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Macquarie Pays $2.95 Million Blue Sheets Fine
January 6, 2016For decades, when Wall Street regulators were conducting investigations of trading issues, such data was literally transmitted from industry firms on blue paper; hence, the derivation of the name "Blue Sheets." Sadly, I am old enough to remember the colored pages. Despite the advent of electronic filing, however, the term Blue Sheets has hung on as a quaint reminder of the old days.
Understandably, regulators rely upon the accuracy of Blue Sheet submissions when investigating trading issues such as suspicious trades, manipulations, etc. Consequently, the onus is on industry firms to ensure that they are accurately compiling and presenting data for the trading under scrutiny. The obligation on industry participants to submit responsive and accurate data is codified under:- Exchange Act Section 17(a) and Rules 17a-4(j) and 17a-25; and
- FINRA Rules 8211 and 8213.
Essex Radez AWC For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Essex Radez LLC submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Essex Radez LLC, Respondent (AWC 2015044333201, December 23, 2015). FINRA member firm Essex Radez provides execution services to broker-dealers and also engages in limited proprietary trading. The AWC characterized the firm as having about 19 registered representative. Programming Error The Essex Radez AWC asserts that:
Due to a programming error, the Firm's system could not properly match data for some trades between January 2013 and February 2014. These trades were omitted from the Firm's blue sheets. As a result, between January 2013 and February 2014, Essex Radez submitted approximately 425 inaccurate blue sheets to the SEC that misreported approximately 164,629 transactions and submitted approximately 487 inaccurate blue sheets to FINRA that misreported approximately 60,967 transactions.In addition to the programming error, the Essex Radez AWC further alleges that the firm did not have in place an audit system providing for accountability of its Blue Sheets submissions. In accordance with the terms of the AWC, FINRA imposed upon Respondent Essex Radez a Censure and $50,000 fine. Additionally, Respondent agreed to review its Blue Sheet policies, systems, and procedures and to submit a certification of same under the signature of an officer within 90 days of the Notice of Acceptance of the AWC; and said certification will include a representation that Respondent has implemented policies, systems, and procedures to address and correct the cited violations. Macquarie AWC For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Macquarie Capital (USA) Inc. submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Macquarie Capital (USA) Inc., Respondent (AWC 2014041862801, December 23, 2015). FINRA member firm Macquarie Capital (USA) Inc.is a a full-service broker. The AWC characterized the firm as having about 568 registered persons. Technical Deficiencies The Macquarie AWC asserts that:
In conjunction with commencing clearing activities for its Cash Trading business in January 2012, Macquarie developed a new system to generate blue sheets. Due to an increase in the volume of blue sheet requests, the Firm developed another, more automated system to generate blue sheets, which the Firm began using in November 2012. Between January 2012 and September 2015, Macquarie experienced multiple problems with these blue sheet systems, including reversing the buy/sell code on allocations of certain customer trades; miscalculating the net amount on allocations of certain customer trades; failing to report post-trade cancels and corrections; and failing to provide (or providing incomplete) customer information for certain transactions. The problems were caused by technical deficiencies in the Firm's blue sheet systems; errors in its blue sheet logic; and the fact that information was pulled from a front-end database that did not accurately reflect actions that some times occurred after a trade was executed. As a result of these problems, Macquarie submitted to the SEC at least 1,143 inaccurate blue sheets that misreported approximately 178,318 transactions and submitted to FINRA at least 600 blue sheets that misreported approximately 160,971 transactions.The Macquarie AWC further assets the firm's 2012 and 2013 written supervisory procedures for Blue Sheets consisted of instruction for submitting responses and validating same via "sample checking." In early 2014, after a review of its Blue Sheet systems and procedures by a consultant, Macquarie revised its process and, in so doing, "discovered the problems" cited in the AWC. The Macquarie AWC notes that in determining sanctions, FINRA's Department of Enforcement considered the member firm's:
"self-report following its discovery of the violations described above. Macquarie detected the violations, initiated internal reviews upon discovery of the violations, identified the cause of the violations, and engaged in remediation.In accordance with the terms of the AWC, FINRA imposed upon Respondent Macquarie a Censure and $2,950,000 fine. Additionally, Respondent agreed to review its Blue Sheet policies, systems, and procedures and to submit a certification of samed under the signature of an officer within 90 days of the Notice of Acceptance of the AWC; and said certification will include a representation that Respondent has implemented policies, systems, and procedures to address and correct the cited violations.. Bill Singer's Comment Sorry but I'm having difficulty reconciling the two fact patterns and the two very, very different fines. Essex Radez Data In the Essex Radez AWC, we are presented with about 13 months of improperly matched trade data resulting in the Blue Sheeting of approximately:
- 425 inaccurate blue sheets to the SEC
- 164,629 misreported transactions
- 487 inaccurate blue sheets to FINRA
- 60,967 misreported transactions
- 1,143 inaccurate blue sheets to the SEC
- 178,318 misreported transactions
- 600 inaccurate blue sheets to FINRA
- 160,971 misreported transactions
- TOTAL Inaccurate Blue Sheets submitted per month:
- Essex Radez: 912/13 or about 70 per month
- Macquarie: 1,743/44 or about 40 per month
- TOTAL Misreported Transactions submitted per month:
- Essex Radez: 225,596/13 or 17,354 per month
- Macquarie: 339,289/44 or 7,711 per month
Request for Automated Submission of Trading Data-Failure to Respond in a Timely and Accurate Manner FINRA Rules 2010, 8211 and 8213Under the heading of "Monetary Sanctions," the guidelines suggest:
10 to 15 Days Late: Fine of $100 per day. 16 to 30 Days Late: Fine of $500 per day.Moreover, on page 75 of the Sanction Guidelines, this footnote appears:
1. Any automated submission submitted by a member firm more than 30 calendar days late generally is alleged to constitute a violation of Rule 8210. A firm with a history of more than four violations of Rules 8211 and 8213 may be alleged to have violated Rule 8210. The filing of incomplete or inaccurate automated submissions or the filing of manual submissions without prior exemptions may be alleged to constitute a violation of Rule 8210.Just for fun, let's take the 13 month period during which Essex Radez was scrutinized and imputing 30 days to each month, we wind up with 13X30 or 390 "fine-able" days. At $500 a day, that would result in a $195,000 fine. Having settled for $50,000, it looks like Essex Radez did quite well. In comparison, let's take the 44 month period during which Macquarie was scrutinized and imputing 30 days to each month, we wind up with 44X30 or 1,320 "fine-able" days. At $500 a day, that would result in a $660,000 fine. Having settled for $2.95 million, it looks like Macquarie didn't do that well. If we look at page 33 of the Sanction Guidelines "Failure to Respond, Failure to Respond Truthfully or in a Timely Manner, or Providing a Partial but Incomplete Response to Requests Made Pursuant to FINRA Rule 8210," we find this guidance for the imposition of fines under "Monetary Sanctions":
Failure to Respond or to Respond Truthfully: Fine of $25,000 to $73,000. Providing a Partial but Incomplete Response: Fine of $10,000 to $73,000. Failure to Respond in a Timely Manner: Fine of $2,500 to $37,000.I can sort of figure out how Essex Radez wound up agreeing to its $50,000 fine; however, if you can figure out how Macquarie got hit with a $2,95 million based upon the "Sanctions Guidelines," good luck to you. Not My Place Let me be quite clear and repeat an admonition that I frequently make when I discuss regulatory settlements. An AWC means that the Respondent entered into a settlement with FINRA. If any given Respondent signs off on an AWC and is happy with the outcome, it's not my place to second-guess such a decision or to question what prompted that result. Much goes on behind the scenes that may commend paying more in fines or taking a longer suspension. Regardless, I can only work with what I have before me, and the four-corners of the page on which an AWC is printed is the limit of my knowledge. Pointedly, Macquarie was not a pro se respondent. To the contrary, the Macquarie AWC notes that the "Counsel for Respondent" was Sidley Austin LLP Partner Susan L. Merrill, who is described, in part, on her law firm's website as:
Susan is the former head of enforcement at FINRA, where she oversaw the establishment and development of its enforcement program. She joined FINRA from her position as enforcement chief at New York Stock Exchange Regulation when it merged with the NASD in 2007. Before she became a regulator, Susan was in private practice for 17 years and represented clients in some of the highest-profile matters on Wall Street.In the end, today's blog is not a defense of Macquarie but an analysis of how Wall Street -- pointedly FINRA -- approaches the calculation of fines for alleged misconduct. I am not excusing Macquarie's extensive or prolonged lapses and I too am disappointed with the firm's failure to discharge its obligation to compile and produce accurate trade data. At this point in time, I am hopeful that the firm's public rebuke will move it in a more compliant direction and that it has hired more attentive and exacting compliance staff.
Much of the day-to-day of Wall Street is about paying the price. It's all part of a massive cost-benefits analysis. Everyday, firms take risks -- calculated or otherwise. And when things go wrong, firms hire high-priced lawyers and consultants; and write out settlement checks for big bucks. Sometimes settling is preferable to making a fuss or running the risk of an uncertain outcome at a regulatory hearing. I'm happy that Macquarie has the deep pockets to pay a multi-million dollar settlement. Unfortunately, when a large member firm plops down such a humongous check via a FINRA settlement, that outcome is often used by the self-regulator to intimidate smaller players on Wall Street. In today's BrokeAndBroker.com Blog, I've set out the manner in which I often approach the calculation of regulatory fines when representing a client. It's up to each member firm to follow whichever path is best suited to get you to where you want to go.