FINRA fines Regal Securities for deficiencies in surveilling for potentially manipulative trading
Regal Securities, Inc. has agreed to pay a $50,000 fine as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From August 2017 through January 2019, Regal did not establish and maintain a supervisory system, including written procedures, reasonably designed to achieve compliance with FINRA rules regarding surveilling for potentially manipulative trading.
In July 2017, a Regal branch manager sought the business of a customer who once maintained an account with the firm. Regal’s compliance department initially recommended that the customer not be allowed to open a new account with the firm due to previous issues regarding margin calls and his trading activity. The branch manager then escalated the on-boarding of this customer to the trading desk, which, in response, also raised a concern. Nonetheless, the firm opened a new account for the customer on August 10, 2017.
The firm delegated responsibility for supervision of this customer’s trading, including review of surveillance alerts, to the branch manager and another registered representative responsible for the account, both of whom were registered with FINRA as General Securities Principals. Both registered representatives provided the firm with assurances that they would monitor the customer’s account activity.
The customer began trading in the new account on August 22, 2017. Initially, some of the customer’s trading generated firm surveillance alerts indicating potential marking the close activity on August 23, 24, 28, and 29, 2017. Then, on August 31, a Regal executive informed the account representative that the account may need to be closed due to this trading activity.
While surveillance alerts were being generated, the firm did not reasonably review them or take any action regarding the customer at that time.
The customer’s trading continued until January 31, 2019, when Regal terminated his ability to trade for failing to meet margin calls. During that period, the customer’s trading activity generated approximately 1,600 firm surveillance alerts indicating potential marking the close activity. Further, between November 2017 and June 2018, the customer’s trading activity generated approximately 40 surveillance alerts indicating potential wash trading.
The firm forwarded these surveillance alerts to the designated representatives for review, however, Regal’s WSPs did not describe how alerts were to be reviewed, or how those reviews were to be documented. Moreover, the firm did not evidence that reviews were in fact conducted to determine whether the activity was manipulative, except for in a small number of instances. In addition, neither representative on the account escalated any concerns about the customer’s trading to the compliance department, and the compliance department did not otherwise follow up with the representatives after forwarding the alerts for review.
Regal also failed to establish a supervisory system reasonably designed to detect other potentially manipulative trading. The firm had no surveillance to detect layering or similar activity until January 2019.
Therefore, Respondent violated FINRA Rules 3110(a) and (b) and 2010. B.
On top of the fine, the firm has agreed to a censure.