UFP’s primary business is providing brokerage and research services to institutional customers. As part of its compliance procedures, the firm requires its chief compliance officer to review the outside brokerage account statements of the firm’s representatives. However, Dickerson did not consistently do so.

“As a result of Dickerson’s failure to reasonably monitor and review outside brokerage accounts, Respondents failed to detect and investigate trading by three employees in securities covered by the firm’s research group during the period April 2019 to June 2022,” FINRA said in its cease-and-desist order.

According to FINRA, Dickerson employed a manual process to request the outside brokerage account statements from time to time. She did not have a regular practice of tracking which statements she requested and she did not verify that she received the account statements that she requested. Although the firm’s manual compliance verifications required associated persons to disclose new outside brokerage accounts, Dickerson did not consistently review those verifications, and she failed to obtain annual compliance questionnaires from any firm representatives in 2021.

UFP and Dickerson Failed to Restrict Information Flow and Report Certain Transactions

UFP and Dickerson also allegedly engaged in additional violations, specifically in connection to FINRA Rule 5280(b). This rule provides that “a member must establish, maintain and enforce policies and procedures reasonably designed to restrict or limit the information flow between research department personnel, or other persons with knowledge of the content or timing of a research report, and trading department personnel, so as to prevent trading department personnel from utilizing non-public advance knowledge of the issuance or content of a research report for the benefit of the member or any other person.”

FINRA alleges that UFP and Dickerson did not implement procedures in line with Rule 5280(b). FINRA claims that the firm and Dickerson permitted unrestricted interactions between UFP’s research analysts and its sales and trading staff. The firm’s research analysts regularly circulated pre-publication draft research reports to sales and trading staff to obtain their input, including on the recommendations of the reports. Dickerson was copied on these communications, but she did not restrict the pre- publication review of the reports by sales and trading staff.

Additionally, FINRA Charged UFP for its failure to report TRACE-eligible transactions and failed to establish and maintain a reasonable supervisory system related to TRACE reporting. TRACE facilitates the mandatory reporting of over-the-counter transactions in certain fixed income securities and provides increased price transparency to market participants and investors.

The charges claim that UFP did not report any of its at least 223 TRACE-eligible transactions from April 2019 through April 2021. Until June 2021, the firm neither addressed its TRACE reporting obligations nor conducted any supervisory review related to TRACE reporting.

As a result of these allegations, UFP agreed to a $215,000 fine as well as an undertaking of reviewing and implementing certain supervisory policies and procedures. Dickerson agreed to a one-month job suspension and pay a fine of $5,000. Both UFP and Dickerson did not admit or deny any wrongdoing.  

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According to FINRA’s order, the broker “facilitated at least 30 UBS customers’ investments in private securities transactions totaling over $7.2 million.” From 1997 to 2021, the UBS representative sold to at least 30 of his UBS customers a “fixed annuit” product offered by an entity formed by the rep’s college friend and business acquaintance. FINRA claims that although the UBS customers believed they were investing in a “fixed annuity” product, they were actually investing in riskier private securities.

FINRA is holding UBS responsible for the broker’s fraudulent practices on account for the fact that its supervisory systems were not reasonably designed to achieve compliance with the firm’s obligation to monitor transmittals of customer funds to third parties. Although the firm automatically flagged for heightened review wires that met certain criteria (e.g., the wire was the customer’s first domestic wire in six months), its automated system did not detect and monitor for instances in which multiple, unrelated customers transferred funds from their UBS accounts by check or wire to the same external party.

UBS Failed to Investigate the Private Transactions

FINRA also notes that UBS should have systems better designed to flag private securities transactions. For at least 17 of the wire transfers to the third party, the reason the customers provided for the wire transfer request was “investment.” UBS flagged the wires for additional review and approval but did not investigate why the representative’s customers were wiring money to the same external, non-UBS entity for an “investment.”

UBS also failed to reasonably investigate several instances from September 2010 to July 2021 in which at least two customers wired money to the third party within the same 30-day period. As an example, in March 2021, two unrelated customers wired a total of $47,000 from their UBS accounts to the third-party entity within eight days of one another. Although UBS flagged both wires for additional review and approval, the firm did not investigate why two of the broker’s customers were wiring money to the same external party.

As a result of UBS’s failures to monitor its customers’ wire transfers, the firms violated NASD Rules 3010 and 3012 and FINRA Rules 3110 and 2010. When the scheme was uncovered, it was discovered that the customers lost most of their funds and UBS repaid the customers more than $17 million in restitution.  

Jacob Horowitz is a contributing editor at Compliance Chief 360° 

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According to Goldman’s letter of acceptance to FINRA, it was charged with violating FINRA Rule 3110(a) and its predecessor, NASD Rule 3010(a) which requires banks to “establish and maintain a system” for the purpose of ensuring that each of its employees complies with the applicable securities laws and regulations. A violation of these rules is also a violation of FINRA Rule 2010, which requires members “to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business”.

According to FINRA, Goldman failed to include warrants, rights, units, and certain equity securities in nine surveillance reports designed to identify potentially manipulative proprietary and customer trading. “The firm failed to detect that nine surveillance reports for potentially manipulative trading excluded various securities types,” FINRA said. “By failing to have a reasonably designed supervisory system, Goldman violated NASD Rule 3010 and FINRA Rules 3110 and 2010.”

Goldman’s System Failures

As a result of the gaps in its surveillance reports, Goldman could not perform reasonable monitoring of trading activity for potential manipulation. The nine affected reports would have identified approximately 5,000 alerts for potentially manipulative trading activity in those securities from February 2009 through mid-April 2023. Goldman added the missing securities to the surveillance reports either in response to FINRA’s investigation or through the firm’s adoption of new surveillance reports. By April 2023, Goldman had finished remediating all surveillance reports.

Goldman’s supervisory system, including its written procedures, also did not require a review of its automated surveillance reports to ensure they included all relevant securities traded as part of the firm’s business. Because of this, the bank did not notice that nine surveillance reports, which could have indicated manipulative trading, overlooked warrants, rights, units, and specific equity securities.

Goldman Sachs encountered additional scrutiny from both FINRA and the U.S. Securities and Exchange Commission (SEC) due to lapses in reporting. In September, the firm settled with FINRA and the SEC, agreeing to pay a total of $12 million. The allegations centered on Goldman’s failure to fulfill its recordkeeping and reporting duties, as it provided inaccurate trading data in response to numerous regulatory requests.

The SEC and FINRA asserted that for approximately ten years, Goldman provided regulators with securities trading records containing inaccuracies or omissions related to millions of transactions involving the firm.  

Jacob Horowitz is a contributing editor at Compliance Chief 360°

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• A top-tier bank was found to have no surveillance on its voice-brokered swaps desk, resulting in a $45 million fine for spoofing.
• FINRA warns about “non-specific surveillance thresholds” that are “not reasonably designed” based on their 2023 exam findings.
• The CFTC plans to invest in a “robust market surveillance unit” as part of its double-digit budget increase
• The SEC’s ambitious market structure proposals may have material consequences for trade surveillance parameters.
• The U.K.’s FCA Market Watch yet again reminds firms to conduct risk assessments and make sure their controls detect market abuse.
• Enforcement priorities across jurisdictions in APAC all cite concerns regarding market abuse, e.g., MAS in Singapore, SFC in Hong Kong, and ASIC in Australia.

While the compliance professionals I speak with are well aware of this regulatory scrutiny, are firms deploying trade surveillance resources efficiently to meet the risk?

As Eventus details in our recent report, global regulators are pressing compliance leaders to reassess their trade surveillance capabilities and to ensure they have tailored these systems properly to the new risks they face. For example, the SEC and FINRA said they examined nearly half of the 3,500 registered U.S. broker-dealers last year. These exams help the regulators collect information to promote compliance, prevent fraud, and monitor risk. Sometimes, these exams expose serious concerns that lead to wider enforcement investigations.

With time and experience, many practitioners note a pattern: new rules and guidance, followed by warnings, then, unsurprisingly, enforcement. Too often, updates in compliance systems, alert parameters and processes that could have prevented many headaches lag behind regulatory scrutiny.  The problems are well-known: pressure to lower the total cost of compliance operations, legacy technology that is unresponsive to ever-increasing false positives, markets that grow increasingly complex, and pressure to lower the total cost of operating.

My colleagues and I come from roles and organizations that have felt this pain. Today, I speak with a range of compliance leaders across the globe who are serious about compliance and care deeply about getting trade surveillance right. These are professionals in broker-dealers, banks, FCMs, exchanges, prop trading firms, and digital asset platforms.

Increased Complexity

One theme we continually hear is the need for flexibility in their compliance technology to empower their teams, not act as a barrier or burden. As shown in our recent survey, 94 percent of respondents cited the increased complexity and challenge of trade surveillance over the last three years. These leaders rarely believe that maintaining the status quo is the safe option and they want flexibility and expertise built into their systems.

As our recent report concludes, global regulators are scrutinizing firms with outdated parameters or alerts not tailored to their businesses. Like financial debt, being weighed down by technical debt can harm a firm’s bottom line and reputation.

The most experienced compliance teams–whether in broker-dealers, banks, or exchanges–look forward, with at least a five-year time horizon. They anticipate what behaviors their firms are exhibiting today that regulators might question in the near future. For example, the spread of encrypted mobile messaging apps a few years ago inevitably led regulators to crack down, issuing warnings and fines. Today, we can anticipate that issues like cross-product manipulation, multi-asset surveillance and having adequate explainability in machine learning will be part of investigations and enforcement cases for the rest of this decade. And, all of this while trying to lower the total cost of ownership.

The opportunity amid this challenge is that the industry has the expertise, experience, and now technical flexibility to build market surveillance for specific needs. There is a renewed desire to get to the risk quicker with top talent and improved efficiencies. The new paradigm dictates that compliance software be adaptable and allow teams to have a real say in how technology works for them.  

Joe Schifano is Global Head of Regulatory Affairs at Eventus

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In addition to the censure and fine, UBS must submit a written certification “by one or more principal(s) and officer(s) of UBS with supervisory authority … that, as of the date of the certification, the firm’s supervisory systems and written procedures are reasonably designed to achieve compliance with Rule 204 of Regulation SHO,” the FINRA order states.

Reg SHO is intended to address concerns regarding persistent failures to deliver and potentially abusive “naked” short selling. Naked short selling is the illegal practice of selling shares a short seller has neither borrowed, owns, nor intends to buy, resulting in a “failure to deliver” (FTD).

Reg SHO requires firms to take affirmative action to close out FTD positions resulting from short sales in equity securities by borrowing or purchasing the securities by the beginning of regular trading hours the day after the settlement date. “Limit orders or other delayed orders do not satisfy the close-out requirement,” FINRA said. “When a firm does not close out a failure to deliver, the rule prohibits the firm from accepting additional short sale orders in the security without first borrowing or arranging to borrow the security (commonly known as the “penalty box”).”

Case details
From 2009 to 2018, UBS did not timely close out at least 5,300 FTD positions and routed or executed more than 73,000 short sales in securities with an unsatisfied close-out requirement without first borrowing or arranging to borrow the shares, FINRA said.

According to FINRA, UBS’s violations of Rule 204 of Reg SHO resulted from several long-running issues, including:

• Using revocable volume weighted average price (VWAP) transactions or limit orders to address buy-in obligations for failures to deliver;
• Considering shares released from segregation in connection with customer long sales available to close out a failure to deliver; and
• Certain order management systems not always restricting short sales in securities with an unsatisfied close-out requirement.

From 2009 to August 2022, UBS’s supervisory systems, including its written procedures, were “not reasonably designed to achieve compliance with the requirements of Rule 204 of Reg SHO. Although UBS conducted annual reviews of its Rule 204 systems, it failed to identify its improper treatment of shares associated with a customer long sale,” FINRA stated.

UBS further “failed to detect red flags present in the firm’s books and records indicating that its VWAP algorithm routed certain buy-in orders as limit orders,” FINRA stated. “UBS also identified its failure to fully enforce Rule 204’s penalty box only after a system malfunctioned.” 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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In this latest action, Merrill Lynch agreed to a censure and must pay more than $15.2 million in restitution and interest to thousands of its customers who purchased Class C mutual fund shares when Class A shares were available at substantially lower costs, FINRA announced June 2.

Mutual fund issuers offer different classes of mutual fund shares, including Class A and Class C shares. Generally, Class A shares are subject to a front-end sales charge, while Class C shares typically don’t carry a front-end sales charge but have ongoing fees and expenses that are higher than those of Class A shares.

Many mutual fund issuers allow customers to purchase Class A shares without a front-end sales charge if the purchase exceeds certain thresholds. If a customer qualifies to purchase Class A shares without a front-end sales charge, there’d be no reason for the customer to purchase Class C shares with higher annual expenses.

“From January 2015 to January 2021, Merrill Lynch failed to establish and maintain a supervisory system reasonably designed to supervise sales of mutual fund Class C shares,” FINRA stated in its order. “In particular, the firm failed to correctly identify and implement applicable limits on customers’ Class C share purchases, which resulted in customers purchasing Class C shares when Class A shares were available, typically at a lower cost.” As a result, customers paid approximately $13.4 million in excess fees and expenses.

‘Extraordinary Cooperation’
For these actions, Merrill Lynch violated FINRA Rules 3110 and 2010, FINRA stated. This conduct overlapped with similar activity being engaged in by Merrill, as noted in FINRA’s notice.

Yet, FINRA stated that it didn’t impose a fine due to the firm’s “extraordinary cooperation and substantial assistance with the investigation.” Specifically, FINRA stated that Merrill Lynch “voluntarily and proactively conducted an internal review, engaged an outside consultant to identify affected customers and calculate remediation, and established a remediation plan to repay customers and convert shares, where applicable.”

Jessica Hopper, executive vice president and head of FINRA’s Enforcement Department, had this message to offer other firms: “FINRA member firms must have supervisory systems reasonably designed to ensure that customers are aware of, and receive, available discounts when purchasing mutual funds, and are not charged unnecessary fees and expenses.”

“We want to remind and encourage firms to proactively detect, fix, and remediate these types of supervisory issues to realize the benefits of ‘extraordinary cooperation’ when warranted,” Hopper added.

In settling this matter, Merrill Lynch accepted and consented to the entry of FINRA’s findings without admitting or denying them. 

PHOTO: ‘Merrill Lynch,” By Hänsel und Gretel, used under license CC BY-SA 3.0.

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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