The US Financial
Industry Regulatory Authority (FINRA) has fined Deutsche Bank $12.5 million for “significant supervisory
failures related to research and trading-related information it disseminated to
its employees…over internal speakers commonly known as squawk boxes”.
FINRA says that despite
“multiple red flags” regarding the potential dissemination of confidential
information, Deutsche failed to establish adequate supervision over registered
representatives’ access to broadcasts – or ‘hoots’ – or their communications
with customers regarding hoots.
Although it has
settled the matter, Deutsche neither admitted nor denied the charges, but
consented to the entry of FINRA’s findings. It also agreed to provide a written
certification that it has adopted and implemented supervisory systems and
written procedures concerning hoots that are reasonably designed to achieve
compliance with FINRA rules and federal securities laws.
FINRA found that
Deutsche Bank was aware that hoots involving research and trading might contain
confidential, price-sensitive information, and that there was a risk that
material non-public information could be communicated over them. In trading
rooms the squawk box systems are used to share information among several desks,
for example many bank analysts use the system to provide internal analysis on
economic data releases.
There have been concerns
in the industry, however, over how the loudspeaker boxes are sometimes used to
transmit customer activities. While the sharing of information between two or
more distinct areas of a trading business may be acceptable, sources have in the
past expressed the worry to Profit &
Loss that other areas, with no “need to know”, can also hear what is being
In its findings
against Deutsche, FINRA says that “for several years” the firm repeatedly
ignored red flags indicating that its supervision was inadequate, including
internal audit findings and recommendations, multiple internal warnings from
members of the firm’s compliance department, and internal risk assessments.
“Despite these red
flags, the firm still failed to implement reasonable written policies,
procedures and systems governing who should have access to the hoot
information, how the employees should handle hoot information, and how
supervisors should supervise employees to ensure compliance, and protection of
confidential and material nonpublic information potentially communicated over
the hoots,” FINRA states.
Brad Bennett, FINRA’s
executive vice president and chief of enforcement, says, “Recognising and
responding to red flags is the hallmark of proper supervision, particularly in
areas involving confidential information. Deutsche Bank’s disregard of years of
red flags including internal audit findings, risk assessments and compliance
recommendations was particularly egregious given the risk that material non-public
information could be communicated over squawk boxes.”