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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. 

suspensions barred public censure fines restitutions

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. 

financial services company fined $3M for misreporting 77 billion shares

a capital market company to pay $1M for alleged FINRA rule

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

submittion-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.

  1. CAT (Consolidated Audit Trail): Tracks all order and trading activity for listed equities and options.
  2. TRACE (Trade Reporting and Compliance Engine): Reports OTC transactions in eligible fixed-income securities.
  3. TRF (Trade Reporting Facility): Reports trades in NextShares (Exchange-Traded Managed Funds).
  4. ORF (OTC Reporting Facility): Reports trades in OTC Equity Securities and Restricted Equity Securities.
  5. SLATE (OTC Reporting Facility): Reports on securities lending transactions.
E. FINRA

FINRA evaluates the reports and, depending on the results, prescribes punitive actions, such as:

  1. Suspensions
  2. Barred
  3. Public Censure
  4. Fines
  5. Restitutions

Apart from ethical misconduct, there are basically two reasons why FINRA would take disciplinary actions: 

  1. Lack of operational controls while processing trade data. 
  2. The report’s 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 FINRA’s “Disciplinary Actions Online” portal related to reporting data and operations. This sample excludes ethical issues, such as:

# FINRA “Disciplinary Actions Online” Quotes Data Issue Source
1. “…failed to accurately report short interest positions to FINRA.” Inaccurate Data REF #3
2. “…excluded from its short interest reporting certain positions in over the counter (OTC) foreign securities that were dually listed…” Incomplete Data REF #3
3. “…overreported short interest positions that were ineligible for reporting since the positions related to dividend reinvestment activity, rather than trading activity.” Invalid Data REF #3
4. “…failed to timely and/or accurately report data for tens of billions of equity and option order events to the CAT…” Timeliness and Accurate Data REF #4
5. “…Did not report “0” in the “leaves quantity” field for certain fully canceled orders…” Incomplete Data REF #4
6. “…Applied the “representative eligible” indicator instead of the “representative” indicator…” Reference Data REF #4
7. “…Did not populate the Immediate or Cancel (IOC) Time-in-Force code…” Incomplete Data REF #4
8. “…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…” External Data REF #4
9. “…sent millions of trade confirmations to customers that failed to accurately disclose whether the price shown was an average price.” Data Operations REF #5
10. “…failed to reasonably supervise its compliance with trade confirmation requirements.” Data Operations REF #5
11. “…improperly classified customer market and limit orders as “other” orders…” Data Operations REF #6
12. “…listed the incorrect execution venue name on the report after that venue was acquired by another broker-dealer.” Data Consistency REF #6
13. “FINRA informed the firm that it was erroneously excluding immediate-or-cancel mid-point peg orders from its Rule 605 reports.” 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

FINRA Compliance with iceDQ Tool

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.

broker-dealler

# 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

icedq-example

Impact

  1. Save thousands of hours required for manual or semi-automated processes to test, validate, reconcile and certify FINRA data 
  2. Ensure 100% compliance with regulatory requirements  
  3. Eliminate Millions of $$ in regulatory fines and fees  
iceDQ-Tool-Page-CTA
iceDQ Tool Page CTA

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: “O”, “P”, “V”, or “X” ATI: “P”, “Q” or “R”
Firm acting as agent on behalf of its own customer accountHolderType Code: “I”, “A”, “V”, or “E” ATI: “A”
Firm acting as agent for the customer of another Broker/Dealer accountHolderType Code: “I”, “A”, “V”, “E” ATI: “A”
Firm acting as agent for the proprietary account of another Broker/Dealer accountHolderType Code: “O”, “P” ATI: “A”

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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