It would only seem logical that, after counting the thousands of instances (which are only partially revealed via Finra’s brokercheck database) in which retail investors have been ripped-off by licensed investment brokers who have sold an investment product without disclosing conflicts of interest courtesy of incentive fees or kickbacks those brokers are making from third parties when selling seemingly simple and/or complex investment products to the respective customers.  After all, the burden of establishing rules of the road and regulating the practice of selling investment instruments has long been the domain of the US Securities & Exchange Commission and secondarily on Finra, which is a self-regulated body that governs the broker-dealer space–which is comprised of the universe of brokers who sell investment products.  The SEC mandate–according to altruists–is to protect investors from abusive practices advanced by those selling investment products by establishing regulations that protect investors. Further, Finra’s mandate is to impose standards of compliance and to police broker-dealers to ensure they comport with SEC regulations.

Aside from the last comments being somewhat redundant, all of this would seem to make sense, were it not for the fact that Finra is the SEC’s biggest lobbyist. Finra member firms (who pay membership fees) are comprised of all of the brokerages that sell investment products to retail investors and by default, Finra is therefore conflicted when having the biggest lobbying influence on the SEC as to the rules and regulations that govern those member firms.

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Mr. Trump and Mr. Clayton (SEC Commissioner)

Yes, there are consumer advocacy groups that lobby the SEC to ensure proper protections are in place for unwitting investors. But, the fact is those advocacy groups do not have anywhere near the resources to effectively influence the handful of SEC Commissioners who are handpicked by the prevailing administration–meaning those sitting inside the White House. All one has to do is consider the circuitous path aggrieved investors must take when they’ve been wronged to realize the system is stacked against them, starting with investors having to bring their claims via an industry arbitration forum and foregoing their rights to sue the wrong-doers in an actual court of law. Once in arbitration, investors then face a forum that is typically overweighted with “expert” industry professionals–the folks who work for Finra member firms, whether as consultants or direct employees. More important, all one has to do is analyze the number of cases brought by investors against a member firm and their respective broker to recognize the cases resolved in favor of the investor are dwarfed by the number of instances in which a ‘no harm no foul’ determination is made in favor of the defendant.

The good news is that in recent years, enough outcry on the part of investors has led to among other things, the federal government establishing an independent watchdog in the form of the Consumer Financial Protection Bureau, whose role “is to make consumer financial markets work for consumers, responsible providers, and the economy as a whole. We protect consumers from unfair, deceptive, or abusive practices and take action against companies that break the law.”  Further, thanks to prior White House administration, the SEC adopted a new set of standards intended to better protect the investor from their investment brokers and imposing guidelines that called for greater transparency and more granular disclosure as to conflicts of interest on the part of investment brokers so that investors could fully understand exactly where their investment dollars were directed and the actual returns on investment they could anticipate receiving.

The bad news is that Finra has fought with tooth and nail to water down those regulations and much like the NRA, they’re experts at navigating the swamplands of Washington DC.  Further bad news-the Trump Administration’s doctrine to loosen regulations on banks and brokers with the goal of making it less onerous insofar as compliance overhead and regulatory oversight so banks can make big profits on transactions and enable them to be more leveraged has also taken aim at those pesky conflict of interest disclosure requirements imposed on investment brokers.

Before TrumpWorld (the political version of WestWorld), it was acknowledged that brokers should be disclosing fees they earn, including commission being charged to the customer and incentive fees the broker is getting paid from the manufacturer of the investment product.

But we know that Trumpeteers have long campaigned to turn the clock back and with the influence of the orange-haired guy sitting in the Oval Office, to bring the world back to the 1950′s so that business titans and US-styled oligarchs who play golf at Mar-A-Lago could become fatter cats than they already are.  And that mindset has included the investment broker space, as evidenced by Trump’s SEC latest proposal to water down existing rules and pending legislation that would favor investors as opposed to the brokers selling investment products–who after all-are either country club members or who vie to be. That’s what makes America great, right?

Something funny happened after the SEC’s latest proposal-investors and brokers have balked. Here’s the opening excerpt from the WSJ coverage..

SEC’s Proposed Curbs on Stockbroker Advice Under Attack

Plan from Trump-appointed officials at SEC runs into criticism from both brokers, investors

WASHINGTON—A government proposal to restrict incentives that can bias broker advice to clients is generating complaints both from Wall Street and investor advocates.

The plan by the Securities and Exchange Commission, developed by Trump-appointed officials, may replace some aspects of an Obama-era regulation by the Labor Department that Wall Street successfully challenged in court. A federal court invalidated the Labor rule, and the Trump administration declined to appeal the decision, killing it for good.

Now investor groups, brokerages and other business groups are taking shots at the SEC’s attempt to address brokers’ conflicts of interest, saying that it is too vague and won’t improve protections for investors. The commission must consider the comments before it can vote to implement the regulation, perhaps sometime in 2019.

To read the full coverage, click here

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If you’ve been on another planet during the past two weeks, Facebook Inc (NASDAQ:FB) reported that the company’s data network was hijacked by a “political intelligence” firm posing as an academic researcher and used captured data of 50 million Facebook users to launch a Trump-friendly advertising campaign in the weeks and days leading up to the 2016 Presidential election. We know how that worked out. Well, according to a whistleblower, it appears that US securities industry self regulator FINRA left its back door wide open too.

Per Bloomberg reporting, “..A whistleblower is accusing some key financial regulators of allowing sensitive broker information to become readily accessible, even as industry watchdogs emphasized the need for companies to protect client data.

According to a complaint lodged with the SEC, personal data such as brokerage account numbers provided to an industry-funded regulator have long been easily accessible online. Separately, Social Security numbers and other information meant to be kept private also was made publicly accessible by state regulators for years up until 2015, according to the complaint, which was reviewed by Bloomberg News.

At issue is material on brokers and their firms gathered by FINRA and other regulators to help clients keep tabs on the people handling their money. To spot potential red flags, the SEC encourages investors to search the data that’s housed in the sprawling Central Registration Depository of more than 3,700 broker-dealers and hundreds of thousands of people authorized to work in the securities industry.

Some of that information, which is used in FINRA’s BrokerCheck online portal and passed on to state authorities, has been mishandled, said the whistle-blower who asked not to be identified in discussing the allegations for fear of reprisals.

While both FINRA and the North American Securities Administrators Association acknowledged past problems in a response to questions from Bloomberg News, they dispute any contention that they’ve been negligent in efforts to clean-up the disclosures.

The issues shed light on the massive back-office systems maintained by regulators and the difficulty of keeping the sensitive information in them private. There is so much data that FINRA has a team of more than 30 people who review filings and runs hundreds of automated queries to look for information that shouldn’t be made public.

“They’re sitting on top of an even larger amount of private data than the firms they regulate,” said Donald Langevoort, a professor at Georgetown University Law Center in Washington. “There is an immense amount of cynicism about the ability of any institution public or private to do a good job at safeguarding privacy.”

Concern over financial regulators’ ability to safeguard data led to congressional hearings last year after the SEC revealed that hackers broke into its corporate filing system and accessed two people’s names, dates of birth and Social Security numbers. That disclosure followed a massive breach at Equifax that may have led to the theft of personal data on about 150 million Americans.

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(Traders Magazine) –Nov 19–The Financial Industry Regulatory Authority is right on top of the evolving financial market structure and to that end, has announced new initiatives designed to increase market transparency.

The Financial Industry Regulatory Authority is right on top of the evolving financial market structure and to that end, has announced new initiatives designed to increase market transparency.

Thomas Gira, Executive Vice President, Market Regulation at FINRA, laid out the regulator’s future plans in remarks made Tuesday, November 15 at the Inaugural Traders Magazine Equity Market Structure Town hall forum at the Upper Story in New York City. In speaking to the audience, he assured that the group is on top of changes in the market and seeks to continue to provide clarity, guidance and transparency into the trading markets.

Tom Gira, FINRA EVP Market Regulation

Gira provided a brief recap of what initiatives have already been put into place, creating a “multi-faceted safety net for the markets and are designed to promote investor confidence.” Among the changes, he told of how regulators adjusted the market-wide circuit breakers, which give market participants an opportunity to assess their positions, valuation models and operational capabilities when extreme periods of volatility occur. On top of that, the marketplace now has a limit up/limit down regime, which addresses the type of sudden individual stock-price movements that the market experienced during the May 2010 flash crash.

Also, he reminded that the Securities and Exchange Commission has also passed the Market Access Rule, which requires firms entering orders into the market, or allowing their customers to enter orders into the market, to have pre-trade controls to avoid erroneous and duplicative orders and to establish pre-trade capital and credit controls on orders entered into the market, among other things. And most recently, the SEC implemented Regulation SCI to strengthen the technology infrastructure of the U.S. securities markets.

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“In sum, I think we are rightly focusing on the evolution of the market more than whether there is something seriously wrong with the market,” Gira said. “So in that vein, I would like to focus on how FINRA is working to stay ahead of issues through our focus on transparency and by making use of innovative technology in our surveillance programs.”

Among the new transparency initiatives, FINRA is continuing to look at ways to expand its Trade Reporting and Compliance Engine, or TRACE, which looks at the trading of corporate bonds and their trade data, including the price and size. The system is now looking at expanding TRACE to include transaction and quote data for the $13 trillion Treasury market.

“There is currently no centralized trade reporting system for Treasuries. Regulators, including FINRA, the SEC, the Treasury Department and the Federal Reserve Board, have taken steps to implement a transaction-reporting regime for Treasuries,” he said. “Starting next July, firms will have to report certain transactions in Treasury securities to TRACE.”

At this time, he added FINRA will not disseminate information on transactions in Treasuries. This new requirement will significantly enhance the ability of FINRA and other regulators to understand trading activity in Treasury securities.

To continue reading this story by John D’Antona, Jr from Traders Magazine, click here

FINRA Trying to Be More Transparent; No Easy Trick

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(Reuters)–27 October-Artificial intelligence programs have beaten chess masters and TV quiz show champions. Next up: stock market cheats.

Two exchange operators have announced plans to launch artificial intelligence tools for market surveillance in the coming months and officials at a Wall Street regulator tell Reuters they are not far behind. Executives are hoping computers with humanoid wit can help mere mortals catch misbehavior more quickly.

The software could, for instance, scrub chat-room messages to detect dubious bragging or back slapping around the time of a big trade. It could also more quickly unravel complex issues, like “layering,” where orders are rapidly sent to exchanges and then canceled to artificially move a stock price.

A.I. may even sniff out new types of chicanery, said Tom Gira, executive vice president for market regulation at the Financial Industry Regulatory Authority (FINRA).

“The biggest concern we have is that there is some manipulative scheme that we are not even aware of,” he told Reuters. “It seems like these tools have the potential to give us a better window into the market for those types of scenarios.”

FINRA plans to test artificial intelligence software being developed in-house for surveillance next year, while Nasdaq Inc (NDAQ.O) and the London Stock Exchange Group (LSE.L) expect to use it by year-end.

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The exchange operators also plan to sell the technology to banks and fund managers, so that they can monitor their traders.

Artificial intelligence is the notion that computers can imitate nuanced human behavior, like understanding language, solving puzzles or even diagnosing diseases. It has been in development since the 1950s and is now used in some mainstream ways, like Siri, an application on Apple Inc’s (AAPL.O) iPhone that can engage in conversation and perform tasks.

While financial firms are already applying artificial intelligence software for everything from compliance to stock-picking, it is only starting to become useful for market oversight.

“We haven’t really let the machines loose, as it were, on the surveillance side,” said Bill Nosal, a Nasdaq business development executive who is overseeing its artificial intelligence effort.

50 BILLION EVENTS

Market surveillance generally relies on algorithms to detect patterns in trading data that may signal manipulation and prompt staff to investigate.

But the sheer volume of data can lead to an overwhelming number of alerts, many of which are false alarms.

FINRA monitors roughly 50 billion market “events” a day, including stock orders, modifications, cancellations and trades. It looks for around 270 patterns to uncover potential rule violations. It would not say how many events are flagged, or how many of those yield evidence of misbehavior.

The “machine learning” software it is developing will be able to look beyond those set patterns and understand which situations truly warrant red flags, said Gira.

Machine learning is a subset of artificial intelligence in which computers figure out new tasks without having been programmed to do so. In the case of market surveillance, that would mean the computers “learn” which trading patterns lead to enforcement charges, in order to flag the right ones.

FINRA plans to test the new tool next year alongside its existing systems to compare the results.

The regulator has already moved its surveillance systems to Amazon.com Inc’s (AMZN.O) web-based Cloud, giving it more computing power to quickly analyze massive data.

Nasdaq is working with cognitive computing firm Digital Reasoning, which it invested in earlier this year.

LSE has teamed up with International Business Machine Corp’s (IBM.N) Watson business and cyber-security firm SparkCognition to develop its A.I.-enhanced surveillance, Chris Corrado, chief operating officer of LSE Group, told Reuters in an interview. Watson has become something of a household name, having bested contestants in the game show “Jeopardy” in 2011.

To continue reading, click here

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FINRA, aka Financial Industry Regulatory Authority, the SRO that serves as overseer of the securities brokerage industry and broker-dealers at large has completed the election campaign and voting process for electing individuals to its Board and the election winners include a former Bear Stearns partner as well as a current senior exec of hedge fund complex Bridgewater Associates.

Per WSJ-The chief executive officer of a San Francisco investment bank prevailed in a hard-fought election to join the board of Finra, the front-line regulator of stockbrokers, knocking off an incumbent and a well-known challenger who campaigned on the message that rigid oversight is choking small firms.

Bob Muh, the CEO of Sutter Securities Inc. and a former Bear Stearns partner, narrowly defeated three other candidates to win a seat on the board of the Financial Industry Regulatory Authority. He beat the second-place candidate, Stephen Kohn of Lakewood, Colo., by just three votes, according to people familiar with the matter. Robert Keenan, a sitting board member who also upset an incumbent when he won his last election in 2013, placed third. Mark Howells, a broker based in Scottsdale, Ariz., also competed in the race.

Finra, one of the country’s most powerful financial regulators, allows the industry it oversees to elect some of its officers. While Finra isn’t a government agency and ultimately answers to the Securities and Exchange Commission, Congress has sanctioned its role as a standard-setter and rule-enforcer for the brokerage industry.

Finra’s bylaws require that a majority of its 24-member governing board have no industry ties. But Finra reserves three board seats to represent its 3,550 small-firm members. That board structure has fostered the unusual dynamic of candidates campaigning for office at the overseer by vowing to lighten its oversight.

Turnout in the election was about 43%, meaning about 1,500 of Finra’s small-firm members voted, people familiar with the matter said. (For the full WSJ article, click here)

A more colorful take on the above is courtesy of DealBreaker’s Jon Shazar:

t may surprise you (but probably shouldn’t) to learn that there are some people who think FINRA’s doing too good and too thorough a job regulating broker-dealers. That it’s really nobody’s business if a broker levies an unspoken lap dance fee. That its website is actually too up-to-date and too easy for clients to use to find out about the levying of unspoken lap dance fees. That the problem isn’t FINRA’s habit of whitewashing what broker records are available, but that there are just too many disciplinary actions being taken that require whitewashing. These people are called FINRA members, specifically its 3,550 small-firm members. And because self-regulation is a hilarious carnival of ineptitude and bad optics, these small firms get to elect a representative to FINRA’s board, to represent their interest in going unregulated to the greatest extent possible.

These triennial contests have all the hallmarks of a real political campaign: websites, mudslinging, throw-the-bums-out mentalities. Unsurprisingly, they also look an awful lot like a local Tea Party meeting, with candidate trying to one-up the other in making deregulatory promises they’ll never be able to keep in the face of the 23 other FINRA board members who don’t think it’s a great idea to provocatively antagonize customers, the press and the Securities and Exchange Commission at every turn.

This year, the bum getting thrown out was Robert Keenan, elected three years ago on the platform that the previous bum wasn’t doing enough to get these regulatory pencil pushers off their goddamned backs, and who was felled by the same sword. But the winner—who will get to serve alongside fellow new FINRA director and Bridgewater exec Eileen Murray—wasn’t the most fire-breathing of the candidate. Instead, by a margin of all of three votes out of 1,500 cast, the small folks of FINRA picked a 78-year-old former Bear Stearns, Bob Muh, partner to carry the doomed torch.

Mr. Muh, 78 years old, was seen as a moderate and experienced voice in a campaign in which Mr. Kohn accused Mr. Keenan of playing fast and loose with campaign rules and not pushing back hard enough against regulations that brokers oppose….

“I certainly can’t call it a landslide or a mandate, but I’m delighted I’ll have the chance to convince the independent directors on the board of some the changes that are need for the small firms,” Mr. Muh said in an interview Monday after Finra announced the results.

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Agency could alter 2015 proposal, which sought to pull back the curtain on opaque trading venues

In what might be her last major speech to members of the broker-dealer community as the Obama administration winds down and gets ready for the closing bell, SEC Chair Mary Joe White addressed a Washington DC gathering of the Securities Traders Association this week and talked about BDs favorite topic: equities market structure.  After taking a few accolades for approving Finra-recommended regulations that require software developers of algorithmic trading tools to be registered and licensed just as securities traders, Ms White  summarized her accomplishments  and forward looking perspectives regarding SEC efforts to address inequities in the equities market structure.

Courtesy of Mondo Visione, below are the opening extracts from Ms. White’s speech:

Thank you, Jim [Toes], for that kind introduction.  I am honored to join you again for your annual market structure conference.

The American equity markets are the strongest in the world, and one of the Commission’s most important responsibilities is to work every day to maintain their fairness, orderliness, and efficiency.  Optimizing market structure is a continuous process, one that requires the Commission to act with both care and intensity, strictly guided by what is best for investors and capital formation for public companies.

I emphasized this guiding principle when I last joined you in 2013,[1] and in 2014 when I laid out a program for enhancing equity market structure.[2]  Fulfilling our responsibility to investors and issuers, of course, demands that the Commission act quickly to address issues that are demonstrably undermining the interests of investors and issuers.  But it also requires the Commission to carefully consider changes to market structure where the impact on those interests is far less clear and the data to support competing perspectives is lacking or conflicting.

Where improvements to equity market structure are clearly called for, the Commission has acted.  The operational integrity of our markets – my top priority – has been significantly enhanced by a number of measures.  The staff is gathering and analyzing more market data than ever before to inform policymaking, and the consolidated audit trail is becoming reality.  And we have detailed proposals out for comment that will give investors more transparency into how the off-exchange markets operate and broker-dealers handle their orders.

At the same time, the Commission has undertaken a deliberate, data-driven process to assess – and, as appropriate, begun to implement – more fundamental changes to equity market structure.  This process requires great care.  The American equity markets today continue to serve well the interests of retail and institutional investors, delivering better executions at lower costs than ever before.  Broad changes to this market structure – especially those executed precipitously or without adequate data – can have serious unintended consequences for investors and issuers as their impact is fully realized, sometimes years down the road.

This two-pronged approach recognizes that market structure can never be perfect and, correspondingly, that the Commission’s work is never – and should never – be done.[3]  Market structure is continually evolving as technology and competition spur innovation.  That fluidity means that the Commission’s review must be both comprehensive and nimble, constantly testing existing assumptions, regulations, and market practices, while remaining poised to act quickly on issues that immediate attention can address.

Today, I want to report on some of our progress on both our targeted enhancements to tackle such issues, and our consideration of more fundamental market structure questions.  While the Commission has been active in a number of areas, I will focus today on operational integrity, market transparency, and algorithmic trading.

In assessing these areas and others, we have been fortunate to have the assistance of our relatively new Equity Market Structure Advisory Committee, or EMSAC.  Especially in addressing some of the more complex issues in market structure today, the EMSAC, which brings deep expertise and a wide range of perspectives, provides a public forum for valuable and timely discussions, both within the Committee itself and as a result of its efforts to reach out to a wide range of others with expertise on key issues.

Strengthening Operational Integrity and Market Stability

Let me begin where I always do, with operational integrity and market stability.  Since I arrived at the Commission, enhancing the reliability and resilience of our markets has been my top priority.  Weaknesses or disruptions in operations can destabilize markets and, in some cases, lead to extreme price volatility and the loss of investor confidence.  The Commission’s work here continues – we can never be complacent – but I am very pleased with the steps we have taken to strengthen the market systems on which investors depend every day.

Regulation SCI

Central to this effort has been Regulation SCI, which the Commission adopted at the end of 2014.[4]  While no measure can eliminate technology disruptions altogether, Regulation SCI is designed to reduce the occurrence of systems issues and to improve resilience and communication when systems problems do occur.  It imposes requirements on key market participants – the exchanges, high‑volume alternative trading systems (ATSs), clearing agencies, the securities information processors (SIPs), the Financial Industry Regulatory Authority (FINRA), and the Municipal Securities Rulemaking Board (MSRB).

These “SCI entities” were required to start complying with most of the requirements of Regulation SCI last November.[5]  In the first instance, this means maintaining comprehensive policies and procedures to ensure the capacity, integrity, resiliency, availability, and security of key automated systems.  It also means: taking appropriate corrective action when systems issues happen; reporting systems problems and changes directly to the Commission and market participants; and conducting periodic reviews and testing of automated systems.

Approaching the first full year of the regulation’s operation, our examiners have been reviewing compliance with Regulation SCI.  It is apparent from these examinations that many market participants have devoted significant resources to compliance, and there has been good progress in implementation.  But a few areas for additional attention have emerged.  For example, it is clear that processes for patching and updating systems deserve close attention – human errors in these routine tasks can create much more significant issues.  Another example is diversifying primary and backup systems – in seeking to fulfill their recovery obligations under Regulation SCI, market participants should focus on not just the geographic locations of those systems, but also consider their reliance on different electrical, telecommunications, and other infrastructure support.  Our staff is continuing to work with market participants in these areas and others to help ensure that the goals of Regulation SCI are achieved.

Improvements to Critical Market Infrastructure

Regulation SCI has been complemented by a number of initiatives by the exchanges and FINRA to enhance the operational integrity of critical market infrastructure like the SIPs and the open/close process.  At my direction, following the Nasdaq SIP outage in 2013 and NYSE’s trading outage in 2015, SEC staff worked with the exchanges and FINRA to correct the defects that caused these incidents, as well as to identify and address other potential single points of failure.  These cooperative efforts were expanded after the unusual volatility of August 24, 2015, and there has been significant progress.

• First, the resilience of the SIPs is considerably improved.  There are now enhanced disaster recovery sites and systems to establish a “hot/warm” backup process, which provides for a failover from the primary site to the backup site in ten minutes or less.[6]
• Second, as of June, the equity listing exchanges now have mutual backup arrangements for their closing auctions, which will address situations when a disruption might prevent the execution of a closing auction on the primary listing exchange.[7]
• And third, the process for opening auctions, especially in volatile markets, has been and continues to be improved.[8] 

Enhancements to Volatility Moderators

Amidst these and other improvements,[9] reminders persist about the continued importance of the volatility moderators implemented after the “Flash Crash,” especially the “limit-up/limit-down” plan designed to reduce extraordinary volatility in individual securities.  The exchanges and FINRA have already implemented basic enhancements to limit-up/limit-down in the wake of the events of August 24, 2015,[10] and I have asked them to address additional issues that emerged during that event. 

Further Strengthening Market Operations

One such issue is the application of the mechanism to exchange-traded products (ETPs), where we have a broader program underway to help ensure that these increasingly popular products operate robustly in a variety of market conditions.  We saw during the Flash Crash and on August 24 that ETPs can be disproportionately affected when markets become disorderly.  Orderly trading in an ETP requires a smoothly functioning market for the ETP’s holdings so that market makers and authorized participants can reliably value the ETP’s portfolio.  If the underlying market becomes disorderly, or if market makers and authorized participants step away from trading, the arbitrage mechanism can be disrupted and an ETP can trade at prices substantially away from its implied value.

Commission staff, as well as the exchanges and FINRA, are assessing the special characteristics of ETP trading in determining whether particular changes should be made to the limit-up/limit-down mechanism to reflect the sensitivity of ETPs to disorderly market activity.[11]  In addition, I have directed the staff’s ETP Working Group to identify and analyze a broad range of issues relating to the structure, trading, and use of ETPs.  The Working Group is considering, among other things: what portfolio characteristics and market structures support effective arbitrage; the roles and practices of market makers and authorized participants; and the effects of the ongoing exchange pilot programs to incentivize trading in less‑liquid ETPs.

If you haven’t already fallen asleep and would like to read the entire transcript, please click here

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For those not following the travails of Germany’s biggest investment bank and broker-dealer Deutsche Bank, suffice to say this bank has had its full share of comeuppance throughout the past many months. If nothing stings more than getting hit with a big fat fine from Finra, the sting is more palpable when its a $12.5 million smack for hooting and hollering confidential information over a company-wide ‘squawk box.’ Below courtesy of Business Insider columnist Portia Crowe:

(Business Insider) Aug 8-Deutsche Bank allowed potentially confidential research and trading information to be broadcast over internal speakers, according to the Financial Industry Regulatory Authority, or Finra.

That body fined Deutsche Bank $12.5 million after finding that the German bank was aware that broadcasts, known as “hoots” or “squawks,” contained potentially confidential or price-sensitive information but “repeatedly ignored red flags” suggesting it wasn’t adequately supervising the loud systems.

Traders regularly communicate across desks over internal speaker systems known as “squawk boxes.”

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At least one registered representative of the firm communicated potentially confidential and/or material nonpublic information to customers as a result of the supervisory deficiencies, according to a filing from Finra.

That provided the recipients with a potential informational advantage over other customers.

“Deutsche Bank’s disregard of years of red flags including internal audit findings, risk assessments, and compliance recommendations was particularly egregious given the risk that material nonpublic information could be communicated over squawk boxes,” Finra’s chief of enforcement, Brad Bennett, said in a statement.

Deutsche Bank neither admitted to nor denied the charges. The full story via this link to Business Insider

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(MarketsMuse.com) –Finra, the securities industry’s self-regulator sent out its first monthly “report cards” to brokerage firms warning about manipulative superfast trading practices, marking the beginning of an effort to encourage the firms to cut off traders that aren’t playing fair.

The Financial Industry Regulatory Authority said it made the grades available to brokerage firms Thursday, identifying potential evidence of manipulative practices by firms or their customers. The report cards, which aren’t made public, focus on spoofing and layering, two practices that involve traders submitting orders they don’t intend to execute with the goal of moving prices and capitalizing on the change.

“Spoofing” is an illegal practice in which a trader with long position enters a a buy order for that security and immediately cancels it without filling the order in an effort to artificially create a demand for that security so as to induce other investors to then issue their own buy orders at a higher price, which increases the appearance of heightened demand. The first investor then closes his/her long position by selling the security at the new, higher price.

“These types of manipulation take advantage of other investors and harm public confidence in market integrity,” Finra Chairman and Chief Executive Richard Ketchum said in a news release. “We expect that the firms will use the data to enhance their own surveillance and move swiftly to cut off potential market manipulation.”

The move is part of a broader regulatory effort to stamp out devious practices in response to high-profile cases of alleged manipulation, such as​the case involving ​Navinder Sarao, the British trader accused of contributing to the 2010 stock market “Flash Crash.”

Finra wouldn’t say how many firms received the report cards, but a spokesman said it was “a large number.”

To continue reading the story from MarketsMuse, click here

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As FINRA examiners make their rounds this year, they will put firms’ culture under the microscope. Wall Street’s chief regulator is turning its attention to the tone set by senior leaders and supervisors, asking whether the culture they create supports compliance, risk management and ethical conduct throughout the  brokerdealer organization.

The industry regulator last week published its annual letter outlining its examination priorities for the new year, putting the industry on notice that, along with firm culture, FINRA examiners will be looking broadly at issues around supervision and liquidity, as well as a host of other areas ranging from cybersecurity to how brokers work with elderly clients.

In a statement accompanying the exam-priorities letter, FINRA CEO Richard Ketchum explains that the focus on culture comes in response to the failure of too many firms to establish a compliance-driven ethos that rejects self-dealing and where brokers and advisors consistently place clients’ interests ahead of their own.

“Nearly a decade after the financial crisis, some firms continue to experience systemic breakdowns manifested through significant violations due to poor cultures of compliance,” Ketchum says. “In 2016, FINRA will be looking for firms to focus on their culture and whether it is putting customers first and promoting risk management adaptable to a changing business environment.”

Not One-Size-Fits-All

While FINRA says that it plans to “formalize” its method for assessing a firm’s culture in 2016, the industry regulator insists that it is not going to be overly prescriptive and hold brokers to a one-size-fits-all standard for what an appropriate culture should look like.

“Our goal is not to dictate a specific culture, but rather to understand how each firm’s culture affects compliance and risk management practices,” Ketchum says.

At the same time, FINRA is working toward a more objective set of criteria to evaluate the culture of a firm, and says that it will complete the review of incentives and conflicts of interest in the retail brokerage sector that it began late last year. Through those sweep exams, FINRA has been collecting information on how firms navigate conflicts of interest in areas like proprietary products and the compensation structure for registered reps.

The mechanism for evaluating a firm’s culture that FINRA expects to finalize in 2016 will draw on five criteria:

Whether control functions are valued within the organization

Whether policy or control breaches are tolerated

Whether the organization proactively seeks to identify risk and compliance events

Whether immediate managers are effective role models of firm culture

Whether sub-cultures (such as at a branch office or trading desk) that may not conform to overall corporate culture are identified and addressed
FINRA explains that it expects firms to take “visible actions” to mitigate conflicts of interest and promote the clients’ interests, and to adopt a zero-tolerance policy for violations of the organization’s protocols.

Additionally, FINRA intends to focus on the four areas where it has observed firms falling down in their supervisory procedures: Conflicts of interest, Technology, Outsourcing, and Anti-money laundering programs.

Cybersecurity will be a chief focus as examiners review firms’ technology operations. Officials at FINRA and the SEC have been warning the industry to sharpen its focus on protecting information systems and client data in the face of constantly evolving and widely varied cyber threats.

“While many firms have improved their cybersecurity defenses, others have not — or their enhancements have been inadequate,” FINRA cautions in its letter.

This article originally appeared on the website of Traders’ sibling publication Financial Planning.

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The total number of Financial Industry Regulatory Authority (FINRA) member retail brokerages has been on the decline for the last five years, but one sliver of the universe is showing new signs of life: A new crop of broker/dealers and online funding portals are joining FINRA to capitalize on new opportunities made possible by the JOBS Act of 2012. The legislation prompted the SEC to make it easier to market and solicit investments, and opened the door for small businesses to engage in so-called “equity crowdfunding.”

About 15 to 20 of these new firms have signed on since 2013, according to Fishbowl Strategies, with another three to six launching soon, in anticipation of a wave of issuers and investors entering the market. Whether there is a crowd for equity crowdfunding remains to be seen.

But Paul Boyd, managing partner at ClearPath Capital Partners, a wealth management firm for tech entrepreneurs, says there
is plenty of pent-up demand and a backlog of Reg D deals that are moving forward.

Boyd also expects the next phase of the JOBS Act, Title III, will bring a lot more attention to capital raises online. Set to go into effect in May, those rules let any investor, accredited or not, invest in unregistered securities online (with limits on the amounts that can both be invested, and raised, in a year). The tech-fueled vision of bypassing stuffy financial intermediaries in favor of a new-class of SEC-registered and FINRA member “crowdfunding portals” has inspired a flotilla of startups to enter the space.

Many of the new entrants have affiliated agreements with brokerdealers. Some have launched their own b/ds.

WealthForge launched its own b/d to provide all the services needed to complete a private securities transaction, including investor accreditation, regulatory filings and escrow. Co-founder and CEO Mat Dellorso says the new rules—and bringing the process online—have spurred their growth.

“When you bring the internet and you’re allowed to advertise a private security through 506(c), more investors do take part,” he says. WealthForge has completed 150 private financing transactions, bringing in 2,500 investors. “A traditional investment bank might complete three or five a year,” he says. “It’s a lot more volume because it’s more transparent and online now.

“Normally these transactions take weeks and months, but an investor can literally invest in a private placement on our platform in a matter of minutes,” he says.

Dellorso doubts they will do much work with firms looking to raise capital through the exemptions for non-accredted investors.

CircleUp is another new broker-dealer with a focus on consumer products and retail companies. Bhakti Chai, which makes Fair Trade Certified tea, raised nearly $865,000 on the platform.

Folio Institutional, a self-clearing broker/dealer, saw the interest around equity crowdfunding and decided to launch an online equity and debt-funding platform in September. Since the firm can custody the securities, it can enage in secondary-market transactions and, potentially, public offerings.

For the entire article from WealthManagement.com please click here

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