What You Need to Know
- E-Trade didn't have a supervisory system in place to detect potentially manipulative trading by clients, FINRA alleged.
- Surveillance of wash trades was insuff
- The Morgan Stanley subsidiary declined to comment on FINRA's allegations and sanctions.
The Financial Industry Regulatory Authority has ordered E-Trade to pay $350,000, alleging that from February 2016 through November 2021, it “failed to establish and maintain” a supervisory system for detecting “potentially manipulative trading” by its clients.
E-Trade should have had written procedures in place that were “reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules,” according to the broker-dealer self-regulator. Of the $350,000, $144,500 is payable to FINRA.
Without admitting or denying FINRA’s findings, E-Trade signed a letter of acceptance, waiver and consent on Dec. 31, consenting to the sanctions. FINRA signed the letter on Monday.
E-Trade on Wednesday declined to comment on FINRA’s allegations and the sanctions imposed on it, which also included a censure and an agreement to, within 180 days of the notice of acceptance of the AWC, provide FINRA with information showing it implemented a supervisory system.
Morgan Stanley acquired E-Trade for $13 billion in 2020.
From December 2016 through November 2021, E-Trade used surveillance reports to identify potential wash trades and prearranged trades by its clients, according FINRA.
“Certain of these reports, however, used parameters that significantly restricted their ability to detect such trading, particularly in lower priced and thinly traded securities (which may be more easily affected by manipulative trading),” FINRA alleged.
For example, E-Trade used a surveillance report to identify potential wash sales, which it defined as “one or more transactions where there is no change in beneficial ownership,” according to FINRA.