[ by Howard Haykin ]

September 2012 is Sweep Month at FINRA, a time when the SRO gathers information and carries out investigations.  Sweep information is used to focus the regulator's routine exams and pinpoint regulatory responses to emerging issues.  The number of firms included in targeted exams varies, ranging from several firms to dozens of firms. 

FINRA claims to carefully select the participating firms, usually basing its decision on a variety of factors, including:  (i) level and nature of business activity in a particular area;  (ii) customer complaints and regulatory history;  (iii)  and, prior examination findings. 

September 2012 Sweep Exam. This month's targeted exam covers Alternative Trading Systems.  Selected firms receive a Targeted Examination Letter that identifies what information and documents FINRA examiners will require. 

If your firm or client was lucky enough to have received a Dear 'Targeted Firm' Letter - they were mailed out in August - then your friends at Compliance Insights wish you all the best of luck.  We also suggest that you can skip reading this post - it's nothing you haven't seen and proceed directly to the FINRA Sanction Guidelines.  It may come in handy during this examination.

Everyone else, please continue reading to see what you're missing.  And now, the Letter ...

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Dear FINRA Member Firm.

Notice of Participation in FINRA's Targeted Examination

Re: Alternative Trading Systems

The Trading Examinations Unit (TEU) of the Market Regulation Department at FINRA is conducting a review of Alternative Trading Systems (ATS) operated by XYZ Firm (the Firm).  As part of this review, TEU is requesting the following information.

1. Identify any ATS affiliated with or operated by the Firm.
    
2. For each ATS identified in Item 1, above, provide a copy of the most recent Form ATS filed with the SEC.
    
3. Provide a copy of any marketing materials or responses to client inquiries on the operation of the ATS's identified above in Item 1.
    
4. Provide a copy of the Firm's current written supervisory procedures (WSPs) relating to each ATS identified in response to Item 1, above.  In addition, provide: 

1. date(s) the WSPs went into effect; and
2. an indication of whether there have been any changes in the WSPs since 1/1/11.  If so, discuss any changes in detail and provide the dates of the changes.
3. copy of the Firm's current Fair Access Procedures (FAPs) relating to each ATS identified in response to Item 1, above.  In addition, provide:
   
   1. the date the FAPs went into effect; and
   2. an indication of whether there have been any changes in the FAPs since 1/1/11.  If so, discuss any changes in detail and provide the dates of the changes. 
       
4. identities of the various levels of access that are available to clients of the ATS and how the Firm determines which clients are entitled to the various levels of access.    In addition please provide:
   
   1. a detailed description of the visibility of ATS order information by ATS clients, including a description of whether access to ATS order information differs by type of order or client;
   2. a detailed discussion regarding preferred access to retail order information provided to affiliates and/or valued customers; and
   3. any and all fees charged by the Firm for each type of customer access provided by the ATS.
       
5. detailed discussion of any interaction by the Firm with the ATS' order flow, both before and after an order enters the ATS.
    
6. an indication as to whether any of the Firm's ATS' send or receive indications of interest (IOIs).  If the Firm sends or receives IOIs, provide the following:
   
   1. a detailed description of how the Firm uses IOIs;
   2. a detailed discussion of whether the IOIs are actionable;
   3. a description of the circumstances under which each ATS would utilize an IOI;
   4. to whom are IOIs disseminated;
   5. list all market participants from whom are IOIs received;
   6. a detailed explanation of how the Firm determines to whom IOIs are sent.
   7. an indication of who determines where IOIs are sent; 
   8. a detailed description of the timing of an IOIs dissemination (i.e., are IOIs disseminated simultaneously to all destinations).  Explain the reasoning for such timing;
   9. a detailed description of all response types for the IOIs and how is each type of response handled; and
   10. a description as to how the Firm discloses to subscribers the ATS' order handling practices and that their orders could be the basis for an IOI disseminated by the ATS.
        
7. Does the Firm act as principal or riskless principal on any transactions within its ATS or any other ATS?  If so, discuss the circumstances under which the Firm will act in such a capacity.
   
   1. State whether the Firm enters principal or proprietary orders into its ATS, directly or indirectly, for any reason.
       
8. If the ATS acts in a principal or riskless principal capacity, a detailed explanation of the Firm's disclosures to customers/clients with regard to each ATS affiliated with the Firm including, but not limited to, websites , advertising material, general marketing material, customer correspondence and new account forms.  If the firm does not disclose its proprietary trading, state so in the response.
    
9. detailed description of how customer errors or ATS errors are handled.   Are error positions ever injected back into the ATS?  If so, please describe under what circumstances.
   
   1. Provide all activity through the ATS' error account for both March and April 2012.
       
10. a detailed explanation regarding how the Firm's trading systems handle odd-lot quantities resulting from a transaction between subscribers? 
     
11. identities of any Firm personnel or business units that have access to client information in any ATS of the Firm.
    
    1. Describe all safeguards that the Firm has in place to protect customer order information and how the Firm monitors such safeguards.
        
12. detailed discussions for any and all methods in which the Firm generates compensation from each ATS.
    
    1. Identify how the Firm's compensation is disclosed to broker-dealer and non-broker-dealer subscribers of the ATS.
        
13. percentage of the Firm's ATS subscribers that are broker-dealers, as well as the percentage of non-broker-dealer clients.
     
14. explanation as to whether any ATS affiliated with the Firm interact with any other ATS?  If so, identify each ATS of the Firm that effects this activity and all corresponding ATSs involved in these interactions.  In addition, provide a detailed explanation how each interaction takes place.
     
15. identities of any affiliate of the Firm that interacts with orders residing in any ATS identified in response to item #1?  If so, please provide the following:
    
    1. Provide the identity of the Firm's affiliate;
    2. Identify how the affiliate interacts with ATS subscriber orders;
    3. Identify any information the affiliate receives about orders residing in the ATS.  State whether this information is available to other ATS subscribers.
    4. The percentage of ATS executions that the affiliate is response for on a monthly basis; and
    5. Copies of any disclosures provided by the Firm in connection with the affiliate and its interactions with the ATS.
        
16. detailed explanation of any and all complaints that have been received regarding orders sent to any ATS affiliated with the Firm.  Discuss the nature of each complaint and how each complaint was resolved.  Include any responses that the Firm provided in connection with each complaint.

[C-I Note:  Now that wasn't so painful, was it?]

To access the referenced link, go to:  [FINRA Targeted Exam Letters, August 2012].