter from 2015 to the first quarter in 2019.

Elsewhere, the bank was found to have a supervisory system and written supervisory procedures that were not “reasonably designed to achieve compliance with best execution obligations” when reviewing price improvement for orders routed to LX or modifying routing practices.

“FINRA continues to prioritise broker-dealers’ compliance with best execution requirements when handling their customers’ orders,” said Jessica Hopper, executive vice president and head of FINRA’s Department of Enforcement. “Firms must continuously monitor their reviews of execution quality and make changes accordingly.”

Barclays settled this matter without admitting or denying FINRA’s findings.

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This included the Securities and Exchange Commission (SEC)’s Customer Protection Rule as well as FINRA rules which require firms to disclose potential conflicts of interest when issuing research reports.

To fulfil the settlement, Credit Suisse has been asked by FINRA to confirm that it has implemented supervisory system and procedures which will allow it to comply with the Customer Protection Rule and other requirements.

“The Customer Protection Rule is intended to protect customers’ securities by prohibiting firms from using those securities for their own purposes and to ensure the prompt return of customer securities in the event of broker-dealer insolvency,” said Jessica Hopper, executive vice president and head of FINRA’s department of enforcement.

“This case should serve as a reminder to member firms of their obligation to protect customer funds from improper use, and to ensure accurate disclosures of potential conflicts between research subjects and firms in research reports, both of which are critically important for investor protection.”

According to FINRA, the Customer Protection Rule was found to have been violated by Credit Suisse in two ways. Firstly, the firm was not able to maintain possession or control of billions of dollars of fully paid and excess margin securities it handled for customers, as required.

Secondly, in multiple instances, Credit Suisse was unable to calculate its required customer reserve accurately – essentially, the firm failed to meet the required amount of cash or securities needed to be maintained in a special reserve bank account. 

FINRA also found that from 2006 until 2017, Credit Suisse issued over 20,000 research reports containing inaccurate disclosures about potential conflicts of interest.

In addition, 6,000 research reports which omitted required disclosures, were found to have been issued by the firm.

FINRA stated that Credit Suisse’s disclosures omitted that the company which was the subject of the research report had been a client of the firm during the prior 12 months; or that the firm expected to receive investment banking compensation from the subject company within the next three months.

FINRA also found that Credit Suisse was unable to preserve over 18.6 billion records in a non-erasable and non-writable format, as required.

Credit Suisse, as a means of settling the matter, has accepted and consented to the entry of FINRA’s findings without admitting or denying them.

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The watchdog has requested that participants submit a comment by 22 February on several topics including execution timestamps, reporting timeframes, and new indicators to identify non-alternative trading system (ATS) trading venues and methods of execution.

It is also looking for a response from participants on the implementation of standardised price reporting, reporting of ATS fees for each transaction, as well as, potential modifiers to identify additional multi-leg transactions and to identify whether a transaction is priced at the current market.

“FINRA is issuing this notice to solicit comment on these potential changes to help inform FINRA’s and the official sector’s continuing analysis of the data and whether changes to the TRACE reporting rules for US Treasury securities may be appropriate,” said the US watchdog.

FINRA members have been required to submit reporting information on transactions in US Treasury securities since 2017 and while the information is not publicly available, it is used by the official sector to monitor the US Treasury securities markets.

Market data has been at the forefront of discussion for US regulatory bodies in recent months following the Securities and Exchange Commission’s (SEC) decision in December to overhaul rules relating to key equity market data feeds after years of debate that they reduced competition.

The amendments to the rules by the SEC expand the information available to investors via SIPs, the real-time consolidated data feeds for the US equities market, to include depth of book data which was previously only available through exchanges as proprietary data feeds.

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Market Structure Partners, which conducted the report, recommended the Commission moves ahead with forming a post-trade EU tape for equity and debt markets with legislative changes to require the data to be consolidated in law.

Surveying tapes already in operation in the US and Canada, the study considered that the increased complexity of European markets means the US model is not suitable for the proposed EU tape, but similar characteristics are desirable.  

To maintain optimum data quality and standards, the EU-backed study added that Europe should allow a self-regulated entity to take responsibility for the tape, similar to the Financial Industry Regulatory Authority (FINRA) that operates in the US.

The report continued that the US experience had also demonstrated the importance of having revenue allocation models based on the value of the contribution of data in facilitating the consolidation and use of the tape.

It noted the US securities regulator’s recent move to overhaul governance of the tape and the need to ensure more pre-trade data is accessible via the tape to reduce the impact of high-speed trading.   

The development in the US earlier this year marked the culmination of intense debate among market participants, many of whom have warned that exchanges have an unfair monopoly on the US tape. They have also argued the data is grossly overpriced considering the supposed low-cost of production.

Niki Beattie, CEO of Market Structure Partners and author of the report, stated in a release that the study had demonstrated there is a clear need for a European consolidated tape and that it is unrealistic a tape will be established under the current market legislation.

“If the current impediments to consolidation are not resolved then trying to consolidate data is a waste of time and it is not surprising that no consolidated tape provider has come forward,” Beattie said.

Efforts to develop a consolidated tape in Europe have been impeded due to concerns around the high costs of developing a tape in a restrictive regulatory environment and a lack of clear commercial benefits.

MiFID II laid out requirements for voluntarily consolidated tape providers, but it did not mandate the establishment of a consolidated tape that firms would have to submit transaction data to. Under the MiFID II review, major asset management firms urged the European Commission to move forward with plans to establish a consolidated tape.

“It’s scary to hear the stories of so many market participants struggling without good data. Asset managers who manage trillions of euros of assets on behalf of investors say they have sub-optimal data with which to do their jobs, risk managers of even the largest firms speak of the difficulty of monitoring the markets without consolidated data and regulators struggle to compile data sets to undertake basic regulatory calculations and perform the required oversight,” Beattie concluded.

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In a statement, the US Securities and Exchange Commission (SEC) said it has issued two orders to introduce a phased reporting timeline, including certain exemptions for small broker-dealers.

Broker-dealers were due to submit reports for equities to the FINRA Order Audit Trail System on 20 April, but this was initially delayed until May by the SEC last month due to the coronavirus. The most recent delay has now extended the reporting deadline to 22 June.

Similarly, options reporting has been pushed back to 20 July. Full equities and options reporting for all broker-dealers will now take place on 13 December 2021, with complete customer and account reporting required from 11 July 2022.

The SEC was forced to delay the initial timeline for reporting last month due to disruption caused by the global pandemic, as the regulator issued a ‘no-action’ letter relating to CAT reporting to allow firms to focus on navigating the ongoing crisis.

The US CAT project has been in development for several years, after the SEC gave the green light for the project in 2012. It will act as the central repository for the regulator to track orders, and the brokers handling those orders, throughout the transaction lifecycle, including cancellations, modifications and executions, for listed-equities and options.

The single data trail will also allow authorities to spot potentially manipulative activity and determine the cause of major incidents, such as flash crashes. The CAT officially went live for broker-dealer reporting on 13 April, as the CAT operating committee described the launch as an important milestone.

“Today marks an important milestone as we have opened the system to receive data in the production system from broker-dealers that have been certified for reporting,” the CAT operating committee said earlier this month. “Although broker-dealers have additional time before they will need to comply with their reporting obligations, we continue to move full-speed ahead, and firms that are ready can begin live reporting.”

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The fine is related to AML failures involving penny stock deposits and resales, and wire transfers that spanned a four-year period between February 2013 and March 2017.

FINRA stated during the period, BNP Paribas did not develop and implement a written AML programme that could detect and report any potentially suspicious transactions.

FINRA also said until 2016, BNP Paribas’ AML programme did not include any surveillance targeting potential suspicious transactions involving penny stocks, despite the French bank accepting the deposit of nearly 31 billion shares of penny stocks worth hundreds of millions of dollars from its clients, including from so-called “toxic debt financiers”.

During the period, FINRA said BNP Paribas had processed more than 70,000 wire transfers with a total value of $230 billion, including more than $2.5 billion sent in foreign currencies, whereby the bank did not review these transactions to determine whether they involved any high-risk entities or jurisdictions.

Although BNP Paribas identified many deficiencies as early as January 2014, it did not fully revise its AML programme until March 2017, FINRA added.

“In order to be effective, a firm’s AML programme must be tailored to the firm’s business model and types of customer transactions,” said Jessica Hopper, FINRA senior vice president and acting head of enforcement.

“When customers engage in high-risk transactions involving low-priced securities and foreign currencies, the firm must devote sufficient resources to its AML programme, including transaction and wire movement monitoring, to ensure that the system is tailored to the business’s unique money laundering risks.”

In settling this matter, BNP Paribas neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. The settlement also required BNP Paribas to certify within 90 days that its procedures are reasonably designed to achieve compliance in these AML areas.

The fine is the latest by FINRA as it continues to crack down on AML failures by Wall Street’s biggest banks. In December last year, the organisation fined Morgan Stanley $10 million for AML failures over period of five years, relating to suspicious wire and foreign currency transfers, as well as suspicious penny stock deposits and trades.

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