The Financial Industry Regulatory Authority and other industry experts, executives and policymakers shared their knowledge Wednesday about compliance, regulatory and a wide range of other topics affecting institutional firms at the FINRA Institutional Conference in New York.
During a session on common examination findings, FINRA staff discussed some of the most common deficiencies they’ve seen during their cycle examinations of institutional firms.
FINRA typically checks to see if personnel have been properly registered, “not only with FINRA, but across all exchanges” broker-dealers at a firm do business with, Rajesh Mirchandani, senior director of FINRA Market Regulation, noted. What FINRA often finds is that while individuals have passed the required qualification exams, they’re “not properly registered at the various exchanges that the firm is a member of,” he said, noting that’s an issue he’s seen with many exams in the past year and a half.
FINRA, however, put functionality in place that allows firms to automatically add each individual to all the exchanges that person is a member of, he told attendees. He urged everybody to take advantage of that new capability that was implemented in October 2018.
Firms, meanwhile, need to also make sure that all their clocks used to record certain events in securities or over-the-counter (OTC) equity securities are accurately synchronized within the new standard of 50 milliseconds that was put in place by the Securities and Exchange Commission, he said.
“While we haven’t seen synchronization issues per se, what we’ve seen is firms do not have procedures or they’re not maintaining logs where the synchronization is not taking place,” he said. One common problem: Many of the firms are using vendors to handle that functionality for them, he noted, adding it’s important for firms to request logs from the vendors to make sure those vendors are synchronizing their clocks.
Another area where “we’ve been seeing issues across the board” is with the Order Audit Trail System (OATS), he said. There aren’t many exams in which FINRA doesn’t find at least some violation of OATS, he noted, adding “we typically find issues” that include times are not reported or certain events are not reported, or special handling instructions customers have provided are not being reported correctly.
FINRA established OATS as an integrated audit trail of order, quote and trade information for all NMS stocks and OTC equity securities. FINRA uses this audit trail system to recreate events in the life cycle of orders and more completely monitor the trading practices of member firms. Under FINRA Rules 7410 – 7470, FINRA member firms are required to develop a means for electronically capturing and reporting to OATS specific data elements related to the handling or execution of orders, including recording all times of these events in hours, minutes, and seconds and to synchronize their business clocks. These rules were approved by the SEC March 6, 1998.
In the area of vendor management, vendors are often omitting certain disclosures, Mirchandani also said. In fact, one big takeaway from the session was that firms need to do their due diligence before hiring vendors.