BofA Securities, Inc has agreed to pay a $155,000 fine as part of a settlement with the Financial Industry Regulatory Authority (FINRA).
From at least September 2014 through August 2022, BofAS conducted approximately 11,089 OTC transactions that it reported to FINRA with an ISO Outbound Exemption modifier. However, system latency issues prevented the company from executing the transactions simultaneously.
Instead, they ran, in limited cases, a second or more after the ISOs were routed. The periodic delays were the unintended consequence of the company’s scheduling choices for two components of its electronic order management systems that the company had implemented by September 2014 and May 2016, respectively.
Because these delays were involuntary and not intended to allow customers to take advantage of better ISO pricing, the Outbound ISO Exclusion did not apply to these transactions.
In addition, from at least January 2015 to July 2023, one of BofaS’s electronic order management systems ingested and processed market data from the national exchanges for the top eight price levels for each NMS share displayed by each exchange as part of the process of taking market snapshots and routing ISOs to protected prices.
If there was no protected bid among the top eight bids (due to the prevalence of odd lots in live market data feeds), the firm’s electronic order management system did not drive an ISO to that exchange. As a result, from June 2022 to August 2022, BofAS executed approximately 42 potential transactions without initiating the necessary ISOs.
Also, from at least November 2019 to June 2020, a BofaS trading desk manually executed orders outside the national best bid and offer (NBBO) for customer facilities and manually executed certain position transfers outside the NBBO during market hours, resulting in NMS shares being traded.
In November 2019, BofAS permitted approximately 47 trades as a result of this manual order execution that did not qualify for a Rule 611(b) exemption.
From at least January 2021 through at least April 2021, BofAS routed ISOs with incorrect FIX tag information from the customer about an affiliated clearing firm, resulting in exchanges rejecting 3,475 ISOs. This resulted in BofaS executing 23 negotiations without initiating the necessary ISOs.
In addition, BofAS did not conduct regular surveillance of the Rule 611 compliance program to identify the problems noted above.
Therefore, from at least September 2014 through at least July 2023, BofAS violated Rule 611(a)(1), (a)(2), and (c) and FINRA Rules 6380A(a)(5)(I) and (J) and the Exchange Act of 2010.
From at least September 2014 through at least July 2023, BofaS’s supervisory system was not reasonably designed to achieve compliance with Exchange Act Rule 611 because the firm’s supervisory process did not include a system or written procedures designed to identify and review potential trades reported with an ISO Exemption modifier Outbound without concurrent ISO routing.
In addition, the company’s WSPs did not include specific guidance for supervisors on how to review the validity of Exchange Act Rule 611 exemption modifiers applied to transactions.
From at least January 2015 through July 2023, BofAS’s surveillance system and WSPs were not reasonably designed to detect and review trades generated by the firm’s electronic order management system that only ingested and processed market data from national exchanges for the top eight price levels for NMS shares.
From at least November 2019 through June 2020, BofAS’s supervisory system and WSPs were not reasonably designed to detect and control manually executed trades by the firm’s trading staff at one of its trading desks.
From at least January 2021 to at least August 2022, BofaS’s supervisory system and WSPs were not reasonably designed to review ISO rejection messages sent by national exchanges following BofaS’s ISO routing and potential trades that may have occurred as a result of those rejections.
Therefore, from at least September 2014 through at least July 2023, BofaS violated FINRA Rules 3110(a), 3110(b), and 2010 and NASD Rule 3010.
In addition to the $155,000 fine, the company agreed to a censure.