FINRA Issues Its 2019 Risk Monitoring and Examination Priorities Letter

SIDLEY UPDATE FINRA Issues Its 2019 Risk Monitoring and Examination Priorities Letter

January 25, 2019

On January 17, the Financial Industry Regulatory Authority (FINRA) released its annual Risk Monitoring and Examination Priorities Letter (Letter), which identifies topics that FINRA will focus on in 2019. Unlike in previous years, this Letter primarily discusses new topics and priorities in areas of ongoing concern while not repeating topics that have been at the center of FINRA’s attention over the years. FINRA notes, however, that while traditional topics such as cybersecurity,1 recidivist brokers and anti-money-laundering (AML) may not be discussed extensively in the Letter, FINRA will nonetheless review firms for compliance regarding these areas of focus.

As always, firms should use the Letter to review their compliance and supervisory procedures carefully and make any necessary revisions. Firms also should be prepared to explain their compliance and supervisory policies in these areas in their upcoming FINRA examinations and provide documentation of relevant reviews. The following is a discussion of some of the more salient points of the FINRA Letter.

Highlighted Items

Online Distribution Platforms

FINRA notes that firms increasingly are involved in the distribution of securities through online platforms, some operated by unregistered entities, in reliance on Rule 506(c) of Regulation D and Regulation A under the Securities Act of 1933, and FINRA is concerned that some member firms have argued that they are not selling or recommending securities when involved with such platforms, despite evidence to the contrary. FINRA plans to evaluate how firms conduct their reasonable basis and customer-specific suitability analyses, supervise communications with the public and meet AML requirements in the context of distribution from online platforms. Further, given the broad visibility of these offerings, FINRA will evaluate how firms are addressing the risk of offering documents or communications with the public that omit material information or contain false or misleading statements or promises of high targeted returns.

Fixed-Income Markup Disclosure

FINRA will review firms’ compliance with their markup or markdown disclosure obligations on fixed-income transactions with customers pursuant to recent amendments to FINRA Rule 2232 and MSRB Rule G-15. As is typical with a new rule, we expect initial exams to focus on whether firms successfully implemented the requirements and have adequate policies and procedures designed to ensure compliance. To help firms assist in compliance with such requirements and to better inform investors, FINRA commenced issuing to firms its “Mark-up/Mark-down Analysis Report” and has also made publicly available a Bond Facts Tool, which provides security-specific product data to help retail investors understand the quality of their fixed- income securities transactions. FINRA will also review for any changes in firms’ behavior that might be undertaken to avoid their markup and markdown disclosure obligations.

Regulatory Technology

FINRA notes the increase in firms’ use of a variety of innovative regulatory technology tools to make their compliance efforts more efficient, effective and risk-based. FINRA plans to engage with firms to understand how they are using such tools and addressing related risks, challenges or regulatory concerns.

Sales Practice Risks

Suitability

Suitability remains a perennial priority. Some of the specific areas that FINRA plans to focus on include (1) deficient quantitative suitability determinations or related supervisory controls; (2) overconcentration in illiquid securities, such as variable annuities, nontraded alternative investments and securities sold through private placements; and (3) recommendations to purchase share classes that are not in line with the customer’s investment time horizon or hold for a period that is inconsistent with the security’s performance characteristics. In addition, FINRA remains concerned about the increasing complexity of exchange-traded products (ETPs) and securities products that package leveraged loans.

Senior Investors

FINRA will continue to focus on how firms are protecting senior investors and retirees from fraud, sales practice abuses, and financial exploitation. FINRA will assess the supervisory systems that firms use to place heightened scrutiny over such accounts. FINRA is also interested in learning about firms’ early experiences with new FINRA Rules 2165 and 4512 relating to, respectively, temporary holds on disbursements and the requirements of a trusted contact.

Outside Business Activities and Private Securities Transactions

FINRA will continue to assess firms’ controls related to associated persons’ outside business activities and private securities transactions, including associated persons raising funds from their customers away from their firm and outside of their firm’s supervision. FINRA is particularly concerned about fundraising activities for entities that the associated persons control or in which they have an interest, specifically for entities with misleading names that are similar to established issuers.

Operational Risks

Supervision of Digital Assets Business

FINRA notes that firms have demonstrated significant interest in participating in activities related to digital assets,2 and FINRA encourages firms to notify FINRA if they plan to engage in such activities, even where a membership application is not required. FINRA will review firms’ activities through its membership and examination processes related to digital assets and assess firms’ compliance with applicable securities laws and regulations and related supervisory, compliance and operational controls to mitigate the risks

2 associated with such activities. FINRA intends to coordinate closely with the U.S. Securities and Exchange Commission (SEC) on an array of issues related to digital assets.

Customer Due Diligence and Suspicious Activity Reviews

FINRA will assess firms’ compliance with the Financial Crimes Enforcement Network’s newly enhanced customer due diligence rule, focusing on the data integrity of suspicious activity monitoring systems as well as the decisions associated with changes to those systems.

Market Risks

Best Execution

FINRA is concerned about firms failing to use reasonable diligence to assure that their customer order flow is directed to the best market given the size and types of transactions, the terms and conditions of orders and other factors. As a point of emphasis, FINRA is specifically interested in reviewing firms’ best execution decision-making in situations where firms route all or substantially all customer orders to a small number of wholesale market makers from which they receive payment for order flow or an affiliated broker-dealer or alternative trading system in which the firm has a financial interest. FINRA will also review how firms quantify the benefits to customers from firms’ receipt of order routing inducements and how they manage conflicts of interest. Requiring firms to quantify the benefits to customers from the receipt of payment for order flow or other inducements appears to be a new factor FINRA believes is necessary to be weighed in connection with the firms’ best execution reviews. We are unaware of previous law or guidance that has required this. Also, notably, late last year the SEC approved amendments to Rule 606 that require additional disclosures regarding the handling of customer orders, including the terms of any payment for order flow arrangements.

Market Manipulation

FINRA continues to focus on market manipulation by enhancing FINRA’s surveillance capabilities and providing firms with tools they can use to identify possible manipulative activities. This year, FINRA will focus on manipulative trading in correlated ETPs, with an emphasis on those that track common, broad market indices. FINRA also will focus on reviews for manipulation of options products that may be correlated to such indices. FINRA will continue to help firms with their compliance efforts by providing Cross Market Supervision Report Cards, which can help firms identify potential manipulation across multiple firms, markets and products and proactively address related compliance risks. Firms will be expected to incorporate cross-market transaction activity into their suspicious and/or manipulative trading activity surveillance and reviews. We note that firms are generally well served to use the Cross Market Supervision Report Cards in their review, keeping mind that the regulators are able to monitor the frequency with which they are accessed.

Market Access

FINRA plans to review firms’ compliance with SEC Rule 15c3-5, focusing on how firms apply appropriate controls and limits to sponsored access orders, retain the sole authority to determine the boundaries for those controls and limits, test the effectiveness of those controls and limits, and implement and test exception reporting systems covering sponsored access orders. Firms need to pay particular attention to enforcement actions in this area as interpretation of the Rule’s requirements and regulatory expectations

3 have expanded.3 For example, we note that firms often must to show an empirical basis for their trade thresholds, such as order size or message rates. Unfortunately, little other guidance has been issued outside of the regulatory context.

Short Sales

FINRA will review whether firms have structured their aggregation units in a manner that is consistent with the requirements of Regulation SHO Rule 200(f) and can demonstrate the independence of the units through measures such as separate management structures, location, business purpose and profit- and-loss treatment.

Short Tenders

As in 2018, FINRA will review how firms account for their options positions when tendering shares in partial tender offers, for compliance with Rule 14e-4 under the Exchange Act. FINRA will continue to educate firms about the applicable requirements and evaluate firms for compliance.

Financial Risks

Credit Risk

FINRA will review firms’ policies and procedures for identifying, measuring, and managing credit risk, including risk exposures that may not be readily apparent.4 Such responsibility can be incurred under clearing arrangements, prime brokerage arrangements, “give up” arrangements, sponsored access arrangements or principal letters. In recent exams, FINRA has focused on illiquid or highly concentrated margin positions and margin positions involving highly volatile securities and will likely do so in 2019. FINRA will also assess the extent to which firms identify and address all relevant risks when they extend credit to their customers and counterparties and whether firms comply with FINRA’s rules on margin requirements.

Funding and Liquidity

FINRA will continue to evaluate firms’ liquidity planning, including whether they have a reasonable process to regularly assess the adequacy of their liquidity pools and update their stress test assumptions based on changes in their businesses, products and customers. FINRA plans to focus on whether firms update their stress test assumptions in light of changes in the marketplace, such as the increased volatility experienced at the end of quarters, including the fourth quarter of 2018. FINRA will also focus on applicable contingency plans related to government securities repo funding and adequacy of firms’ liquidity pools.

Wells Notices

Though not mentioned in the Letter, we have recently become aware that FINRA Enforcement is no longer issuing a Wells Notice in every inquiry, particularly with respect to routine sweeps and reviews conducted by Market Regulation. The practice, which was based on Rule 5(c) of the SEC’s Rules on Informal and Other Procedures, required FINRA staff to notify a respondent of the nature of the investigation and potential violations and afforded the respondent an opportunity to make a written submission outlining any potential defenses or mitigating factors. A firm’s response to a Wells Notice was included in the information presented to the Office of Disciplinary Affairs when considering the sufficiency of a recommended sanction. Our understanding is that FINRA will generally reserve issuing a Wells Notice for those instances that appear unlikely to settle or are clearly subject to litigation.

4 Conclusion

There were very few surprises in the Letter as many of the topics and initiatives have dominated FINRA’s focus in the prior year. One of the general themes we observed is FINRA’s focus on testing compliance with new or enhanced rules, including rules related to senior investor protection, AML, customer due diligence and fixed-income markup disclosure. Nevertheless, firms should review their practices and procedures in each of the areas and be prepared to address in future examinations.

1 FINRA recently published a Report on Selected Cybersecurity Practices – 2018, and this document provides additional information on practices that may help some firms strengthen their cybersecurity programs.

2 FINRA provided general guidance regarding digital asset in Regulatory Notice 18-20, available here: http://www.finra.org/industry/notices/18-20. In this notice, FINRA defined “digital asset” as cryptocurrencies and other virtual coins and tokens (including virtual coins and tokens offered in an initial coin offering (ICO) or pre-ICO) and any other asset that consists of, or is represented by, records in a blockchain or distributed ledger (including any securities, commodities, software, contracts, accounts, rights, intangible property, personal property, real estate or other assets that are “tokenized,” “virtualized” or otherwise represented by records in a blockchain or distributed ledger).

3 See, for example, certain market access cases involving member firms in 2018 that involved fines above $1 million: http://www.finra.org/newsroom/2018/finra-box-cboe-iex-nasdaq-and-nyse-fine-instinet-llc-market- access-rule-violations; http://www.finra.org/sites/default/files/fda_documents /2012034623903%20Morgan%20Stanley%20%26%20Co.%20LLC%20CRD%208209%20%28FINRA %29%20AWC%20va.pdf. This is in addition to multiple actions related to market access in 2017: http://www.finra.org/newsroom/2017/finra-bats-nasdaq-and-nyse-fine-firms-market-access-rule-violations.

4 For example, a firm may be exposed to credit risk when it becomes responsible for transactions that its customers and correspondents execute “away” from the firm, without the firm’s participation until after execution.

CONTACTS

If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or

James Brigagliano, Partner +1 202 736 8135, [email protected] W. Hardy Callcott, Partner +1 415 772 7402, [email protected] Kevin J. Campion, Partner +1 202 736 8084, [email protected] Lilya Tessler, Partner +1 212 839 5849, [email protected] Michael D. Wolk, Partner +1 202 736 8807, [email protected] Timothy B. Nagy, Counsel +1 202 736 8054, [email protected] Andrew J. Sioson, Associate +1 202 736 8351, [email protected]

5 Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers. In addition, this information was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any U.S. federal, state or local tax penalties that may be imposed on such person.

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6 SIDLEY UPDATE First Criminal Charge of U.S. Broker-Dealer for Bank Secrecy Act Violation Highlights Importance of Anti-Money-Laundering Controls

January 3, 2019

On December 19, 2018, federal prosecutors in the Southern District of New York announced the first-ever criminal charge against a U.S. broker-dealer for a Bank Secrecy Act (BSA) violation.1 The charge against Central States Capital Markets, LLC (CSCM), which the government agreed to dismiss upon completion of a deferred prosecution agreement, stems from serious gaps in CSCM’s anti-money laundering (AML) compliance program: CSCM failed to follow its own customer due diligence procedures, ignored known red flags when opening accounts and failed to adequately employ its monitoring system to capture and report suspicious transactions.

The investigation was prompted by CSCM’s willful failure to file a suspicious activity report ( SAR) concerning the illegal activities of its customer, Scott Tucker (Tucker). Tucker and his attorney, Timothy Muir (Muir), operated a nationwide internet payday lending enterprise, which extended small, short-term, high-interest loans with rates as high as 70 percent or more.2 To circumvent state usury laws, Tucker entered into sham relationships with Native American tribes in order to conceal his ownership and control of the companies involved, and to gain the protection of the tribes’ sovereign immunity, which generally prevents states from enforcing their laws against the tribes. In October 2017, Tucker and Muir were convicted of racketeering, wire fraud, and money laundering for their roles in this scheme.

The government’s investigation of Tucker revealed that CSCM, Tucker’s broker-dealer, was aware of multiple red flags leading up to, during and after the opening of accounts used in the scheme but failed to file a SAR. CSCM opened accounts for the supposedly tribal companies (the Tribal Companies) but routinely took direction for those accounts from Tucker and his brother and failed to follow its own customer due diligence (CDD) procedures when it neglected to verify in writing Tucker’s authority to represent the companies. Even before opening the accounts, Tucker had informed the CEO of CSCM that he was involved in the payday lending business and had approached Native American tribes to gain the protection of sovereign immunity. CSCM also learned that Tucker had been convicted of fraud, was reportedly involved in a “rent-a-tribe” scheme and was the subject of an action by the Federal Trade Commission (FTC) but nevertheless failed to investigate further when Tucker provided assurances that these matters would be resolved. After onboarding the Tribal Companies’ accounts, CSCM also failed to properly monitor account activity. The company never tuned its tool for transaction monitoring for the specific, risk-based needs of CSCM and instead relied on the tool’s default factory settings. Between 2011 and 2015, even with those default settings, the transaction monitoring tool generated 103 alerts indicating possible suspicious activity, but CSCM failed to take any action to investigate the alerts.

CSCM also failed to use a monitoring function that would have enabled it to identify third-party wire transfers to CSCM account holders. In a three-month period, between December 21, 2012, and March 13, 2013, 18 wire transfers totaling more than $40 million, in round dollar amounts, were sent from accounts in the names of Tribal Companies at a Florida bank to Tucker’s personal CSCM account. CSCM never investigated any of these transactions.

In response to the criminal charge, CSCM entered into a deferred prosecution agreement with the government, accepting responsibility for its actions in a detailed stipulated statement of facts, agreeing to forfeit $400,000 and making a commitment to enhance its BSA/AML controls. CSCM also entered into a cease and desist order with the U.S. Securities and Exchange Commission3 that included a censure and a requirement that CSCM retain a compliance consultant to monitor its BSA/AML compliance program over a two-year period.

* * *

This criminal charge is a reminder that all financial institutions4 governed by the BSA, including but not limited to banks, broker-dealers, futures commission merchants, introducing brokers in commodities and insurance companies, may be subject to criminal charges when systemic AML program failures related to suspicious activity are present. This case reaffirms the need for financial institutions with BSA obligations to ensure that they are effectively monitoring, detecting and reporting suspicious activity to the government. Financial institutions should make concerted efforts to develop and establish robust internal BSA/AML compliance programs. Such programs should include reasonably effective and consistently monitored automated and manual tools to detect suspicious activity, employee training, controls for detecting suspicious activities and transactions, and regular internal audits. The prosecution of CSCM demonstrates that when financial institutions do not effectively meet their BSA obligations, criminal charges can follow.

1. Deferred prosecution agreement, In the Matter of Central States Capital Markets, (S.D.N.Y., Dec. 10, 2018); Manhattan U.S. Attorney Announces Bank Secrecy Act Charges Against Kansas Broker Dealer, DOJ Release 18-499 (Dec. 19, 2018), available at https://www.justice.gov/usao-sdny/pr/manhattan- us-attorney-announces-bank-secrecy-act-charges-against-kansas-broker-dealer.

2. Scott Tucker Sentenced to More Than 16 Years in Prison for Running $3.5 Billion Internet Payday Lending Enterprise, DOJ Release 18-007 (Oct. 13, 2017), available at https://www.justice.gov/usao-sdny/pr /manhattan-us-attorney-announces-bank-secrecy-act-charges-against-kansas-broker-dealer.

3. In the Matter of Central States Capital Markets, LLC, Admin. Proceeding File No. 3-18940 (Dec. 19, 2018), available at https://www.sec.gov/litigation/admin/2018/34-84851.pdf.

4. Bank Secrecy Act, 31 U.S.C. § 5312(a).

CONTACTS

If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or

Joan M. Loughnane, Partner +1 212 839 5567, [email protected] Michael D. Mann, Partner +1 212 839 5837, [email protected] Fiona A. Philip, Partner +1 202 736 8214, [email protected] Timothy J. Treanor, Partner +1 212 839 8564, [email protected] Paul M. Tyrrell, Partner +1 617 223 0350, [email protected] Doreen M. Rachal, Counsel +1 617 223 0311, [email protected] Alexa Poletto, Associate +1 212 839 7340, [email protected]

Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers. In addition, this information was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any U.S. federal, state or local tax penalties that may be imposed on such person.

3 SIDLEY UPDATE FINRA Issues Report on Recent Examination Findings

December 17, 2018

On December 6, the Financial Industry Regulatory Authority (FINRA) published its “2018 Report on FINRA Examination Findings” (Report). The Report highlights recent examination findings that FINRA deems to be particularly important due to market impact or frequency of occurrence. It describes specific compliance challenges and best practices to deal with these issues.

Continuing its efforts from previous years to provide meaningful feedback to member firms, FINRA’s Report provides guidance to assist firms in complying with FINRA rules and federal and state securities laws. As with all FINRA guidance, firms should consider information contained in the Report seriously. A firm that does not adopt such guidance should consider whether it can demonstrate that its procedures are equally effective.

The following summarizes the topics and findings in the Report and includes best practices. While some of the issues discussed in the Report may remind firms about basic responsibilities, other topics, such as the discussion of volatility-linked products, suggest that firms may need to formulate new review processes or procedures based on findings in the Report.

Suitability for Retail Customers

FINRA observed situations where registered representatives did not adequately consider their customers’ financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives, liquidity needs and other investment profile factors when making recommendations. Registered representatives often fail to take into account cumulative fees, sales charges or commissions charged. FINRA found that firms with sound supervisory practices for suitability generally identify risks, develop policies and implement controls tailored to the specific features of products they offered to their customers. These controls include restricting recommendations of products for certain investors, as well as establishing systems-based controls (or “hard blocks”) for recommendations of those products to retail investors to ensure that registered representatives adhere to those restrictions. Further, we note that suitability considerations and controls should equally be used when recommending listed products, as we understand that FINRA may view certain listed products as not suitable for certain, or any, investors.

Findings From Targeted Examination of Volatility-Linked Products

Following the high-volatility market conditions of February 2018, FINRA conducted a sweep to assess firms’ supervisory systems and controls to meet their suitability obligations when recommending volatility-linked products to retail customers. Many firms have comprehensive written supervisory procedures (WSPs) and controls regarding such products, and several firms prohibit or restrict representatives’ recommendations to retail clients for all or some volatility-linked products. The Report urges firms that recommend any complex or risky products, such as leveraged and inverse exchange-traded products, to focus on suitability when communicating or making recommendations to customers. These findings are a reminder that firms should consider exchange-listed products in their new product approval process; simply because a product is listed on an exchange does not mean that a firm’s representatives should be recommending it to retail customers.

Fixed Income Markup Disclosure

To implement the markup disclosure rules, the Report states that firms should consider performing a regular review of confirmations to review whether they include the new disclosures on all confirmations that require them. In particular, firms should review samples of their confirmations for all of the required disclosure elements, including markup/markdown and time of execution. FINRA observed that in implementing the amended FINRA and Municipal Securities Rulemaking Board rules, some firms face challenges relating to their confirmation review processes, systems and vendors. For example, certain firms fail to enter information into order entry systems or make inadequate disclosures for agency trades.

Reasonable Diligence for Private Placements

FINRA observed instances where some firms with suitability obligations failed to conduct reasonable diligence on private placements and failed to meet their supervisory requirements under FINRA Rule 3110. Firms with the strongest compliance programs perform reasonable diligence; conduct meaningful, independent research on material aspects of each offering; identify any red flags with the offering or the issuer; and address concerns that would be relevant to each potential investor. These firms independently verify information that was key to the performance of the offering, and some employ due diligence firms, experts and third-party vendors. These considerations apply with special force to offerings involving affiliated issuers or issuers whose control persons are employed by the firm — offerings that also may require extra due diligence and disclosures concerning conflicts of interest.

Abuse of Authority

FINRA’s Report reminds firms that engage in trustee roles or act on discretionary trading authorization from customers that such activity can expose investors to material risks (e.g., unsuitable or excessive trading) unless firms implement appropriate controls required by National Association of Securities Dealers Rule 2510 (Discretionary Accounts). FINRA observed that some firms prohibit the use of all discretionary customer accounts. Firms that permit such accounts establish and maintain robust supervisory procedures and controls, such as automated systems to detect potential excessive trading in customer accounts, inconsistencies or errors related to the completion of customer new account forms, and indications of customers granting discretionary authority to their registered representatives. Further, certain firms prohibit registered representatives from acting in some positions of trust, such as trustees or co-trustees, executors or beneficiaries. Other firms mitigate the potential conflicts of interest involved in such roles by implementing additional supervision and review procedures.

SUMMARY OF ADDITIONAL OBSERVATIONS

2 FINRA highlighted the issues above as ones of primary importance. However, the Report discusses various additional issues.

Anti-Money-Laundering — FINRA continued to find problems with some firms’ overall anti-money- laundering (AML) programs; allocation of AML monitoring responsibilities, particularly responsibilities for trade monitoring; data integrity in automated AML surveillance systems, such as suspense accounts for processing foreign currency movements and conversions; adequacy of firm resources for AML programs; and independent testing of AML programs.

Accuracy of Net Capital Computations — Firms have faced challenges in complying with the net capital rule and related guidance from the Securities and Exchange Commission staff, particularly with respect to operational charges, inventory haircuts and documentation of expense-sharing agreements.

Liquidity — FINRA observed that many firms have substantially strengthened their liquidity management practices, but some firms would benefit from expanding the breadth and scope of their stress testing. FINRA recommends that firms assess whether extended stress test periods and a greater focus on incorporating stress tests results into firms’ business models would strengthen firms’ compliance programs.

Segregation of Client Assets — FINRA observed various shortcomings including inconsistent check- forwarding processes, challenges with possession and control and inaccurate reserve formula calculations.

Operations Professional Registration — FINRA observed that some firms permit unregistered staff to engage in activities that require registration as an operations professional, such as approving general- ledger journal entries, acting as supervisors and approving certain business requirements.

Customer Confirmations — FINRA observed that some firms did not maintain adequate supervisory programs relating to confirmations or comply with certain confirmation disclosure under Exchange Act Rule 10b-10 and FINRA Rule 2232 (Customer Confirmations) for transactions with customers in equity securities. Most confirmation deficiencies are caused by programming errors. Frequent and thorough review can discover such issues early and potentially prevent thousands or millions of violations.

DBAs and Communications With the Public — FINRA observed that certain firms did not maintain sufficient WSPs and controls or provide adequate disclosures regarding the use of “doing business as” names. These issues may lead to failures to disclose firm names on correspondence to retail customers or lack of a hyperlink to BrokerCheck on the websites of registered representatives.

Best Execution — FINRA advised that firms should not allow conflicts of interest relating to financial benefits from routing orders to particular venues to affect the objectivity of their regular and rigorous review. Also, firms should engage in regular and rigorous review for execution quality, including comparing a firm’s current order-routing destinations to market centers it is not routing to and conducting such review by order type.

TRACE Reporting — FINRA observed that some firms engaging in institutional sales of fixed-income securities did not comply with certain key Trade Reporting and Compliance Engine reporting rules, specifically FINRA Rules 6730(a)(7), 6730(b)(1) and (2), 6730(c)(8) and 6730(d)(4)(E). Many of these issues were discussed in FINRA’s report issued last year.

Market Access Controls — FINRA generally observed that some firms continue to encounter challenges

3 with intraday adjustment of pretrade financial thresholds and oversight of third-party vendors. Further, we recommend that firms ensure that they are able to demonstrate the basis for market threshold controls and have WSPs for all order controls, including single-order controls tailored to the trading characteristics of a given security, as applicable.

CONTACTS

If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or

James Brigagliano, Partner +1 202 736 8135, [email protected] W. Hardy Callcott, Partner +1 415 772 7402, [email protected] Kevin J. Campion, Partner +1 202 736 8084, [email protected] Michael D. Wolk, Partner +1 202 736 8807, [email protected] Timothy B. Nagy, Counsel +1 202 736 8054, [email protected] Michael R. Trocchio, Counsel +1 202 736 8070, [email protected] Andrew J. Sioson, Associate +1 202 736 8351, [email protected]