Instinet, a brokerage firm subsidiary of Nomura Group, agreed to pay $3.8 million as part of a settlement with the Financial Industry Regulatory Authority (FINRA) regarding “tens of billions” of inaccurate or late reports filed to the consolidated audit trail (CAT) central repository.
Obligations for large industry members that originated or received an order involving national market system or over-the-counter equity securities to report related data to the CAT central repository were put in place in June 2020. Instinet did not meet that compliance deadline, causing it to late report billions of events and lending to more than 150 other types of reporting errors, according to FINRA’s disciplinary action published Wednesday.
The details: In early June 2020, Instinet notified FINRA it anticipated it would experience CAT reporting issues, according to the self-regulatory organization. The firm had retained a third party to act as its CAT reporting agent but failed in the establishment of its technical specifications for its order data, thus hindering the third party’s ability to convert the data.
In less than five months from the start of its CAT reporting obligations, Instinet failed to timely report more than 5.2 billion equities and options order events, FINRA said. The firm did not complete its reporting of these late events until March 2021. At least 26 billion other late events were reported from November 2020 through December 2022, FINRA said, with the third party’s insufficient capacity to handle order volume among issues at fault.
“By January 2023, Instinet identified approximately 180 different types of CAT reporting errors, including inaccurate share quantity, handling instructions, department type codes, customer display instruction flags, and event timestamps,” FINRA said. These errors contributed to the inaccurate reporting of 32 billion order events related to special handling codes to the CAT central repository from June 2020 to October 2021, per the settlement.
Compliance considerations: Instinet was faulted for failing to reasonably design and supervise its written procedures for CAT reporting. The firm did not conduct a review regarding the accuracy of its CAT data until the third quarter of 2021, FINRA noted.
In addition to paying a penalty, Instinet consented to the retention of an independent consultant to conduct a review of its CAT reporting procedures.
Nomura declined to comment. Instinet settled with FINRA without admitting or denying the organization’s findings.
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