Broker-dealer Wedbush Securities received the second part of a regulatory one-two punch as the Financial Industry Regulatory Authority (FINRA) filed a complaint against the Los Angeles firm for systematic supervisory and anti-money laundering violations related to providing sponsored and direct market access to broker-dealers and non-registered market participants.
The industry regulator alleges the Wedbush did not have the proper amount of risk management and supervisory systems in place, which allowed clients “to flood U.S. exchanges with thousands of potentially manipulative wash trades and other potentially manipulative trades, including manipulative trades including manipulative layering and spoofing” from January 2008 to August 2013.
FINRA further alleges that Wedbush’s regulatory risk management controls and supervisory procedures were not designed to manage such risk as well as claiming that Wedbush compensated its compliance personnel based on market access customer trading volume.
The complaint is the first step in FINRA’s regulatory process, in which firms named in a complaint may file a response letter and request a hearing before the regulator’s disciplinary panel.
If the charges are proven, FINRA could fine, censure and suspend or bar Wedbush from the securities industry as well as require a payment of restitution of the disgorgement of grains associated with those trades.
In June, the US Securities and Exchange Commission (SEC) announced charges against Jeffrey Bell, former executive vice president of Wedbush’s market access business, and Christina Fillhart, senior vice president within Wedbush’s market access business, for having inadequate risk controls before providing market access to clients from July 2011 to August 2013.
According to the SEC’s enforcement, Bell was aware that Wedbush’s systems did not meet the requirements of SEC Rule 15c3-5, which requires pre-trade risk checks for clients using sponsored access or direct market access. The regulator also accuses that Fillhart, despite inquiries by exchange operators of potential violation by Wedbush clients, did not take the proper steps to design and adopt a reasonable risk management system.
The Wedbush officials acknowledged in June that there were some disputes concerning certain former correspondent firms that had market access between 2011 and the start of 2013 through Wedbush Securities’ Advanced Clearing Services, but since had their accounts terminated.
They also argued that the firm’s risk management controls and procedures, which were developed with guidance from the SEC, meets the rule requirements and that the regulator “seeks to impose additional regulatory requirements retroactively.”
Wedbush Securities did not respond to requests for comment.