Brokers charge Finra with becoming OATS mill

Smaller B-Ds complain that fines for innocent order errors are unfair

Apr 24, 2011 @ 12:01 am

By Dan Jamieson

Call this one a fine mess.

Brokers, many of whom need little provocation to bash Finra, are up in arms about what they say is an increasing number of fines — substantial ones, at that — for innocent trade-reporting errors. Indeed, some broker-dealers claim the violations are often due to the complexity of the trade-reporting rules themselves and the cumbersome system Finra uses to track orders.

A review of the Financial Industry Regulatory Authority Inc.'s monthly disciplinary releases revealed a welter of alleged violations involving Finra's Order Audit Trail System. Fines of $10,000 or $20,000 are common for what look to be clerical errors, which generally do not involve investor restitution.

In fact, an InvestmentNews review of disciplinary actions announced by Finra from January 2010 through this month showed that about a quarter or more of all broker-dealer cases involve OATS violations. Granted, the InvestmentNews analysis included any case announcement mentioning OATS. Some of the cases involve wider-ranging trading problems than merely an error in an order report. But clearly, trade-reporting problems dominate the list of infractions.

Finra spokeswoman Nancy Condon disputed InvestmentNews' numbers. According to Ms. Condon, OATS cases have made up 7.5% of disciplinary actions — not a quarter —and just 3% of fines since 2010. She added that cases with fines under $10,000 are not publicly released.

Industry participants said it's easy to figure out why actions involving trade-reporting problems are so common.

“[Finra] can bring a fair number of the trade-reporting-violation cases because they're easy to do,” said Joel Beck, founder of The Beck Law Firm LLC and a former Finra attorney.

“Often the violations are cut and dried, and it's difficult for a firm to argue that they fully complied with the rule,” he said. “The rules are very technical, and there are a lot of areas where mistakes can be made.”

“The OATS program is one of the most complex programs Finra has,” said David Sobel, general counsel at Abel/Noser Corp., which evaluates execution quality for institutional investors. He also is chairman of the National Association of Independent Broker/Dealers Inc. and a member of Finra's Small Firm Advisory Board.

The SFAB has raised the reporting issue with Finra officials, Mr. Sobel added.

He and other critics believe OATS fines have become a money generator. The fines have been “a cash cow” for Finra, Mr. Sobel said.

Others dismiss that idea as nothing more than a conspiracy theory. They note that the amount of money Finra receives in fines is small relative to its overall budget. Moreover, Finra restricts how it uses revenue from fines.

Regardless, many B-Ds wonder why they're being fined for errors that they contend don't have the potential to harm customers.

“The fundamental issue is, what was the harm?” said Robert Muh, chief executive at Sutter Securities Inc.


OATS requires firms to report detailed information about customer orders for stocks so that the receipt of the order and its terms, modifications and execution can be tracked.

The system dates from 1996, when the Securities and Exchange Commission ordered Finra, then known as NASD, to implement an audit trail in the wake of the Nasdaq price collusion scandal. Many OATS-related violations today are for “syntax errors” that prevent orders from matching up, or for failures to report trade orders on time.

“Maybe your ID number didn't match the executing broker's ID on the same order, but if there's a mismatch, you can't correct it,” Mr. Sobel said.

Those types of problems “should not go to enforcement — they should go to the IT department to fix,” he said.

What's more, Mr. Muh said, small firms can get into trouble when their clearing firms make mistakes.

Large firms get hit with trade-reporting violations, as well.

One of the largest OATS settlements was made by Citigroup Global Markets Inc. in 2009 for $2 million over violations dating back a number of years. Last December, the firm was fined another $400,000 and was required to pay $10,000 plus interest and restitution over faulty reporting of stock and bond trades.

Some smaller players, however, feel the $10,000 or $20,000 fines they are required to pay are disproportionately large.

Either way, Mr. Muh said, the number of violations indicates that the reporting system “itself needs to be reviewed.”

That might happen. In fact, the OATS system could be expanded.

In response to the May 6 flash crash, the SEC proposed a new audit trail system that would consolidate data from all markets in real time. Finra is pushing the expansion of OATS as a solution. The regulator wants to broaden the system to include all stocks beyond the Nasdaq and OTC issues that OATS now covers, and has told the SEC it wants to update the system as part of that effort.

That worries many industry participants, some of whom said they have their hands full dealing with the current order-reporting system.

“Finra is totally abusing [OATS] by fining people,” said an official at one small brokerage firm, who asked not to be identified, as his firm is currently fighting Finra over a trade-reporting case.

“Small firms don't have money to pay lawyers,” the source said. “So nobody challenges them.”

E-mail Dan Jamieson at


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