SEC Fines Firm for Mismarking Short Sales

A firm settled FINRA charges for failing to obtain locates for short sales, mismarking short sales and failing to maintain accurate books and records.

According to the AWC, the firm effected more than 12 million short sales without locating securities available to borrow. FINRA said the firm provided retail customers the opportunity to engage in self-directed trading in both whole and fractional shares, permitting customers to trade only at two designated times each day. The firm would then execute these orders on an aggregated basis and provide the customers with pricing based on average executions. FINRA found that the firm then marked all transactions as long trades done on an agency basis, which was factually incorrect.

As a result, the firm maintained inaccurate memoranda for each of those orders and executions. FINRA also found that the firm failed to establish WSPs reasonably designed to achieve the necessary compliance with short sale and related recordkeeping rules.

FINRA found that the firm violated Regulation SHO Rules 200(g) ("Definition of 'short sale' and marking requirement") and 203(b)(1) ("Short sales"), Exchange Act Section 17(a) ("Records and Reports"), Exchange Act Rule 17a-3 ("Records to be made by certain exchange members, brokers and dealers"), and FINRA Rules 4511 ("General Requirements") and 2010 ("Standards of Commercial Honor and Principles of Trade").

To settle the charges, the firm agreed to (i) a censure and (ii) pay a $400,000 fine.