Solutions / FINRA Compliance with iceDQ
Introduction
The Financial Industry Regulatory Authority (FINRA) oversees broker-dealers and their associated personnel, ensuring compliance with industry regulations and ethical standards. To maintain transparency and integrity in financial markets, FINRA mandates that organization:
- Accurate Reporting: Submit timely, complete, and error-free reports.
- Operational Controls: Implement strong controls to ensure compliance and mitigate risks.
- Ethical Conduct: Establish and enforce policies that uphold ethical business practices.
By adhering to these requirements, firms can ensure regulatory compliance, reduce risk exposure, and maintain investor trust.
Despite the existence of these clear expectations since July 26, 2007, organizations continue to face fines and censure for various violations related to the above three activities. Below are examples of recent FINRA violations and the penalties imposed.
While recognizing the numerous areas for improvement, including ethical considerations, a significant portion of the issues observed stem from errors in reporting or operational controls and are related to data.
This article will show where and why the FINRA issues occur and how iceDQ can help broker-dealers deliver:
- Establish robust data operations controls.
- Provide high-quality FINRA reports (CAT, TRACE, ORF, TRF & SLATE).
Understanding the FINRA Report Submission Process
A. Front Office | Orders and executions. |
B. Middle Office | Trade compression, corporate actions, and trade matching. |
C. Back Office | Positions, settlement, account balance, and custodian balance. |
D. Compliance Reporting | The data is collected, and reports are submitted to FINRA.
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E. FINRA | FINRA evaluates the reports and, depending on the results, prescribes punitive actions, such as:
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Apart from ethical misconduct, there are basically two reasons why FINRA would take disciplinary actions:
- Lack of operational controls while processing trade data.
- The reportâs data is not validated, hence the data or the format is incorrect.
Analysis of FINRA Quotes for Data Issues
Below are some sample excerpts from FINRAâs âDisciplinary Actions Onlineâ portal related to reporting data and operations. This sample excludes ethical issues, such as:
# | FINRA âDisciplinary Actions Onlineâ Quotes | Data Issue | Source |
1. | ââŚfailed to accurately report short interest positions to FINRA.â | Inaccurate Data | REF #3 |
2. | ââŚexcluded from its short interest reporting certain positions in over the counter (OTC) foreign securities that were dually listedâŚâ | Incomplete Data | REF #3 |
3. | ââŚoverreported short interest positions that were ineligible for reporting since the positions related to dividend reinvestment activity, rather than trading activity.â | Invalid Data | REF #3 |
4. | ââŚfailed to timely and/or accurately report data for tens of billions of equity and option order events to the CATâŚâ | Timeliness and Accurate Data | REF #4 |
5. | ââŚDid not report â0â in the âleaves quantityâ field for certain fully canceled ordersâŚâ | Incomplete Data | REF #4 |
6. | ââŚApplied the ârepresentative eligibleâ indicator instead of the ârepresentativeâ indicatorâŚâ | Reference Data | REF #4 |
7. | ââŚDid not populate the Immediate or Cancel (IOC) Time-in-Force codeâŚâ | Incomplete Data | REF #4 |
8. | ââŚreporting violations were caused by various coding and system issues, issues with data received from third parties, and the firmâs interpretation of certain reporting scenariosâŚâ | External Data | REF #4 |
9. | ââŚsent millions of trade confirmations to customers that failed to accurately disclose whether the price shown was an average price.â | Data Operations | REF #5 |
10. | ââŚfailed to reasonably supervise its compliance with trade confirmation requirements.â | Data Operations | REF #5 |
11. | ââŚimproperly classified customer market and limit orders as âotherâ ordersâŚâ | Data Operations | REF #6 |
12. | ââŚlisted the incorrect execution venue name on the report after that venue was acquired by another broker-dealer.â | Data Consistency | REF #6 |
13. | âFINRA informed the firm that it was erroneously excluding immediate-or-cancel mid-point peg orders from its Rule 605 reports.â | Data Operations | REF #6 |
Given the previously identified data and reporting anomalies, it is imperative to ascertain their provenance and implement remedial measures. Data issues from the above table are summarized in the following buckets:
Category | Defect Summary | Defect Source |
Operational Controls | Data provided by the vendor was not correct. | Data Source |
Data between the two systems was not in sync. Changes in events did not trigger downstream changes. Checks and controls are not established. | Data Processing | |
The data in the report was wrong. | Report Generation | |
Report | Report reference data was incorrectly used. | Report Generation |
Towards a Solution with iceDQ
As the analysis indicates, the defect sources are:
- Data Source
- Data Processing
- Report Generation
iceDQ’s data monitoring capabilities can address these issues through the creation of Data Reconciliation and Data Validation business rules.
# | iceDQ Checks Description | Outcome |
1. | Reconcile source data from data providers to identify any inconsistent data. | This will identify and prevent bad data before the processing starts. |
2. | Reconcile order executions with compressed trade to match the trade quantities and cost. | Ensures data consistency between front office and middle office. |
3. | Reconcile the trade quantities + settlement + fails match the trade dated, value dated and settled positions. | Ensures data consistency between the middle office and back office. |
4. | Reconcile balances with the custodian balances. | Ensures the data consistency between broker dealer and custodians. |
5. | Reconcile the trading data with the generated reports. | Ensures the data consistency between operations data and reported data. |
6. | Apply business validation on the reports based on the rules provided by FINRA. | Validates the report as per FINRA requirement before submission. |
iceDQ Example
Impact
- Save thousands of hours required for manual or semi-automated processes to test, validate, reconcile and certify FINRA data
- Ensure 100% compliance with regulatory requirements
- Eliminate Millions of $$ in regulatory fines and fees
Conclusion
Although ethical behavior falls outside the current scope, operational and reporting issues can be comprehensively captured through the implementation of auditing principles. Specifically, a data auditing system, independent of the data processing system, should be created.
Create business data reconciliation rules between various systems to ensure consistency of data across the data processing pipelines.
Ensure that the reports are validated before submitting them to FINRA.
Appendix
FINRA Reporting Requirements
Report Category | Focus | Data Reported | Purpose | Reporting Rules |
CAT (Consolidated Audit Trail) | Order-level data across all U.S. markets for listed equities and options. | Order origination, routing, modification, execution, etc. | Enhance market surveillance, improve market quality, and protect investors. | FINRA Rule 6800 Series |
TRACE (Trade Reporting and Compliance Engine) | OTC transactions in eligible fixed-income securities. | Trade data: price, size, time, counterparty. | Enhance transparency and market integrity in the OTC fixed-income market. | FINRA Rule 6700 Series |
SLATE (Securities Lending and Transparency Engine) | Securities lending activity. | Loan terms, collateral, fees, etc. | Increase transparency and oversight in the securities lending market. | FINRA Rule 6500 Series (proposed) |
ORF (Order Routing Facility) | Order routing practices of broker-dealers. | Order routing destinations, execution quality metrics. | Increase transparency into how broker-dealers route customer orders. | FINRA Rule 606 |
TRF (Trade Reporting Facility) | Reporting of trades in NextShares (Exchange-Traded Managed Funds). | Trade data for NextShares, including price, size, and time of execution. | Enhance transparency and market integrity for NextShares. | FINRA Rule 6184.02 |
FINRA Operational Requirements
FINRA Rule | Focus | Purpose | Scope |
6893 | Compliance Thresholds within the CAT system. | Ensure the accuracy and reliability of the data collected in the CAT. | Addresses the acceptable error rates in the data reported by broker-dealers to the CAT. |
6800 | Overarching Compliance Rule for the Consolidated Audit Trail (CAT). | Provide the overall framework for broker-dealers to comply with the requirements of the Consolidated Audit Trail. | Encompasses various aspects of CAT compliance, including data reporting, clock synchronization, connectivity, development, testing, and recordkeeping. |
5130 | Prohibits broker-dealers from selling New Issues to accounts in which "Restricted Persons" have a beneficial interest. | Prevent conflicts of interest and ensure fair and equitable distribution of new issues. | Applies to a broader range of industry insiders, including broker-dealers, portfolio managers, finders, and fiduciaries in securities offerings. |
5131 | Prohibits broker-dealers from selling New Issues to accounts beneficially owned by executive officers and directors of public and certain non-public companies. | Prevent situations where individuals with insider information or influence can gain an unfair advantage in the allocation of new securities. | Specifically targets individuals with a direct connection to the issuer of the new securities. |
4522 | Periodic Security Counts, Verifications, and Comparisons for broker-dealers. | Enhance oversight and mitigate potential risks for firms with higher risk profiles or engaging in more complex operations. | Builds upon SEC Rule 17a-13, requiring more frequent counts, verifications, and comparisons. |
4511 | Customer Account Information | Ensure that broker-dealers maintain accurate and complete customer account information. | Covers the collection, maintenance, and disclosure of customer account information. |
FINRA Ethics Requirements
FINRA Rule | Focus | Purpose | Scope |
2010 | Standards of Commercial Honor and Principles of Trade | Maintain high standards of commercial honor and just and equitable principles of trade. | Applies to all members and associated persons engaged in the securities business. |
2020 | Use of Manipulative, Deceptive or Other Fraudulent Devices | Prohibit the use of manipulative, deceptive, or other fraudulent devices in connection with the purchase or sale of securities. | Applies broadly to any manipulative, deceptive, or fraudulent activity in the securities markets. |
3110 | Supervision | Ensure that broker-dealers establish and maintain a system to supervise the activities of their associated persons. | Applies to all activities of associated persons, including sales, trading, and operations. |
Account Holder Type – Reference Data Sample
Capacity of Firm | CAT | Exchange |
Firm routing to the Exchange for the account of the member | accountHolderType Code: âOâ, âPâ, âVâ, or âXâ | ATI: âPâ, âQâ or âRâ |
Firm acting as agent on behalf of its own customer | accountHolderType Code: âIâ, âAâ, âVâ, or âEâ | ATI: âAâ |
Firm acting as agent for the customer of another Broker/Dealer | accountHolderType Code: âIâ, âAâ, âVâ, âEâ | ATI: âAâ |
Firm acting as agent for the proprietary account of another Broker/Dealer | accountHolderType Code: âOâ, âPâ | ATI: âAâ |
Exchange Codes- Reference Data Sample
Exchange/Market Code | Exchange/Market |
A | New York Stock Exchange |
B | NYSE American |
E | NYSE Arca |
H | Cboe BZX Exchange |
R | NASDAQ |
S | Over-the-Counter |
References
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