Bad Brokers

According to FINRA, Citigroup Global Markets Inc. was censured and fined $1,400,000 on October 7, 2024, for failing to collect initial and maintenance margin on over-the-counter equity option contracts with two affiliated entities.

The firm calculated margin requirements for OTC equity option con...

Read More

According to FINRA, Citigroup Global Markets Inc. was censured and fined $1,400,000 on October 7, 2024, for failing to collect initial and maintenance margin on over-the-counter equity option contracts with two affiliated entities.

The firm calculated margin requirements for OTC equity option contracts using a manually created report, but discontinued using the report during a change in management of the firm's Margin Operations team. As a result, the firm had no process to calculate or collect initial or maintenance margin on OTC equity option contracts entered into with affiliated entities. The firm's failure to collect margin on OTC equity option contracts resulted in margin deficiencies during a three-month sample period ranging from approximately $16 million to approximately $2.2 billion for one affiliate, and from approximately $1 million to approximately $81.1 million for the other affiliate.

The firm's extension of credit to its affiliated entities for OTC option transactions violated federal securities laws and FINRA rules. The OTC equity option contracts executed for the firm's affiliated entities improperly occurred in cash accounts, and by failing to collect margin, the firm improperly extended credit to the affiliated entities.

The firm's failure to collect margin also resulted in inaccurate computation of net capital. By not deducting the margin deficiencies from its net capital computations, the firm overstated its reported net capital by as much as $2.2 billion during the three-month sample period. This inaccurate computation resulted in the firm maintaining inaccurate books and records and filing inaccurate FOCUS reports.

This case highlights the critical importance of margin requirements in protecting the financial system. Margin requirements exist to ensure that firms maintain adequate capital to cover potential losses and prevent systemic risk. When a major firm like Citigroup fails to collect margin from affiliates, it creates hidden risks that could threaten the firm's stability. The fact that net capital was overstated by as much as $2.2 billion is deeply concerning, as it means regulators and investors had a false picture of the firm's financial health. While this case involved transactions with affiliates rather than retail customers, it demonstrates how operational failures in critical systems can create enormous regulatory violations. Investors should understand that even large, well-known firms can have serious compliance breakdowns, underscoring the importance of robust regulatory oversight.

Show Less

According to FINRA, Citadel Securities LLC was censured and fined $1,000,000 on October 9, 2024, for failing to timely and accurately report data for tens of billions of equity and option order events to the Consolidated Audit Trail (CAT) Central Repository.

The firm developed a proprietary order...

Read More

According to FINRA, Citadel Securities LLC was censured and fined $1,000,000 on October 9, 2024, for failing to timely and accurately report data for tens of billions of equity and option order events to the Consolidated Audit Trail (CAT) Central Repository.

The firm developed a proprietary order and trade reporting system, testing process, and related supervisory procedures designed to comply with CAT reporting obligations. However, for over two years from the start of its CAT reporting obligation, the firm inaccurately reported certain data fields for equity and option order events to CAT, spanning 33 unique CAT reporting error types. The firm subsequently remediated these error types, some of which had persisted from a few weeks to nearly two years.

After remediating the 33 error types, the firm identified four additional issues that caused it to fail to timely and accurately report certain data fields to CAT for more than two and a half additional years. The firm ultimately remediated these issues and submitted corrections for the events a few months later.

The firm's reporting violations were caused by various coding and system issues, issues with data received from third parties, and the firm's interpretation of certain reporting scenarios. The firm identified many of the reporting errors through its supervisory reviews.

The Consolidated Audit Trail is a comprehensive database that tracks orders throughout their lifecycle, from inception through execution or cancellation. It was created to help regulators detect and investigate market manipulation, fraud, and other misconduct. When firms fail to accurately report to CAT, it undermines regulators' ability to monitor markets and protect investors.

While CAT reporting errors may seem like technical violations, they have real implications for market integrity. Accurate CAT data is essential for detecting market manipulation schemes that can harm retail investors. This case shows that even sophisticated firms with substantial resources can struggle with the technical requirements of modern market regulations. Investors should be reassured that FINRA takes these reporting obligations seriously and will impose substantial fines when firms fail to meet their obligations, even when the failures are technical in nature rather than intentional.

Show Less

According to FINRA, IMC-Chicago LLC (doing business as IMC Financial Markets) was censured and fined $1.2 million on October 9, 2024, for failing to timely and accurately report 28.7 billion equity and options order events to the Consolidated Audit Trail (CAT) Central Repository.

The firm's 21.8 ...

Read More

According to FINRA, IMC-Chicago LLC (doing business as IMC Financial Markets) was censured and fined $1.2 million on October 9, 2024, for failing to timely and accurately report 28.7 billion equity and options order events to the Consolidated Audit Trail (CAT) Central Repository.

The firm's 21.8 billion inaccurate reports were caused by software coding and system issues, which persisted for periods spanning a few weeks to nearly two years. The firm's 6.9 billion late reports were caused by technology issues involving the firm's connectivity to various exchanges and other broker-dealers. After updating its reporting system, the firm remediated the issues that caused the CAT reporting violations and has submitted reports to correct over 99.9 percent of the late and inaccurate reports.

The firm also failed to establish and maintain a supervisory system reasonably designed to achieve compliance with CAT reporting rules. From June 2020 to September 2020, the firm had no supervisory system in place to review the accuracy of the data it reported to CAT, nor did it maintain written supervisory procedures concerning its CAT reporting obligation. The firm then began implementing a supervisory system, but the scope of its supervisory review was unreasonably narrow. The firm conducted a quarterly accuracy review of only three complete order cycles, later increased to one complete order cycle for equities and options for each of the over 10 market centers to which the firm sent orders.

The firm subsequently reduced the number of order events reviewed per quarter to two order cycles from each trading platform that generated order and trade data. The scope and frequency of the firm's supervisory review for CAT reporting compliance was not reasonable given the volume of data that it reported to the CAT Central Repository.

This case demonstrates the inadequacy of sampling-based supervision when dealing with billions of data points. Reviewing just a handful of order cycles per quarter when reporting billions of events is like inspecting a few grains of sand on a beach—it cannot possibly provide reasonable assurance of accuracy. Firms must implement automated systems and controls that can monitor reporting accuracy at scale. For investors, this case illustrates how even technical reporting requirements serve an important protective function. The CAT system helps regulators detect market manipulation and other misconduct that can harm retail investors. When firms fail to report accurately, it creates blind spots that bad actors can exploit.

Show Less

According to FINRA, CICC US Securities Inc. was censured and fined $300,000 on October 17, 2024, for failing to establish and implement an anti-money laundering (AML) compliance program that could reasonably be expected to detect and cause the reporting of suspicious transactions.

The firm's proc...

Read More

According to FINRA, CICC US Securities Inc. was censured and fined $300,000 on October 17, 2024, for failing to establish and implement an anti-money laundering (AML) compliance program that could reasonably be expected to detect and cause the reporting of suspicious transactions.

The firm's procedures did not describe the factors to consider when performing surveillance for potential market manipulation, including a description of potential types of market manipulation or information about how such surveillance should be documented. The firm's compliance program was not tailored to account for its business model and the types of customers and activities it served. The firm maintains omnibus affiliate account relationships in foreign jurisdictions, generates commissions from agency trading for institutional customers trading in both U.S. and foreign securities, and engages in transactions involving foreign customers opening omnibus accounts. Despite this, the firm did not have a reasonable means of detecting suspicious activity in trades executed on non-U.S. stock exchanges.

The firm failed to reasonably review trades in low-priced securities by firm customers, and the firm's written procedures for monitoring low-priced securities were not tailored towards its business activity. The firm later suspended low-priced securities trading and adopted revised procedures.

Additionally, the firm failed to establish and implement an AML program and supervisory system reasonably designed to detect and cause the reporting of potentially suspicious trading in its stock buyback business. A corporate entity participated in the firm's stock buyback program and repurchased shares through an omnibus account at the firm's foreign affiliate. The trades occurred two days before an announcement that increased the corporate entity's share prices. The volume and timing of the trades should have raised red flags, but the firm did not take reasonable steps to investigate the activity.

The firm also did not have a supervisory system or procedures reasonably designed to ensure trades were accurately marked as "solicited" or "unsolicited." Over 22,000 trades were automatically marked "unsolicited" due to a system default setting, even though many were likely solicited.

Furthermore, the firm permitted three non-registered individuals to serve as authorized signatories for three firm bank accounts, giving them control over cash and clearing accounts comprising most of the firm's net capital assets.

This case illustrates multiple layers of AML compliance failures. A firm engaged in international trading with foreign affiliates and omnibus accounts faces heightened AML risks and needs robust surveillance systems. The failure to monitor trades on foreign exchanges created a significant blind spot for detecting market manipulation. The stock buyback program violations are particularly egregious—trading immediately before a major announcement is a classic red flag for insider trading, yet the firm failed to investigate. Investors should understand that AML programs are not just about preventing terrorism financing—they also help detect market manipulation, insider trading, and other schemes that can harm retail investors. When choosing a broker, investors should look for firms with strong compliance cultures and avoid firms with histories of AML violations.

Show Less

According to FINRA, Maxim Group LLC was censured and fined $75,000 on October 18, 2024, for publishing public quarterly reports on its handling of customers' orders in NMS securities that failed to disclose required information and provided incomplete or inaccurate information.

The firm published...

Read More

According to FINRA, Maxim Group LLC was censured and fined $75,000 on October 18, 2024, for publishing public quarterly reports on its handling of customers' orders in NMS securities that failed to disclose required information and provided incomplete or inaccurate information.

The firm published its report for the fourth quarter of 2019, which did not describe, as required, the rebates it received from certain equities execution venues to which the firm routed customer orders. The firm also failed to provide the amount per share or per order received with respect to each equities and options execution venue. For quarterly reports published for the first three quarters of 2020, the firm did not disclose that it received rebates from certain equities execution venues.

For the firm's quarterly reports for all four quarters of 2020 and the first quarter of 2021, it did not include the more detailed disclosures required by Rule 606(a) of Regulation NMS, including the net aggregate amount of any payment for order flow received, payment from any profit-sharing relationship received, transaction fees paid, and transaction rebates received for certain order types. In the firm's first quarter 2021 report, it inaccurately listed several entities as execution venues that did not serve as execution venues during that period.

Although FINRA alerted the firm to the deficiencies in its Rule 606(a) reports during the firm's 2020 cycle examination, the firm did not timely remediate the deficiencies. The firm also did not reasonably supervise its Rule 606(a) quarterly reports. The firm's written procedures did not specify who would review the firm's published quarterly reports for compliance with Rule 606(a) disclosures, or provide guidance as to how such a review would be conducted, when it would occur, and how it would be documented. In practice, the firm did not analyze its Rule 606(a) reports to determine whether the information disclosed comported with the requirements.

Rule 606 reports are designed to provide transparency about how brokers handle customer orders and the financial arrangements that may influence order routing decisions. When firms receive payment for order flow or rebates from execution venues, it creates potential conflicts of interest that can affect the quality of execution customers receive. These reports allow investors to understand these conflicts and make informed decisions about whether their broker is acting in their best interest.

This case is particularly concerning because FINRA alerted the firm to the deficiencies during an examination, yet the firm failed to timely remediate the problems. This suggests a lack of commitment to compliance and transparency. Investors should review their broker's Rule 606 reports, which are typically available on the broker's website, to understand how their orders are being routed and what payments the broker receives. Incomplete or inaccurate reports should be viewed as a red flag.

Show Less

According to FINRA, Fenix Securities LLC was censured and fined $250,000 on October 21, 2024, for permitting foreign individuals to conduct a securities business using the firm's systems when they were not registered with FINRA in any capacity.

The firm used foreign individuals to refer non-U.S. ...

Read More

According to FINRA, Fenix Securities LLC was censured and fined $250,000 on October 21, 2024, for permitting foreign individuals to conduct a securities business using the firm's systems when they were not registered with FINRA in any capacity.

The firm used foreign individuals to refer non-U.S. customer accounts to the firm, and the individuals then accessed the firm's trading platform and used that access to place trades in customer accounts. The firm issued the individuals representative codes that were used to effect transactions in the referred accounts. Additionally, the firm issued trade confirmations that failed to disclose its payment of transaction-based referral fees. The firm paid approximately $20,000 in transaction-based compensation to a foreign, non-registered entity in connection with transactions for customer accounts that were referred to the firm by foreign individuals associated with the entity.

The firm failed to reasonably supervise its business with non-registered foreign individuals who engaged in securities business on the firm's behalf. Despite its routine use of non-registered foreign individuals to direct customers to the firm and place trades using its systems, the firm did not establish or maintain any policies or procedures concerning its registration obligations regarding such foreign individuals. Until August 2023, the firm's written supervisory procedures did not provide any guidance concerning payments of transaction-based compensation to foreign finders. The firm also did not have any supervisory system or procedures to review trade confirmations to ensure they disclosed foreign finder fees.

The firm also failed to develop and implement a reasonable anti-money laundering (AML) program. The firm's AML compliance program did not have procedures that could be reasonably expected to detect and cause the reporting of suspicious transactions. The firm's AML program did not have procedures or guidance on how to review for red flags of suspicious transactions. Rather than reviewing certain exception reports specified in the firm's procedures, the firm conducted a manual review of activity reports that listed basic information about all transactions and did not identify potentially suspicious activity.

Additionally, the firm's AML compliance program did not develop and implement reasonable risk-based procedures for conducting ongoing customer due diligence. While the firm's procedures required conducting risk assessments of new accounts, in practice the firm gave all customers the same "acceptable" risk ranking based on internet and OFAC searches conducted only at account opening, without any assessment of the AML risk presented by the customer. The firm also lacked any process to conduct ongoing due diligence of customers.

This case reveals serious structural problems in the firm's operations. Allowing unregistered individuals to place trades in customer accounts completely circumvents the regulatory framework designed to protect investors. FINRA registration requirements exist to ensure that individuals conducting securities business have passed appropriate examinations and are subject to oversight. When firms allow unregistered individuals to conduct business, investors have no assurance that these individuals have any training or competence, and there is no regulatory record that investors can check. The failure to disclose finder's fees on trade confirmations compounds the problem by hiding from investors the fact that unregistered, unvetted individuals were being compensated for their business. The AML failures created an environment where suspicious activity could go undetected and unreported. Investors should avoid firms that cut corners on registration requirements, as it suggests a broader disregard for investor protection rules.

Show Less

According to FINRA, Interactive Brokers LLC was censured and fined $475,000 on October 22, 2024, for creating or increasing its segregation deficits for securities by returning borrowed shares when it should not have.

The firm incorrectly calculated the number of excess shares of stocks listed on...

Read More

According to FINRA, Interactive Brokers LLC was censured and fined $475,000 on October 22, 2024, for creating or increasing its segregation deficits for securities by returning borrowed shares when it should not have.

The firm incorrectly calculated the number of excess shares of stocks listed on European exchanges it had available to return to customers from whom it had borrowed them as part of the firm's fully paid securities lending program. The firm updated an algorithm it utilized to identify securities for which the firm possessed an excess and was therefore available to be returned to customers. The firm updated this algorithm for shares traded on European exchanges in a way that resulted in the firm inadvertently creating or increasing its segregation deficits on multiple occasions.

The firm relied on anticipated loan return activity in calculating the number of shares in its possession or control, but then failed to receive the expected shares. The firm thereby created or increased existing deficits, the sums of which were approximately $30 million. In these instances, the firm returned to customers fully paid shares that it had borrowed from them via its fully paid securities lending program (and thus stopped paying those customers the applicable daily rate for borrowing those shares) even though the firm should have continued to borrow those shares to avoid creating or increasing a segregation deficit.

The firm also failed to establish and maintain a supervisory system reasonably designed to comply with its possession and control obligations. The firm's written supervisory procedures failed to address how the firm should identify or resolve deficits caused by early returns and did not have a system to detect issues that might cause early returns or deficits as a result of its stock lending program. Furthermore, the firm did not have a registered principal or Operations Professional directly supervise the creation, launch, or testing of the algorithm the firm relied on to identify securities available to be returned.

Additionally, the firm allowed an unregistered associated person to lead and oversee some software development efforts concerning the firm's securities finance business, including its securities lending program. As securities lending is a covered function, that person was required to have been registered with FINRA as an Operations Professional.

Securities lending programs allow investors to earn additional income by lending their fully paid securities to the broker, which then lends them to short sellers or other borrowers. However, these programs come with risks, and firms have strict obligations to segregate customer securities and maintain possession and control. When a firm creates segregation deficits, it means the firm has failed to maintain adequate securities to meet its obligations to customers—a serious breach that could leave customers at risk if the firm were to fail.

This case demonstrates the dangers of inadequate oversight of automated systems. The firm's algorithm error went undetected because no registered principal or Operations Professional supervised its development and implementation. The fact that an unregistered person was leading software development for a critical regulatory function is particularly concerning. Investors participating in securities lending programs should understand the risks and ensure their broker has robust controls to protect their securities. While these programs can generate income, this case shows that operational failures can result in customers being deprived of lending fees they should have received.

Show Less

According to FINRA, Sustainable Development Capital LLC was fined $2,500 on October 23, 2024, and required to certify that it remediated the identified issues and completed independent testing of its anti-money laundering (AML) compliance program. A lower fine was imposed after considering the firm'...

Read More

According to FINRA, Sustainable Development Capital LLC was fined $2,500 on October 23, 2024, and required to certify that it remediated the identified issues and completed independent testing of its anti-money laundering (AML) compliance program. A lower fine was imposed after considering the firm's revenue and financial resources.

The firm failed to conduct independent testing of its AML compliance program. The firm did not execute transactions for customers or otherwise hold customer accounts and did not act as an introducing broker with respect to customer accounts. It therefore was required to conduct an independent test of its AML compliance program every other calendar year. The firm last conducted independent testing in 2019 and was required to do so again in 2021, and then again in 2023. However, between 2021 and the present, the firm failed to conduct independent testing of its AML compliance program, despite receiving previous warnings from FINRA about the need for timely and independent testing. In addition, the firm's written AML procedures failed to require that testing be conducted every two years and by an independent party.

Independent testing of AML programs is a critical component of the regulatory framework designed to prevent money laundering and terrorist financing. Even firms that do not handle customer accounts must have AML programs and conduct independent testing to ensure those programs are functioning effectively. Independent testing provides an objective assessment of whether the firm's AML controls are adequate and identifies deficiencies that need to be addressed.

This case is particularly troubling because the firm received previous warnings from FINRA about the need for timely and independent testing, yet continued to fail to conduct the required testing. This suggests a pattern of non-compliance and disregard for regulatory obligations. While the low fine reflects the firm's limited revenue and financial resources, the violation itself is serious. The fact that the firm's written procedures did not even require biennial independent testing shows a fundamental failure to understand or prioritize AML compliance.

For investors, this case serves as a reminder that even smaller firms with limited customer-facing activities must maintain robust compliance programs. AML compliance is not optional or something that can be deferred due to limited resources. Firms that fail to conduct independent testing may have significant AML vulnerabilities that go undetected, potentially exposing them to exploitation by money launderers or other bad actors. Investors should look for firms that demonstrate a strong commitment to compliance, regardless of their size.

Show Less

According to FINRA, ViewTrade Securities Inc. was censured and fined $40,000 on October 23, 2024, and required to certify it remediated the identified issues and implemented a reasonably designed supervisory system.

The firm failed to establish, maintain, and enforce a supervisory system reasonab...

Read More

According to FINRA, ViewTrade Securities Inc. was censured and fined $40,000 on October 23, 2024, and required to certify it remediated the identified issues and implemented a reasonably designed supervisory system.

The firm failed to establish, maintain, and enforce a supervisory system reasonably designed to supervise the outside brokerage accounts disclosed by its registered representatives. The firm's written procedures failed to identify any steps the firm would take to verify that it actually received and reviewed duplicate statements for each disclosed outside brokerage account. The procedures also failed to provide guidance regarding how the firm would detect and investigate potential securities violations and did not impose a deadline for reviews to be completed.

In practice, the firm did not have a reasonably designed process to ensure that it timely received and reviewed duplicate statements for all disclosed outside accounts. With respect to the receipt of account statements, the firm maintained a tracking spreadsheet, but certain statements were not recorded as having been received, and the firm did not timely follow up on the missing statements. As a result, the firm failed to timely obtain account statements for certain outside brokerage accounts disclosed by the firm's associated persons. The firm also failed to timely review certain account statements that it received, including some statements that were not reviewed for more than six months after the firm received them.

In addition, the firm's system to review duplicate statements was not reasonably designed. The firm's manual review of duplicate statements was performed by a single supervisor, which was unreasonable given the volume of monthly statements subject to review. Further, the manual review did not facilitate identification of patterns of activity over time or across accounts. The firm's review of account statements was also unreasonable because it did not review for certain potential securities violations such as brokers trading ahead of customer orders or front running.

Firms require registered representatives to disclose outside brokerage accounts and obtain duplicate statements precisely to prevent misconduct such as unauthorized trading, excessive trading, front running, and other violations that might not be detected if the activity occurs in accounts away from the firm. When firms fail to properly supervise these outside accounts, it defeats the entire purpose of the disclosure requirement.

This case illustrates a supervisory system that existed on paper but failed in practice. Having a tracking spreadsheet is meaningless if no one follows up when statements are not received. Assigning review of numerous accounts to a single supervisor creates an overwhelming workload that virtually guarantees inadequate review. The failure to look for specific red flags like front running or trading ahead of customers means the review was superficial at best.

Investors whose brokers maintain outside brokerage accounts should understand that their broker's firm is required to monitor those accounts for potential misconduct. If a firm's supervisory system is inadequate, brokers have greater opportunity to engage in misconduct that harms customers. This case demonstrates the importance of robust supervisory systems, not just written procedures that look good on paper but are not actually implemented effectively.

Show Less

According to FINRA, HSBC Securities (USA) Inc. was censured and fined $125,000 on October 29, 2024, and required to certify that it remediated the identified issues and implemented a reasonably designed supervisory system.

The firm failed to timely report to Trade Reporting and Compliance Engine ...

Read More

According to FINRA, HSBC Securities (USA) Inc. was censured and fined $125,000 on October 29, 2024, and required to certify that it remediated the identified issues and implemented a reasonably designed supervisory system.

The firm failed to timely report to Trade Reporting and Compliance Engine (TRACE) transactions in TRACE-eligible corporate debt securities. The firm's late reporting was caused by, among other things, delays associated with manual handling of orders, such as firm employees entering trades late and making untimely amendments and corrections to transaction terms, and issues related to the manual process required to report transactions in certain foreign debt securities.

The firm also failed to establish and maintain a supervisory system reasonably designed to achieve compliance with TRACE reporting requirements. Specifically, the firm's written supervisory procedures lacked reasonable guidance for supervisors to address traders' repeated instances of late reporting. The firm identified specific traders responsible for the late reporting but failed to effectively address their pattern of late reporting. The firm's procedures required supervisors to address and resolve issues with such repeat offenders but provided no guidance on how to do so.

TRACE reporting provides transparency to the corporate bond market by making transaction data available to market participants and the public. Timely and accurate TRACE reporting is essential for price discovery and market efficiency. When firms report late, it deprives the market of real-time information about bond prices and trading activity, which can disadvantage investors who rely on that information to make informed trading decisions.

This case reveals a supervisory system that identified problems but failed to solve them. The firm knew which traders were repeatedly reporting late, yet the supervisory procedures provided no guidance on how to address the issue. This is a classic example of a supervisory system that is not reasonably designed—identifying a problem is only the first step; the system must also provide tools and guidance for resolving the problem.

The reliance on manual processes for trade entry and reporting is another red flag. In today's technology-driven markets, manual processes are more error-prone and slower than automated systems. Firms handling significant volumes of transactions should implement automated systems that ensure timely and accurate reporting.

For investors, particularly those who trade corporate bonds, this case illustrates the importance of TRACE reporting in ensuring fair and transparent markets. Late reporting can result in investors making trading decisions based on stale information, potentially causing them to pay higher prices when buying or receive lower prices when selling. Investors should be aware that timely TRACE reporting is a regulatory requirement, and firms that fail to meet this obligation are compromising market integrity.

Show Less