A broker-dealer settled FINRA charges for failing to comply with the "locate" requirement under Regulation SHO ("Reg. SHO") in connection with equity security short sales.
In a Letter of Acceptance, Waiver and Consent, FINRA stated that for 45 equity security short sales of a single security on a single day, the firm inappropriately relied on the bona fide market making exemption under Reg. SHO Rule 203(b)(1) ("Borrowing and Delivery Requirements"). As a result, the firm carried out the sales without (i) obtaining the security or entering into a bona fide agreement to obtain the security, (ii) an adequate basis for believing that the security could be borrowed for the purpose of delivering it by the due date or (iii) keeping records of such sales' compliance with Reg. SHO Rule 203(b)(1). In connection with the 45 transactions, which netted $26,720 in profits for the firm, the firm also failed to adhere to its written supervisory procedures that required it to ensure that the bona fide market making exception was applicable.
As a result of its findings, FINRA determined that the firm violated Reg. SHO Rule 203(b)(1) and FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110(b) ("Written Procedures").
To settle the charges, the firm agreed to (i) a censure, (ii) a $35,000 fine and (iii) disgorgement totaling $26,720.
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