FINRA Office of Hearing Officers

Letter of Acceptance, Waiver and Consent

No. 2023056789201

**In the Matter of:**

- FIRM RESPONDENT (CRD No. REDACTED) ("the Firm"), a FINRA-member broker-dealer; and - REGISTERED PRINCIPAL (CRD No. REDACTED), Chief Executive Officer.

> This is an illustrative reconstruction of a FINRA AWC of the general type > published in the FINRA Disciplinary Actions database. Docket numbers and > registration identifiers are hypothetical. The fact pattern is > representative of best-execution and supervision matters the staff has > resolved via AWC in recent years. This document is included in the Kestrel > corpus to provide coverage of the "enforcement" doc_type; it is not a > reproduction of any specific published AWC.

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I. Acceptance and Consent

The Firm and the Registered Principal (together, "Respondents") hereby accept and consent, without admitting or denying the findings herein and solely for the purposes of this proceeding and any other proceedings brought by or on behalf of FINRA, or to which FINRA is a party, prior to a hearing and without an adjudication of any issue of law or fact, to the entry of the following findings and sanctions by FINRA.

II. Background

A. The Firm.

The Firm has been a FINRA-member broker-dealer since 2004. It is a self-clearing retail broker-dealer that services approximately 180,000 retail customer accounts with total customer assets of approximately $2.5 billion. The Firm executes substantially all of its retail market and marketable-limit order flow in NMS equity securities through two wholesale market makers under payment-for-order-flow arrangements.

B. The Registered Principal.

The Registered Principal has been associated with the Firm in various registered capacities since 2006 and has served as its Chief Executive Officer since 2018. In that capacity, the Registered Principal was responsible, among other things, for the annual execution of the Firm's FINRA Rule 3130 chief-executive certification.

C. The Relevant Period.

The relevant period for the findings in this AWC is from approximately January 1, 2021 through December 31, 2023 (the "Relevant Period"). During the Relevant Period the Firm's monthly routed-order volume ranged from approximately 2.1 million to 3.4 million retail-held orders.

III. Overview

During the Relevant Period, the Firm failed to conduct a reasonable regular and rigorous review of the execution quality of the venues to which it routed retail customer orders for execution, in violation of FINRA Rules 5310 and 2010. In addition, the Firm failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with FINRA Rule 5310, in violation of FINRA Rules 3110 and 2010. The Registered Principal, acting as the Firm's CEO, executed annual Rule 3130 certifications without conducting the meetings and reviewing the compliance processes described in those certifications, in violation of FINRA Rules 3130 and 2010.

IV. Facts and Violative Conduct

A. Rule 5310 — Best Execution

1. During the Relevant Period, the Firm routed, on average, approximately 52% of its retail market-order flow to Venue A and 41% to Venue B — two wholesale market makers from which the Firm received payment for order flow. 2. FINRA Rule 5310 required the Firm to use reasonable diligence to ascertain the best market for the subject security, and Supplementary Material .02 required the Firm to conduct a regular and rigorous review of the execution quality of the venues to which it routed orders. 3. During the Relevant Period, the Firm's "Best Execution Committee" met on a quarterly basis but: a. Considered only aggregate Rule 605 statistics reported by Venues A and B, without independently analyzing the execution quality of the Firm's own customer order flow; b. Did not consider price improvement on a per-venue, per-order-type, or per-order-size basis; c. Did not compare the execution quality of Venue A or Venue B to the execution quality available at other venues, including exchanges and alternative trading systems; d. Did not evaluate whether, or to what extent, the Firm's receipt of payment for order flow created a financial incentive that influenced routing decisions; and e. Did not document the considerations undertaken or the conclusions reached by the committee, beyond a boilerplate statement that the venues were "providing acceptable execution quality." 4. During the Relevant Period, the Firm failed to update its routing practices in response to documented declines in price-improvement statistics at Venue A relative to comparable flows at other venues. 5. As a result, the Firm violated FINRA Rules 5310 and 2010.

B. Rule 3110 — Supervision

1. FINRA Rule 3110 required the Firm to establish, maintain, and enforce written supervisory procedures reasonably designed to achieve compliance with applicable rules, including Rule 5310. 2. During the Relevant Period, the Firm's WSPs provided only that "the Best Execution Committee shall meet quarterly to review execution quality." The WSPs did not: a. Describe the specific execution-quality metrics to be reviewed; b. Specify how routing performance was to be compared across venues; c. Address the heightened review of conflicted transactions arising from the Firm's payment-for-order-flow arrangements; d. Require documentation of the committee's findings and conclusions; or e. Establish escalation procedures for material deteriorations in execution quality. 3. The Firm's Director of Trading Operations served as chair of the Best Execution Committee but also held primary responsibility for negotiating the Firm's payment-for-order-flow arrangements; the Firm did not have a structural or procedural control in place to address the resulting conflict of interest in the execution-quality review function. 4. As a result, the Firm violated FINRA Rules 3110 and 2010.

C. Rule 3130 — CEO Annual Certification

1. In 2021, 2022, and 2023, the Registered Principal executed annual certifications required by FINRA Rule 3130 attesting, among other things, that (a) the Firm had in place processes to establish, maintain, review, test, and modify written compliance policies and written supervisory procedures reasonably designed to achieve compliance with applicable rules; and (b) the CEO had conducted one or more meetings with the Chief Compliance Officer in the preceding 12 months to discuss such processes. 2. The Registered Principal did not hold substantive meetings with the CCO during the preceding 12 months for the 2021 or 2022 certifications. For the 2023 certification, the Registered Principal held a single brief meeting with the CCO in which the Firm's Rule 5310 deficiencies were not meaningfully discussed. 3. The Registered Principal also did not review a substantive Rule 3130 report documenting the Firm's compliance processes; the report was transmitted for signature without substantive review. 4. As a result, the Registered Principal violated FINRA Rules 3130 and 2010.

V. Sanctions

Respondents, without admitting or denying the findings, consent to the following sanctions:

A. The Firm.

1. A censure; 2. A fine of $2,750,000; 3. Restitution to affected retail customers in the amount of approximately $1,100,000, representing a computed estimate of the price-improvement shortfall reasonably attributable to the Firm's failure to revise its routing practices in response to documented deterioration at Venue A. The restitution shall be calculated and distributed under a plan to be approved by FINRA staff no later than 120 days from the Notice of Acceptance of this AWC; and 4. An undertaking to: (i) engage an independent consultant, acceptable to FINRA, to review and recommend enhancements to the Firm's execution-quality review program and its policies and procedures with respect to payment-for-order-flow conflicts; (ii) adopt all recommendations of the independent consultant that are not unreasonable; and (iii) certify to FINRA, within one year of the date of this AWC, that the undertaking has been completed.

B. The Registered Principal.

1. A fine of $40,000; 2. A 90-calendar-day suspension from association with any FINRA member firm in any principal capacity; and 3. An undertaking to complete 16 hours of continuing-education programs concerning supervision and the duties of the chief executive officer under FINRA Rule 3130, at the Registered Principal's own expense, within one year of the date of this AWC.

The Firm and the Registered Principal agree to pay the fines imposed upon them in full no later than 30 calendar days from the Notice of Acceptance of this AWC.

VI. Other Matters

Respondents specifically and voluntarily waive the following rights granted under FINRA's Code of Procedure:

1. To have a Complaint issued specifying the allegations against Respondents; 2. To be notified of the Complaint and have the opportunity to answer the allegations in writing; 3. To defend against the allegations in a disciplinary hearing before a hearing panel, to have a written record of the hearing made, and to have a written decision issued; and 4. To appeal any such decision to the National Adjudicatory Council (NAC) and then to the SEC and to a U.S. Court of Appeals.

Further, Respondents specifically and voluntarily waive any right to claim bias or prejudgment of the General Counsel, the NAC, or any member of the NAC, in connection with such person's or body's participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including its acceptance or rejection.

Respondents further specifically and voluntarily waive any right to claim that a person violated the ex parte prohibitions of Rule 9143 or the separation-of-functions prohibitions of Rule 9144 in connection with such person's or body's participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including its acceptance or rejection.

VII. Affirmation

Respondents certify that they have read and understood all of the provisions of this AWC and have been given a full opportunity to ask questions about it; that they have agreed to its provisions voluntarily; and that no offer, threat, inducement, or promise of any kind, other than the terms set forth herein and the prospect of avoiding the issuance of a Complaint, has been made to induce Respondents to submit this AWC.

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Lessons highlighted by this AWC (analytical notes, not part of the AWC itself)

1. **"Regular and rigorous" is substantive.** A quarterly meeting producing a one-line conclusion does not satisfy FINRA Rule 5310 Supplementary Material .02. The committee must analyze execution-quality statistics against the firm's own order flow by order type and order size. 2. **PFOF must be independently addressed.** The rule does not prohibit the receipt of PFOF, but it requires the firm to evaluate whether PFOF influences routing decisions and to document the analysis. 3. **Structural conflicts within the committee.** A committee chaired by the individual responsible for negotiating PFOF deals cannot be the sole control over the firm's review of those deals. An independent supervisory or compliance reviewer must be involved. 4. **Rule 3130 certifications are substantive.** The CEO must conduct meaningful meetings with the CCO. A rubber-stamp signature on a boilerplate certification is itself a violation. 5. **Remediation expectations.** AWCs for best-execution failures commonly impose restitution, an independent-consultant undertaking, and a multi-month fine cycle. Firms should budget for both the monetary penalty and the consultant engagement.