Violation of the Reporting Rules

The consequence rules are short, and every word in them is worth reading. The verb is permissive, the reach includes associated persons, and the closing sentence of the timely reporting rules is not limited to a pattern.

What Happens When a Participant Breaks a System Rule?

Each of the four facilities closes its series with the same sentence. Failure of a participant, or of a person associated with a participant, to comply with any of the rules or requirements of the system may be considered conduct inconsistent with high standards of commercial honor and just and equitable principles of trade, in violation of the standards of commercial honor rule.

Two features of that sentence get tested:

• The verb is may, not shall. The conduct is capable of being treated as a violation rather than automatically being one.
• The reach includes a person associated with a participant, not the participant firm alone.

Exam Tip: Gotchas

• The violation sentence reaches any rule or requirement of the system. It is not limited to late reporting, so an input or participation failure falls inside it as well.
• An associated person is named in the rule itself. The consequence does not stop at the participant firm.

What Does a Single Late Report Cost?

Under the timely transaction reporting rules, all reportable transactions not reported within the required time period shall be marked late, and FINRA routinely monitors members' compliance with the reporting requirements.

That marking is automatic and is not itself the finding of a violation. The four reporting rules say the same thing in their own words: transactions not reported within 10 seconds after execution, or such other time period prescribed by rule, shall be designated as late.

Exam Tip: Gotchas

• Marking a report late is a status, not a sanction. The rule directs that the transaction be marked, and the consequence analysis happens separately.

When Does Late Reporting Become a Pattern or Practice?

If FINRA finds a pattern or practice of unexcused late reporting, the member may be found to be in violation of the standards of commercial honor rule.

The rule defines that phrase for you. A pattern or practice of unexcused late reporting is repeated reports of executions submitted after the required time period without reasonable justification or exceptional circumstances.

The same conclusion appears inside each of the four reporting rules, worded as a pattern or practice of late reporting without reasonable justification or exceptional circumstances.

Exam Tip: Gotchas

• Three elements have to be present, not one. The reports must be repeated, they must be after the required time period, and they must lack reasonable justification or exceptional circumstances.
• The finding is still permissive. The member may be found in violation, so a pattern does not convert automatically into a sanction.

Which Circumstances Can Excuse a Late Report?

Exceptional circumstances will be determined on a case-by-case basis and may include instances of system failure by a member or service bureau, or unusual market conditions, such as extreme volatility in a security, or in the market as a whole.

That list is open, because the rule says exceptional circumstances may include those examples rather than defining them as the whole set.

Reasonable justification is treated in the reporting rules' own Supplementary Material. For the very small universe of trades reported manually, where the member does not purposely withhold, in deciding whether it exists to excuse what might otherwise be a pattern or practice, FINRA will take into consideration such factors as the complexity and manual nature of the execution and reporting of the trade, where the trade details must be manually entered into the trade reporting system following execution.

Exam Tip: Gotchas

• The exceptional circumstances list is illustrative and decided case by case. A circumstance outside the two named examples is not automatically excluded.
• Reasonable justification and exceptional circumstances are two separate escapes. The rule joins them with "or", so a member needs only one of them.

What Does the Closing Sentence Add?

Each timely reporting rule ends with a statement that is not limited to a pattern or practice: timely reporting of all transactions is necessary and appropriate for the fair and orderly operation of the marketplace, and FINRA will view noncompliance as a rule violation.

Read against the pattern-or-practice sentence above it, that closing line matters. The pattern-or-practice analysis is how repeated lateness is judged, while this sentence states FINRA's view of noncompliance itself.

Exam Tip: Gotchas

• The closing sentence has no pattern requirement in it. It speaks to timely reporting of all transactions and states that FINRA will view noncompliance as a rule violation.
• The two sentences are not the same test. One asks whether repeated lateness lacked justification, and the other states a general view of noncompliance.

What Should You Check on Exam Day?

• Read the verb in the violation sentence; it says the conduct may be considered inconsistent with high standards of commercial honor.
• Check whether the fact pattern describes one late report or repeated late reports, because the pattern analysis needs repetition.
• Confirm the member had neither reasonable justification nor exceptional circumstances before treating repeated lateness as a pattern or practice of unexcused late reporting.
• Check whether an associated person, rather than the firm, is the actor; the violation sentence names both.
• Read the timely reporting rules to their last sentence, which is not limited to a pattern or practice.