HSBC USA Fined for Violating Regulation NMS by FINRA

As part of a settlement with the Financial Industry Regulatory Authority (FINRA), HSBC Securities (USA) Inc has agreed to pay a modest fee.

Between July 2017 and September 2020, HSBC failed to take reasonable measures to ensure that intermarket sweep orders it routed to certain market centers met the requirements of Regulation National Market System (NMS) of the Securities Exchange Act of 1934's Rules 600(b)(30) and 600(b)(312), in violation of Regulation NMS Rule 611(c) and FINRA Rule 2010. HSBC also violated FINRA Rules 3110 and 2010 by failing to develop and maintain a supervisory system, including written supervisory procedures, reasonably tailored to ensure compliance with Rule 611(c).

HSBC failed to recognize these problems and failed to conduct a review to ensure that all relevant ISOs were routed to execute against protected quotations. As a result, HSBC failed to take reasonable precautions to ensure that the ISOs it routed complied with Rules 600(b)(30) and 600(b)(31) (31). In September 2020, the firm's vendor fixed the technical concerns with its smart order router system.

HSBC exclusively sent ISOs to executing brokers prior to July 2017. HSBC did not update its supervisory systems to incorporate an assessment of ISOs for Rule 611 compliance when it began routing ISOs directly to exchanges. HSBC's supervisory system, including written procedures, was not properly structured to achieve Rule 611 (c) compliance between July 2017 and September 2020.

HSBC failed to discover and repair three technical faults with its vendor's smart order router, causing the firm to route ISOs that were priced through market centers' protected quotations, due to these supervisory deficiencies. These issues have since been resolved by HSBC.