FINRA imposes $500,000 fine on Public Investing
Open to the Public Investing, Inc. has agreed to pay a $500,000 fine as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From January 2019 through February 2021, Public Investing did not conduct reasonable reviews of the execution quality of its customers’ orders. During this period, Public Investing’s reviews of its customers’ execution quality were limited to reviewing its clearing firm’s quarterly reports prepared pursuant to Rule 606 under the Securities Exchange Act of 1934. These reports did not provide any data specific to Public Investing’s execution quality or the quality of the executions it could have obtained from competing markets. As a result, Public Investing violated FINRA Rules 5310(a), 5310.09(a) and (b), and 2010.
From January 2019 through February 2021, Public Investing’s supervisory system was not reasonably designed to achieve compliance with its best execution obligations. The firm lacked a reasonable system for reviewing the execution quality of its existing order routing arrangements or competing markets.
In addition, Public Investing’s WSPs were not tailored to the firm’s business. The WSPs did not address equity trading, even though Public Investing only provided equity trading. Instead, the WSPs addressed best execution obligations for fixed-income securities, which Public Investing did not offer. As such, the procedures did not provide guidance as to how Public Investing should conduct execution quality reviews for its business.
Therefore, Public Investing violated FINRA Rules 3110 and 2010.
Public Investing failed to disclose its policies regarding the receipt of payment for order flow.
Exchange Act Rule 607(a)(l) requires a broker-dealer that acts as agent for a customer to disclose, in writing, upon opening a new account and annually thereafter, the firm’s policies regarding the receipt of payment for order flow (PFOF), including whether payment for order flow is received for routing orders and a detailed description of the nature of the compensation received.
Under Exchange Act Rule 607(a)(2), firms are additionally required to describe their policies for determining where to route customer orders that are the subject of payment for order flow absent specific instructions from customers. A violation of Rule 607 also constitutes a violation of FINRA Rule 2010.
From January 2019 to December 2020, Public did not disclose to its customers upon account opening, or in annual disclosures, that it accepted payment for order flow or explain its policies regarding the receipt of payment for order flow and its related routing arrangements.
Therefore, Public Investing violated Exchange Act Rule 607 and FINRA Rule 2010.
Public Investing violated FINRA’s standards for communications with the public.
Public disseminated the following misleading communications to customers that violated FINRA Rule 2210(d)(l)(B):
- From January 2019 through January 2021, Public Investing’s website stated that the firm “may” receive payment for order flow through third parties. This statement was misleading because the firm was receiving payment for order flow for the majority of its customers’ orders during this period.
- From February 2021 through October 2021, Public Investing’s website included a tool called the “Ticker Time Machine,” which allowed users to determine what a hypothetical equity investment made in the past would have been worth. The tool allowed the customer to choose the ticker symbol, investment amount, date of purchase and date o f sale. The tool was misleading because an investor could infer that similar returns could be expected in the future.
Public Investing disseminated the following communications to customers that omitted material facts which caused the communications to be misleading in violation ofFINRA Rule 2210(d)(l)(A):
- From August 2019 through February 2020, Public Investing stated on one page of its website and in a social media advertisement that it offered “commission-free” trading, without further detail. This statement was misleading because it omitted that other fees could apply to commission-free trading, such as regulatory fees or service fees.
- From February 2021 through October 2021, a page on the firm’s website described the benefits of the firm’s fractional share trading, but the descriptions were misleading because they omitted the restrictions or conditions associated with such trading. For example, the website page omitted that fractional shares held in a firm account could not be transferred to another broker-dealer and had to be sold if the account was closed.
- From February 2021 to October 2021, one page of the firm’s website omitted risks and limitations of the firm’s securities lending program. For example, the website page did not provide that loaned securities might not be covered by the Securities Investor Protection Corporation or that the rights to dividends and other distributions ofloaned securities would be received by the borrower.
Therefore, Public Investing violated FINRA Rules 2210(d)(l)(A) and (B) and 2010.
On top of the fine, Public Investing agrees to a censure.