US regulators are on a mission to make financial services firms take their recordkeeping obligations seriously on all fronts, and the latest actions showcase a concern for the completeness and accuracy of routine records.

On Friday, the SEC announced settled charges and a $6m penalty against Goldman Sachs & Co, LLC for providing incomplete and inaccurate trading information to the regulator. FINRA reached a separate settlement with the firm for related conduct, also levying a $6m penalty.

That same day, the SEC fined Citadel Securities LLC $7m for not accurately marking whether transactions were long or short. Citadel’s alleged failures resulted from a coding error and compromised the accuracy of records over a five-year period, according to the regulator.

Goldman Sachs

According to the SEC’s order, over a period of approximately 10 years, Goldman made more than 22,000 deficient blue sheet submissions to the regulator. As a result of 43 different types of errors, these submissions contained missing or inaccurate trade data for at least 163 million transactions.

The SEC also alleged that Goldman lacked adequate processes to verify the accuracy of its electronic blue sheet submissions.

“Blue sheet data is vital to the Commission’s ability to carry out its enforcement and regulatory functions and to protect investors and maintain market integrity.”

Thomas P. Smith Jr., Associate Regional Director in the New York Regional Office

“Firms must provide complete and accurate blue sheet data in response to our requests,” said Thomas P. Smith Jr., Associate Regional Director in the New York Regional Office. “Blue sheet data is vital to the Commission’s ability to carry out its enforcement and regulatory functions and to protect investors and maintain market integrity.”

The SEC said Goldman contravened the broker-dealer recordkeeping and reporting provisions of the federal securities laws; namely, Section 17(a)(1) of the Exchange Act and Rules 17a-4(j) and 17a-25 within it.

The SEC credited Goldman for its remedial efforts to correct and improve its blue sheet reporting systems and controls, including conducting a full-scale review of its reporting program that resulted in the self-reporting of 29 of the 43 types of errors underlying the order along with significant supervisory control enhancements.

Citadel Securities

The SEC said in its settlement order that the broker-dealer violated a provision of Regulation SHO, which requires broker-dealers to mark sale orders as long, short, or short exempt in an attempt to prevent abusive short selling practices.

According to the SEC’s order, for a five-year period, it is estimated that Citadel Securities incorrectly marked millions of orders, inaccurately denoting that certain short sales were long sales and vice versa.

“This action against Citadel Securities demonstrates that a broker-dealer’s failure to comply with the requirements of Reg SHO can have negative downstream consequences on the accuracy of the firm’s electronic records.”

Mark Cave, Associate Director of the SEC’s Division of Enforcement

The SEC’s order finds that the inaccurate marks resulted from a coding error in Citadel’s automated trading system and that the firm provided the inaccurate data to regulators, including the SEC, during this period.

“This action against Citadel Securities demonstrates that a broker-dealer’s failure to comply with the requirements of Reg SHO can have negative downstream consequences on the accuracy of the firm’s electronic records … depriving the Commission of important information about the markets it regulates,” said Mark Cave, Associate Director of the SEC’s Division of Enforcement.

Along with the fine, Citadel agreed to a set of undertakings, including a written certification by the chief compliance officer that the coding error has been remediated and a review of the firm’s computer programming and coding logic involved in processing relevant transactions. The agency credited Citadel for its remedial efforts and cooperation during its investigation.

In response to its settlement with the regulator, Citadel said the errors affected a small percentage of orders and “had no impact on the quality of our client execution.”

Interesting points

The most interesting aspect of the two cases is the regulator’s continued vigilance in the area of good recordkeeping and its enforcement staff’s continued reminders about why it matters: preserved records provide the regulator with the information it needs to perform its core job of protecting investors and ensuring market integrity.

In keeping with the above, the SEC noted Goldman’s self-reporting and its significant remedial efforts – but still brought a fine, alongside FINRA’s own penalty.

And, with Citadel, the SEC acknowledged that the mismarked orders only represented a small fraction of the orders the firm placed in the market prior to correction and said the delay did not benefit Citadel or its trading strategies. But the shortcoming nevertheless resulted in both enforcement action and fine.

The certification requirement in the Citadel matter is also interesting, with the CCO being the one executive charged with signing off on it.

Both companies are large ones with an impactful presence in the US markets (The SEC mentions that Citadel executes about 35% of all US-listed retail volume and 22% of US equities volume) and so it is clear why the securities regulator needs them to be as accurate as possible about the many transactions each performs when it comes to the integrity of the market.