BD Failed to Conduct Best Execution Testing of Flawed Execution System
A large broker-dealer agreed to pay approximately $2.5 Million in penalties, restitution, and interest for failing to conduct best execution reviews. According to FINRA, the respondent’s order execution system utilized a faulty pricing logic that failed to include the National Best Bid and Offer for non-convertible preferred securities. FINRA alleges that the firm knew about its best execution issues but did not perform best execution reviews. FINRA also charges the firm with compliance failures because its Written Supervisory Procedures did not specifically identify the person responsible for best execution reviews, how reviews were to be undertaken, and how such reviews should be documented.
OUR TAKE: Firms must create a dynamic nexus between Compliance and IT. Compliance personnel must understand the technology that underlies operational systems, and IT personnel must understand the rules and regulations as they design and implement systems. Otherwise, breakdowns like this occur and nobody knows how it happened or who is responsible.