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2018 EXAMINATION FINDINGS REPORT

December 7, 2018

Customer Confirmations

Customer confirmations help protect investors by allowing them to verify the terms of their transactions, alerting them to potential conflicts of interest, safeguarding against fraud and providing them with information to evaluate the costs of their transactions and the quality of their broker-dealer’s execution. In particular, FINRA observed that some firms did not maintain adequate supervisory programs relating to confirmations or comply with certain confirmation disclosure requirements under Exchange Act Rule 10b-10 and FINRA Rule 2232 (Customer Confirmations) for transactions with customers in equity securities.

  • Inaccurate Disclosure of Capacity – Some firms inaccurately disclosed their trading capacity (such as agent, dual agent, principal or riskless principal, as necessary), including whether they served in multiple capacities.
  • Mislabeled Disclosure of Compensation – In some instances, firms mislabeled their compensation because they did not list it as commission, mark-up or mark-down, or commission equivalent, as appropriate.
  • Incorrect Disclosure of Average Price – Some firms did not disclose the average price for customer orders executed at multiple prices or incorrectly included the average price language when filling an order with a single execution.
  • No Disclosure of Market Maker Status – In some cases, firms did not disclose that they were a market maker when they filled orders from a market making account.
  • Inadequate Supervision – Many of the deficiencies described above were the result of programming errors that produced numerous inaccurate or incomplete customer confirmations over a number of years. In particular, some firms failed to monitor or review confirmations generated on their behalf by clearing firms or other vendors, and did not use available internal and external supervisory resources, including internal records, compliance tools and third-party reports.