An executing broker-dealer settled FINRA charges for failing to adopt a reasonable written methodology governing pending orders received from introducing broker-dealers.
According to the Letter of Acceptance, Waiver and Consent, the firm did not have a written methodology addressing the execution and prioritization of pending orders in equity securities that were handled manually outside of the firm's automated system. FINRA alleged that the firm thereby breached FINRA Rule 5320(b) ("Prohibition Against Trading Ahead of Customer Orders") which requires broker-dealers to adopt "a written methodology . . . governing the execution and priority of all pending orders" that is consistent with FINRA Rule 5310 ("Best Execution") and the substantive requirements of Rule 5320. FINRA alleged that the absence of a written methodology created a "substantial risk that the firm would not handle manual orders consistently."
To settle the charges, the firm agreed to (i) a censure, (ii) a fine of $125,000 and (iii) an undertaking to revise the firm's written methodology.
This case is a reminder that failure to adopt required written procedures may be sufficient grounds for enforcement action even in the absence of any underlying rule violations. In this case, there was no allegation that the firm failed to execute orders in accordance with applicable regulatory requirements. Rather, the concern was that the absence of the required written methodology created a "substantial risk" that orders would not be executed in accordance with applicable regulatory requirements.