August 15, 2022

Broker-Dealer Settles SEC Charges for Short Sale Locate Requirement Violations

A broker-dealer settled SEC charges for violating Regulation SHO ("Reg. SHO: Short Sales") by executing short sale trades through its single-dealer platform ("SDP") without doing proper locates.

The SEC found that the broker-dealer improperly relied on a market making exemption to Reg. SHO's locate requirement for which it did not qualify. The broker-dealer did not qualify for the bona-fide market making exception, Reg. SHO Rule 203 ("Borrowing and delivery requirements"), because, through its SDP, it did not (i) incur market risk, (ii) engage in "a pattern of trading that includes both purchases and sales in roughly comparable amounts to provide liquidity to customers" or (iii) post continuous quotations that are at or near the market.

As a result, the SEC determined that the broker-dealer willfully violated the rule. To settle the charges, the broker-dealer agreed to (i) a cease-and-desist order, (ii) a censure and (iii) a civil monetary penalty of $125,000.

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