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FINRA Fines Deutsche Bank Over Blue Sheets Lapses

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  • Posted on: Jul 18 2016

What are the consequences of submitting inaccurate trade data to the SEC and FINRA?

Investment banks and securities firms are well aware of their responsibilities to adhere to the rules promulgated by the Securities Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) regarding trade data, also referred to as “blue sheets.” The federal securities laws and FINRA rules require firms to provide blue sheet information to FINRA and other regulators electronically upon request. This data provides regulators with detailed information about securities transactions, including the security, trade date, price, share quantity, customer name, and whether it was a buy, sale or short sale.  Regulators use blue sheet information to ferret out fraudulent activity, market manipulation and insider trading.

Last month, FINRA fined Deutsche Bank Securities Inc., an indirect wholly-owned subsidiary of Deutsche Bank AG (“Deutsche Bank”), $6 million for failing to provide complete and accurate trade data in a timely manner when requested by FINRA and the SEC.  In addition to the fine, Deutsche Bank must retain an independent consultant to review all of the firm’s policies, systems, procedures and training related to its blue sheets, and to implement any changes that may be necessary to improve its trade data submissions.

Deutsche Bank allegedly submitted thousands of inaccurate and late blue sheets to the SEC and FINRA over a seven-year period. While Deutsche Bank neither admitted nor denied any wrongdoing – as is often the case in these settlements, the fine is the largest imposed by FINRA in connection with trade sheet lapses.

“Incomplete and inaccurate blue sheet data compromises our ability to identify individuals engaging in insider trading schemes and other fraudulent activity,” Cameron Funkhouser, the executive vice president and head of FINRA’s Office of Fraud Detection and Market Intelligence, said in a statement.

FINRA alleged that Deutsche Bank submitted thousands of inaccurate blue sheets between 2008 and 2015 and misreported over a million transactions. The inaccuracies ranged from incorrect broker codes and missing trading party identifications to duplicated, omitted or incorrectly reported transactions. Moreover, 40 percent of the blue sheets that Deutsche Bank submitted between January and August 2014 were late.

The inaccuracies were said to be caused by systems failures, programming errors, and Deutsche Bank’s  failure to implement required enhancements. The firm also allegedly failed to adequately supervise its blue sheets system, and did not implement an audit system to ensure the trade date was accurate.

“Firms must invest the resources necessary to ensure that they are providing complete and accurate blue sheet data whenever requested — without exception,” said Funkhouser.

The takeaway is that blue sheet submissions appear to be the subject of enhanced regulatory scrutiny as this fine comes in the wake of a $2.95 fine FINRA imposed on Macquarie Capital (USA) late last year. The best way to avoid a regulatory enforcement action is by implementing sound compliance policies and procedures with the help of a an experienced attorney.

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