Two broker-dealers must pay a combined $4.65 million in penalties for providing incomplete and inaccurate securities trading information to the Securities and Exchange Commission. Prudent compliance officers at other broker-dealer firms might want to take a page from their remedial efforts.
On Sept. 16, the SEC announced Stifel, Nicolaus & Co. will pay $2.7 million and BMO Capital Markets will pay $1.95 million to settle charges for providing deficient “blue sheet data” to the SEC. Broker-dealers are required to provide blue sheet data to the SEC, which the agency then uses to carry out its enforcement and regulatory obligations, including investigations of insider trading and other fraudulent activity. The firms admitted the findings in the SEC’s cease and desist orders.
According to the SEC’s orders, over a period of several years, Stifel and BMO each made numerous deficient blue sheet submissions containing missing or inaccurate data, largely due to undetected coding errors. The SEC found Stifel failed to report data for approximately 9.8 million transactions and provided inaccurate information for approximately 1.4 million transactions.
Separately, the SEC found BMO submitted missing or incorrect data for approximately 5.4 million transactions. According to the SEC’s orders, neither firm had adequate processes designed to validate the accuracy of its submissions, and each willfully violated the broker-dealer books and records and reporting provisions of the federal securities laws.
“Firms that do not provide accurate and complete data in response to our requests undermine our efforts to detect wrongdoing and protect Main Street investors,” said Kelly Gibson, associate director of the SEC’s Philadelphia Regional Office. “We will continue to hold firms accountable for not taking these obligations seriously.”
The SEC’s orders found each firm has engaged in remedial efforts to address the causes for its deficient submissions, including the retention of an outside consultant and the adoption of new policies and procedures for processing blue sheet requests.
BMO, for example, retained an expert regulatory and technology consultant to conduct a comprehensive review of its EBS reporting process and to assist BMO in the identification and correction of the deficiencies in its EBS reporting. Further, BMO instituted new controls over its EBS reporting process intended to ensure the completeness and accuracy of its EBS submissions—such as implementing the consultant’s software to perform automated, pre-submission validations and a full reconciliation of EBS data with BMO CMC’s trade blotters and customer settlement data.
BMO also adopted new policies and procedures for processing EBS requests and submitting EBS data and created a new, dedicated regulatory services team to oversee EBS. BMO also implemented new risk-based EBS monitoring and testing procedures, including manual quarterly pre-submission validation and testing of trade data.
For its part, Stifel engaged in voluntary remedial efforts to correct and improve its EBS process and control environment, including but not limited to increased compliance staff and remedial expertise, enhanced EBS submission review procedures and controls, and increased budgets for EBS compliance. Specifically, prior to being contacted by the SEC staff, Stifel hired an expert regulatory and technology consultant to review all of its EBS submissions and, as a result, implemented modifications, both remedial and preventive—including removing trade compression—in an effort to eliminate any future errors.
Stifel also drafted and implemented new procedures for responding to EBS requests, including the use of additional software to review and validate all EBS before their submission in response to regulatory requests. In addition, Stifel staff conducts a manual review of all EBS submissions to ensure completeness and accuracy. Stifel is in the process of resubmitting corrected EBS submissions to the Commission and to the Financial Industry Regulatory Authority.