Targeted Examination Letter on Order Protection Disclosure Practices

October 2012

The Trading and Market Making Surveillance Examinations ("TMMS") group of the Market Regulation Department at the Financial Industry Regulatory Authority ("FINRA") is conducting a review for compliance with the requirements of FINRA Rule 5320 ("Rule 5320"). In connection with this matter TMMS requests the following information.

  1. Indicate how the Firm ensures it has established and maintains an effective system of controls and supervisory procedures in connection with Rule 5320. Provide any and all Written Supervisory Procedures ("WSPs") relating to the rule.
  2. Describe the methodology in place governing the execution and priority of all pending orders. Please make sure your response includes the following:
    1. A detailed description of the Firm's policies and procedures for providing fills (i.e., the execution methodology) to orders at the same price or otherwise triggered under FINRA Rule 5320, when the Firm trades for its own account at price equal to or better customer orders.
  3. Provide a copy of the notice given to customers at account opening and annually which outlines the protections afforded to them under Rule 5320. Additionally, provide the following:
    1. The disclosure provided to customers concerning the Firm's ability to trade proprietarily at its Market Making Desk at prices that would satisfy customer orders.
    2. The disclosure which provides customers with a meaningful opportunity to opt in to the Rule 5320 protections prohibiting the Firm from trading ahead of or alongside all or any portion of its order.
  4. Detail all safeguards afforded by the Firm for customers who opt into the protections of Rule 5320.
  5. State whether the Firm provides oral disclosures and receives consent from customers on an order-by-order basis, in lieu of providing a written disclosure. If so, provide any documentation concerning oral disclosures provided by the Firm for June 2012.
    1. Provide a list of customers that have requested the Firm receive order-by-order consent and a description of how the firm assures it is complying with the customer's instructions.
  6. Describe the Firm's system of internal controls that operate to prevent one trading unit from obtaining knowledge of customer orders held by a separate trading unit.
    1. Describe how the Firm tests its internal controls and provide evidence of such testing from June 2012.
  7. Provide the WSPs for the Firm's riskless principal trading exception to Rule 5320. In addition, provide the following:
    1. Describe the system(s) in place that produce records for riskless principal trades.
  8. Provide a description of the Firm's surveillance / supervision which ensures compliance with Rule 5320. Additionally, provide the following:
    1. A list of any and all exception reports that the Firm has in place to monitor compliance with Rule 5320.
  9. Discuss, in detail, any and all Rule 5320 breaches that the Firm identified for the period of December 2011 through June 2012. Include the following:
    1. All disciplinary actions taken by the Firm in connection with each breach;
    2. All systematic and procedural changes made due to the breaches;