October 7, 2022

Broker-Dealer Settles FINRA Charges for Violations of Short Sale Close-Out Requirements

A broker-dealer settled FINRA charges for failing to comply with short sale regulations related to close-outs of "fail-to-deliver" ("FTD") positions.

Among other things, FINRA found that the broker-dealer:

  • improperly used revocable volume-weighted average price ("VWAP") orders or limit orders to buy-in FTDs;

  • improperly considered shares released from segregation for customer long sales as shares available to satisfy its close-out obligations;

  • did not add securities to its list of penalty box securities, or otherwise restrict short sales in securities with FTDs;

  • did not configure its order management systems to assess the firm's penalty box list of securities and prohibit short sales in such securities;

  • failed to identify red flags indicating the firm's VWAP algorithm sent improper close-out orders, and did not conduct any review or testing of its VWAP programming; and

  • did not review its trade blotter or VWAP executions "which reflected that the algorithm was routing small-sized buy-in orders as limit orders."

FINRA also determined that the broker-dealer failed to establish and maintain a supervisory system and written supervisory procedures reasonably designed to achieve compliance with Regulation SHO's close-out requirements.

FINRA concluded that the broker-dealer violated FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade"), Rule 3110 ("Supervision") and Rule 204 of Regulation SHO ("Close-out requirement"). To settle the charges, the broker-dealer agreed to (i) accept a censure, (ii) pay a civil monetary penalty of $2.5 million and (iii) initiate undertakings to improve compliance with Regulation SHO.