FINRA Sanctions Firm for Faulty Aggregation-Unit Netting

A firm settled FINRA charges for improper aggregation-unit netting and related supervisory failures. 

According to the AWC, the firm improperly included the accounts of two affiliated foreign broker-dealers when calculating an aggregation unit’s net positions. Because those affiliates lacked self-regulatory oversight and were not subject to SEC examination, their inclusion resulted in inaccurate net-position calculations. FINRA also stated that the firm mis-marked certain aggregation-unit sales as long or short and, in some instances, failed to obtain required locates before effecting short sales.

FINRA noted that although the firm became aware that its two affiliated foreign broker-dealers could not be included in aggregation-unit netting, it did not take reasonable steps to correct the issue. FINRA stated that the firm began—but then abandoned—efforts to remove those affiliates’ accounts, ultimately completing the corrective work only after FINRA raised the matter and required remediation.

FINRA determined that the firm violated Regulation SHO Rule 200(f) ("Definition of 'short sale' and marking requirements") and FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade") and 3110 ("Supervision").

To settle the charges, the firm consented to (i) a censure, (ii) a $625,000 fine, and (iii) an undertaking requiring senior management to certify that the firm remediated its aggregation-unit structure and brought it into compliance.