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Regulatory Sanctions

Books and Records: If You ‘See Something, Say Something’

November 12, 2018

by Howard Haykin


I originally intended this post to be about failed supervision – where the broker-dealer somehow overlooked the fact that one of its brokers was mismarking hundreds of order tickets as “unsolicited.” Yet, along the way, a more important Take-Away popped out. So, while it would seem that the firm was at fault for not detecting the problem in a timely manner, much of the blame can and should be placed on the broker who, upon SEEING SOMETHING, APPARENTLY DIDN'T SAY SOMETHING.



During an investigation by FINRA’s Market Regulation Division into trading of “ABCD Corporation” shares by a Registered Rep of Stifel Nicolaus & Company, it was discovered that the Registered Rep had improperly marked 221 buy and sell orders in ABCD on behalf of client accounts as “unsolicited.” Those orders, entered from July 29, 2010 through November 22, 2010 (the "Relevant Period"), were, in fact, solicited.


FINRA FINDINGS.    Prior to the Relevant Period, Stifel Nicolaus restricted the subject Registered Rep from soliciting orders ABCD due to his involvement in a prospective investment banking relationship with ABCD. To implement that restriction, Stifel Nicolaus programmed its order management system to block the Registered Rep from entering 'solicited' orders in that stock.


On July 29, 2010, the restriction was lifted - but Stifel Nicolaus did not immediately remove the systemic block. Faced with the ongoing restriction, the Registered Rep proceeded to mark all his orders in ABCD as "unsolicited." Stifel Nicolaus eventually discovered the problem, at which point it reprogrammed the order management system and had its Registered Rep correct the mismarked orders. That took place on or about November 22, 2010.


Yet, despite the fact that all the mismarked orders were corrected, the damage was already done. Stifel Nicolaus was charged with maintaining inaccurate books and records during the Relevant Period – violations of Section 17(a) of the Securities Exchange Act of 1934, Rules 17-a(3) and (4), thereunder, and NASD Rule 3110.


The firm agreed to pay a $25K fine in order to settle FINRA charges.


FINANCIALISH TAKE-AWAYS.    For this write-up, we made a couple of presumptions: (i) Stifel Nicolaus informed the Registered Rep that it lifted the restriction; and, (ii) the Registered Rep, having observed that the system restriction was still in effect, decided to 'get around the problem' by mismarking the order tickets as "unsolicited" without bothering to inform anyone at the firm.


Whether or not the above facts were accurately represented, the problems and take-aways in this case remain valid. The systemic errors should have been detected and resolved much sooner and, in general, associated persons are obligated to SAY SOMETHING WHEN THEY SEE SOMETHING.



This case was reported in FINRA Disciplinary Actions for June 2018.

For details on either case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2011027891502.