Nasdaq : Notice of Acceptance of Letter of Acceptance, Waiver and Consent No. 2017054491009 (Wedbush Securities Inc.)

THE NASDAQ STOCK MARKET LLC

LETTER OF ACCEPTANCE, WAIVER AND CONSENT

NO. 2017054491009

TO: The Nasdaq Stock Market LLC

c/o Department of Enforcement

Financial Industry Regulatory Authority ("FINRA")

RE: Wedbush Securities Inc., Respondent

Broker-Dealer

CRD No. 877

Pursuant to Rule 9216 of The Nasdaq Stock Market LLC ("Nasdaq") Code of Procedure, Wedbush Securities Inc. (the "firm") submits this Letter of Acceptance, Waiver and Consent ("AWC") for the purpose of proposing a settlement of the alleged rule violations described below. This AWC is submitted on the condition that, if accepted, Nasdaq will not bring any future actions against the firm alleging violations based on the same factual findings described herein.

I.

ACCEPTANCE AND CONSENT

1. The firm hereby accepts and consents, without admitting or denying the findings, and solely for the purposes of this proceeding and any other proceeding brought by or on behalf of Nasdaq, or to which Nasdaq is a party, prior to a hearing and without an adjudication of any issue of law or fact, to the entry of the following findings by Nasdaq:

BACKGROUND

The firm has been a FINRA member since 1955 and a Nasdaq member since July 2006. The firm is a full-servicebroker-dealer headquartered in Los Angeles, CA, which has approximately 70 branch offices and approximately 510 registered employees. The firm provides, among other things, brokerage, wealth management, and investment banking services.

RELEVANT PRIOR DISCIPLINARY HISTORY

In January 2019, the firm was censured and fined $1,000,000 by NYSE Arca, Inc. ("NYSE Arca") and ordered to complete several undertakings in connection with, among other violations, its failure to establish, document, and maintain a system of risk management controls and supervisory systems reasonably designed to ensure compliance with regulatory requirements regarding detection and prevention of potentially manipulative activity, including, but not limited to, wash sales, and marking the open and close, in violation of Rule 15c3-5(b) and (c)(2) of the Securities Exchange Act of 1934 ("Exchange Act") and NYSE Arca Rules 11.18, 11.1(b), 11.2(b), and 9.2010-E.

STAR No. 20170544910 GEJ

In December 2015, the firm was censured and fined $1.8 million by FINRA, Nasdaq, NYSE Arca, and Cboe BZX Exchange, Inc. ("BZX") for violations of Exchange Act Rule 15c3-5, and applicable FINRA and exchange supervisory rules, from January 2008 through August 2013. The firm agreed to, among other things, findings that the firm failed to establish, maintain, and enforce supervisory systems and procedures related to its market access business, and failed to supervise for potentially manipulative trading.

In November 2014, the firm entered into a settlement with the U.S. Securities and Exchange Commission ("SEC") in which it agreed to pay $2.44 million for findings that, from July 2011 until at least January 2013, the firm willfully failed to establish, document, and maintain a system of risk management controls and supervisory procedures that was reasonably designed to manage the risks associated with its market access business and applicable regulatory requirements regarding potentially manipulative trading, such as wash sales and manipulative layering.

SUMMARY

From June 2015 through the present, the firm has provided certain customers with access to third-party electronic trading platforms ("electronic trading customers"), which allows these customers to enter orders for execution using one of the firm's market participant identifiers ("MPIDs"). Those orders are transmitted to other broker-dealers that may route them to various exchanges for execution using the executing broker-dealer's MPID. The firm failed to conduct supervisory reviews of its electronic trading customers' trading activity for any type of potentially manipulative trading, including layering, spoofing, wash sales, or marking the close or open. Instead, the firm relied upon the third-partybroker-dealers to conduct such reviews.

Also, since June 2015, the firm failed to supervise the trading activities of its proprietary traders and other firm customers for potential layering and spoofing.

Based on the conduct described in this AWC, the firm violated Nasdaq Rules General 9, Sections 1(a) and 20(a), and Nasdaq Rules 3010(a) and 2010A.

FACTS AND VIOLATIVE CONDUCT

1. This matter arises from cross market surveillance conducted by FINRA on behalf of Nasdaq.
   Applicable Rules
2. Nasdaq Rule General 9, Section 20(a), and its predecessor Nasdaq Rule 3010(a), require each member to "establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable Nasdaq rules."1

1 Nasdaq Rule General 9, Section 20(a) superseded Nasdaq Rule 3010(a), effective December 6, 2019. STAR No. 20170544910 GEJ

2

1. Nasdaq Rule General 9, Section 1(a), and its predecessor Nasdaq Rule 2010A, provide that, "[a] member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade." A violation of Nasdaq Rule General 9, Section 20(a) also constitutes a violation of Nasdaq Rule General 9, Section 1(a).2
   The firm failed to review electronic trading customers' trading activities for potential manipulation
2. The firm permitted certain customers to enter orders directly onto third-party electronic trading platforms using the firm's MPID. The firm separately executed transactions for its proprietary traders and other customers through its own internal trading systems.
3. For various reasons, including the disciplinary actions described in the Relevant Prior Disciplinary History section above, Wedbush stopped providing market access services to its customers in June 2015. As described above, however, the firm still provided certain electronic trading customers with access to third-party electronic trading platforms, which routed these customers' orders to other broker-dealers for execution.
4. The firm mistakenly believed that it was not required to review this trading for any type of potentially manipulative activity since it was no longer providing market access. Instead, the firm believed that the obligation to review this trading for potentially manipulative activities rested solely with the executing broker-dealers. Thus, since June 2015, the firm did not conduct any supervisory reviews of the trading activities by its electronic trading customers for potentially manipulative trading, such as layering, spoofing, wash sales, or marking the close or open.
5. As a result, Wedbush failed to detect potential layering activity in February and March 2017 by an institutional electronic trading customer, which was comprised of hundreds of foreign day traders, on various exchanges, including Nasdaq. During those two months, FINRA surveillance identified approximately 2,900 layering exceptions involving over 130 different stock symbols associated with the customer's order flow. On March 13, 2017, the executing broker-dealer for that order flow detected the potential layering, provided notice of the potential layering to the firm, and stopped accepting orders from the customer.
6. Upon receiving notice of the potential layering activity from the executing broker-dealer, the firm closed the electronic trading customer's account. The firm, however, did not take any steps to detect and prevent other electronic trading customers from engaging in potentially manipulative trading, or to implement any type of supervisory reviews for potentially manipulative trading. As a result, from June 2015 through the present, approximately 90 electronic trading customers effected more than 3.4 million

2 Nasdaq Rule General 9, Section 1(a) superseded Nasdaq Rule 2010A, effective December 6, 2019. STAR No. 20170544910 GEJ

3

transactions involving 13.5 billion shares without being subject by Wedbush to any review for potentially manipulative trading.

The firm also failed to supervise its proprietary traders' and all firm customers' transactions for potential layering and spoofing

1. 1. Since June 2015, the firm also failed to implement any supervisory system, including written supervisory procedures ("WSPs"), to review for potential layering and spoofing by the firm's proprietary traders and all firm customers, including the firm's electronic trading customers.
   2. Between June 2015 and May 2019, the firm's WSPs failed to include any procedures requiring a review by the firm for potential layering and spoofing activity. In June 2019, the firm added a reference to layering and spoofing in its WSPs, which required the firm's Equity Trading Managers to conduct weekly reviews of certain supervisory reports to detect potential layering and spoofing. Those reports, however, were designed to capture other forms of potential manipulative trading, such as wash sales and marking the open and close, and were not reasonably designed to detect layering and spoofing.
   3. As a result, from June 2015 to the present, the firm also failed to supervise its proprietary traders and other firm customers for potential layering and spoofing activity, and an additional 26.9 million transactions involving approximately 5.1 billion shares were not reviewed by the firm for potential layering and spoofing.
   4. Therefore, the firm violated Nasdaq Rules General 9, Sections 1(a) and 20(a), and Nasdaq Rules 3010(a) and 2010A.
2. The firm also consents to the imposition of the following sanctions:
3. • a censure;
   • a total fine of $975,000, of which $82,142.86 shall be paid to Nasdaq;3 and
   • an undertaking that, within 90 days of the date this AWC is accepted, the firm shall submit a written report to FINRA, certified by a registered principal of the firm, that details the steps taken by the firm to correct the supervisory deficiencies regarding supervision of manipulation and the date(s) the revised supervisory system and WSPs were implemented. The report shall be submitted to Compliance Assistant, FINRA Department of Enforcement, 15200 Omega Drive, Third Floor, Rockville, MD 20850 and by e-mail from a work-related account of the registered principal to [e-mail].

3 The remainder of the fine will be paid to FINRA; Cboe BYX Exchange, Inc. ("BYX"); BZX; Cboe EDGA Exchange, Inc. ("EDGA"); Cboe EDGX Exchange, Inc. ("EDGX"); Nasdaq BX, Inc. ("BX"); Nasdaq PHLX LLC ("Phlx"); New York Stock Exchange LLC ("NYSE"); NYSE Arca; and Investors Exchange LLC ("IEX").

STAR No. 20170544910 GEJ

4

Acceptance of this AWC is conditioned upon acceptance of parallel settlement agreements in related matters between the firm and FINRA; BYX; BZX; EDGA; EDGX; BX; Phlx; NYSE; NYSE Arca; and IEX.

The firm agrees to pay the monetary sanction upon notice that this AWC has been accepted and that such payment is due and payable. It has submitted a Payment Information form showing the method by which it proposes to pay the fine imposed.

The firm specifically and voluntarily waives any right to claim that it is unable to pay, now or at any time hereafter, the monetary sanction imposed in this matter.

The sanctions imposed herein shall be effective on a date set by FINRA staff.

II.

WAIVER OF PROCEDURAL RIGHTS

The firm specifically and voluntarily waives the following rights granted under Nasdaq's Code of Procedure:

1. To have a Formal Complaint issued specifying the allegations against the firm;
2. To be notified of the Formal Complaint and have the opportunity to answer the allegations in writing;
3. To defend against the allegations in a disciplinary hearing before a hearing panel, to have a written record of the hearing made and to have a written decision issued; and
4. To appeal any such decision to the Nasdaq Review Council and then to the U.S. Securities and Exchange Commission and a U.S. Court of Appeals.

Further, the firm specifically and voluntarily waives any right to claim bias or prejudgment of the Chief Regulatory Officer, the Nasdaq Review Council, or any member of the Nasdaq Review Council, in connection with such person's or body's participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including acceptance or rejection of this AWC.

The firm further specifically and voluntarily waives any right to claim that a person violated the ex parte prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144, in connection with such person's or body's participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including its acceptance or rejection.

STAR No. 20170544910 GEJ

5