Frequently Asked Questions about handling FINRA Disciplinary Action Notices; FINRA Report cards; and Terminology.

 

FREQUENTLY ASKED QUESTIONS
(Click On Any Question For An Answer)

Rule 8210 Letter

FINRA Report Cards

Terminology


FAQ’s FINRA Disciplinary Notices

Question: What to do when you receive an 8210 letter from FINRA requesting information or inspection of records?

Answer:

The unfortunate reality for most broker dealer firms is that the firm or one of its registered representative will at some point receive a letter asking for more information. Sometimes FINRA will call, other times they may just show up at the door.

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Question: Does FINRA have the right to inspect records and request information?

Answer:

Yes. FINRA Rule 8210 provides the self regulating authority FINRA permission to require a member provide; information orally, in writing (including electronically), and to testify at a location specified by FINRA staff, under oath if requested, regarding any matter that pertains to investigation, complaint, examination, or proceeding.
Additionally, FINRA member rules provide FINRA with the right to inspect and copy books, records, accounts, and other such detail as it pertains to an investigation, complaint, examination, or proceeding.
Suffice it to say that 8210 request letters are demands for information and should be treated as such. There is a huge cost to not responding including suspension until the information is provided, or barring from membership entirely.

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Question: What happens when a broker-dealer fails to respond to an 8210 letter or FINRA Request for information?

Answer:

FINRA rule 9552 applies in situations where a brokerage firm or representative has failed to provide information or keep information current. FINRA rule 9552 is a Notice of Suspension if Corrective Action is Not Taken. The 9552 notice provides the member or firm with 21 days to provide information, after which membership may be suspended and association with other members is barred.

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Question: What is a FINRA Report Card – Why did I receive a FINRA Report Card

Answer:

April 2016 FINRA began issuing “Equities Supervision Reports” as a means to assist member firms in spotting and preventing suspicious market activity. Reports issued April 28, 2016 are directed toward spoofing and layering activities. These reports are an evaluation of cross-market and trade platform transactions. FINRA recognizes that bad actors will attempt to mask their activity by use of multiple platforms making it near impossible for member firms to detect spoofing or layering themselves. Firms receiving this report should look at trade activity on the report to determine if cancelled offers were legitimate. The reports are not a formal request for FINRA investigation, however firms should take the reports seriously and review their trade policies for market fraud potential, as FINRA can make a formal request at any time.

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Question:What is Spoofing and Layering

Answer:

Layering, Spoofing, Pump-and-Dump Schemes are all illegal Stock Market Manipulation Schemes


Layering – is a high frequency trading strategy where a trader places incremental buy or sell orders of a stock in order to manipulate market prices.


For example – to manipulate a favorable buy price,
A trader places a large-sized sell order of a security at an above market bid price; then places several more large sell orders for the same security at incrementally higher prices in hopes of making market traders (who were ready to sell shares of the stock) think several shares are about flood the market causing the value to drop.


Those traders then place their own sell orders at a lower price to off-load what they are holding before the market price dips down. Once the sell price of the stock falls to where the buying trader wants it, they place their buy order – and cancel their outstanding sell orders (the ones they used to flood the market with). The scheme happens in less than a few seconds and is considered an illegal form of stock market manipulation under the Dodd-Frank Financial Reform Bill of 2010.

Spoofing (similar to layering) – is defined as bidding or offering with the intent to cancel the bid or offer before execution. Spoofers disrupt algorithmic trading platforms in futures, stocks, commodities, and other financial products. Anti-spoofing statute is part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act passed July 21, 2010

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