Broker-Dealers Fined $4.65 Mil for Inadequate EBS Reporting Processes

On September 16, 2019, the Securities and Exchange Commission announced it had levied fines against two broker-dealers for providing incomplete and inaccurate securities trading information known as “blue sheet data.” The SEC often submits data requests as part of its ongoing efforts to spot potential insider trading activity. Blue sheet data also can be used to help determine why specific securities experience an unusual spike in volatility.

Broker-Dealers Fined $4.65 Mil for Inadequate EBS Reporting Processes

The term “blue sheet data” is a holdover from days gone by when the SEC would submit its requests for trading information from broker-dealers on blue forms which would be completed and sent by return mail. Firms now use Electronic Blue Sheets (EBS) to transmit data to the SEC on the names of securities, the dates of transactions, the prices of the securities traded, the size of trading volume, and the names of the parties participating in trades.

The SEC’s report said Stifel, Nicolaus & Co., Inc. has agreed to pay $2.7 million and BMO Capital Markets Corp. has agreed to pay $1.95 million to settle charges for reporting incomplete or inaccurate trading data.

The SEC found that neither firm had adequate processes designed to validate the accuracy of its submissions and each willfully violated the broker-dealer books and records and reporting provisions of the federal securities laws.

Expensive Coding Errors

Much of the inaccurate data provided by both firms was attributed to undetected coding errors over periods of several years. The absence of reliable policies and procedures led the firms to submit missing or inaccurate data for more than 15 million transactions.

The SEC’s action against both firms is not unusual. Citigroup paid $7 million in 2016 and Credit Suisse Securities paid $4.25 million in 2015 to settle similar charges.

The SEC levies heavy fines for insufficient EBS reporting data because firms that do not provide accurate and complete information in response to its routine requests undermine the Commission’s efforts to detect wrongdoing and protect Main Street investors.

Stifel and BMO have since retained outside compliance consultants and adopted new policies and procedures for processing blue sheet requests. Stifel specifically increased compliance staff and remedial expertise, enhanced EBS submission review procedures, and controls, and increased budgets for EBS compliance. Stifel also has eliminated its use of trade compression, a process by which data relating to multiple transactions executed during the same day for the same security, size, and price, is compressed into a single transaction for reporting purposes.

Preventative Measures

The actions taken by Stifel are best used for prevention and not to solve problems after the fact. CCLS has experts in house who can review processes and procedures, identify any deficiencies, and make corrective changes. Contact us here.