FINRA HIGHLIGHTS RED FLAGS AND CONTROLS TO PROTECT AGAINST UNAUTHORIZED TRADING
FINRA recently issued a podcast addressing practices to protect against “rogue” trading. The podcast expands on NtM 08-18: “Sound Practices for Preventing and Detecting Unauthorized Proprietary Trading.” In the podcast and Notice, FINRA offers several “red flags” for identifying unauthorized trading. These include repeated breaches of trading limits, unrealized profit/loss beyond permitted thresholds, unusual patterns of cancellations or corrections, late confirmations, aged unresolved items, requests to relax controls, and trades in products outside of a trader’s expertise. FINRA recommends enforcing 10-day mandatory vacation policies, applying the same controls to trades with affiliates as those with third parties, and limiting systems access.
OUR TAKE: In most enforcement actions involving unauthorized trading, firms knew about the trading but failed to take action. Firms should consider monitoring for the red flags. We also stress the importance of supervising trading with affiliates.