A firm settled FINRA and NYSE Arca charges for mismarking sell orders and failing to document compliance with SEC Regulation SHO ("Short Sale") locate requirements.
The SEC locate rule requires "a broker-dealer to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due before effecting a short sale order in any equity security. This 'locate' must be made and documented prior to effecting the short sale."
In two Letters of Acceptance, Waiver, and Consent, FINRA and NYSE Arca found that the firm, among other things:
- mismarked short sale trades as long, in violation of Rule 200(g) ("Sell Order Marking") under SEC Regulation SHO and NYSE Arca Rule 7.16-E(c)("Marking Orders");
- relied on its clients to attest that they had a locate for short sales, but did not retain records reflecting the attestations or other documents reflecting a reasonable basis for the clients' attestations, in violation of Rule 203(b) under SEC Regulation SHO and NYSE Arca Rule 7.16-E(e);
- submitted incomplete and inaccurate information to the FINRA Trade Reporting Facility ("TRF"), including information with respect to the second leg of riskless principal transactions, in violation of FINRA Rule 7230A ("Trade Report Input");
- omitted order data required to be reported to the Order Audit Trail System ("OATS") and failed to preserve order event information, in violation of FINRA Rules 7440 ("Recording of Order Information") and 7450 ("Order Data Transmission Requirements"); and
- failed to disclose all material aspects of its relationship with significant execution venues, particularly rebates for executing orders on the exchanges, in violation of Rule 606 ("Disclosure of Order Routing Information") under SEC Regulation NMS.
Additionally, FINRA found that the firm's supervisory system failed to ensure compliance with the above-mentioned rules and requirements, in violation of FINRA Rules 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade"), and NYSE Arca Rule 11.18 ("Supervision").
To settle the charges, the firm agreed to (i) a censure and (ii) a $170,000 fine (of which $97,625 is to be paid to FINRA and $20,025 to NYSE Arca). FINRA specified that its fine reflects $22,000 for violations of Rule 200(g), $13,975 for violations of Rule 203(b), $6,650 for violations of Regulation SHO supervision, $45,000 for TRF, OATS and related supervisory violations, and $10,000 for Rule 606 violations.
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