Short selling still the target of FINRA's arrow
04 March 2014 New York
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Short selling generated the third-highest amount of fines for FINRA in 2013, proving that the practice is still very much in the regulator’s eye.
The law firm Sutherland Asbill & Brennan LLP’s annual analysis of FINRA’s disciplinary actions found that this past year, the regulator reported $7.2 million in fines from 40 cases involving alleged short selling violations.
The cases often involved allegations that the firm executed short sales without having a reasonable belief that the securities could be borrowed, or reported trades without short sale modifiers.
There has been a significant increase in short selling sanctions in the last five years. In 2008, there was $289,000 in reported fines. By the next year, this number had reason to $2.5 million—the next year was $3.5 million, and the next spiked to an alarming $16.8 million.
The statistics show that short selling cases have been a significant area of regulatory emphasis for FINRA in recent years. Over the past five years, fines in short selling cases have made up approximately 12 percent of FINRA’s total fines.
Although short selling fines increased substantially in 2013, this was largely due to a single case against Newedge USA, that resulted in a $4 million fine.
In addition to allegations about the firm’s supervision of direct market access and sponsored access trading, FINRA alleged that the brokerage violated Regulation SHO and two of the SEC’s 2008 emergency orders that restricted short sales of certain securities. FINRA asserted that the firm allowed its clients to submit many short sale orders for these restricted securities during the 2008 financial crisis.
Additionally, FINRA alleged that the firm accepted short sale orders without having a reasonable basis that the securities could be borrowed. FINRA found that the firm did not have adequate supervisory procedures in place to ensure that its foreign affiliates that accessed US markets through the firm were complying without Regulation SHO.
FINRA also alleged that the firm knew of these issues, but did not fully correct them until three years later. In addition to FINRA’s $4 million fine, the firm was fined an additional $5.5 million by the BATS Exchange, the New York Stock Exchange, NYSE Arca, and NASDAQ. Thomas Gira, FINRA’s executive vice president of market regulation, said that the case also illustrates how FINRA and the exchanges can effectively pursue activity that spans multiple markets.
Two other significant short selling cases reported in 2013 demonstrate the importance of properly marking short sale trades, said the law firm.
In one case, a firm was fined $265,000 after it allegedly executed and reported more than eight million cross transactions, which were also short sales, without including a short sale modifier.
FINRA fined another firm $250,000 in 2013 for allegedly leaving short sale indicators off some of the firm’s electronic “Blue Sheet” reports over a four-year period. FINRA stated that this issue occurred because some short sale information was not passed from the firm’s middle office system to the back office. FINRA noted that these allegations impacted only 360 short sale transactions, out of 121,000 total trades, over a four-year period, but still fined the firm $250,000.
These two recent cases show that even administrative issues can lead to significant fines, said the law firm.
The law firm Sutherland Asbill & Brennan LLP’s annual analysis of FINRA’s disciplinary actions found that this past year, the regulator reported $7.2 million in fines from 40 cases involving alleged short selling violations.
The cases often involved allegations that the firm executed short sales without having a reasonable belief that the securities could be borrowed, or reported trades without short sale modifiers.
There has been a significant increase in short selling sanctions in the last five years. In 2008, there was $289,000 in reported fines. By the next year, this number had reason to $2.5 million—the next year was $3.5 million, and the next spiked to an alarming $16.8 million.
The statistics show that short selling cases have been a significant area of regulatory emphasis for FINRA in recent years. Over the past five years, fines in short selling cases have made up approximately 12 percent of FINRA’s total fines.
Although short selling fines increased substantially in 2013, this was largely due to a single case against Newedge USA, that resulted in a $4 million fine.
In addition to allegations about the firm’s supervision of direct market access and sponsored access trading, FINRA alleged that the brokerage violated Regulation SHO and two of the SEC’s 2008 emergency orders that restricted short sales of certain securities. FINRA asserted that the firm allowed its clients to submit many short sale orders for these restricted securities during the 2008 financial crisis.
Additionally, FINRA alleged that the firm accepted short sale orders without having a reasonable basis that the securities could be borrowed. FINRA found that the firm did not have adequate supervisory procedures in place to ensure that its foreign affiliates that accessed US markets through the firm were complying without Regulation SHO.
FINRA also alleged that the firm knew of these issues, but did not fully correct them until three years later. In addition to FINRA’s $4 million fine, the firm was fined an additional $5.5 million by the BATS Exchange, the New York Stock Exchange, NYSE Arca, and NASDAQ. Thomas Gira, FINRA’s executive vice president of market regulation, said that the case also illustrates how FINRA and the exchanges can effectively pursue activity that spans multiple markets.
Two other significant short selling cases reported in 2013 demonstrate the importance of properly marking short sale trades, said the law firm.
In one case, a firm was fined $265,000 after it allegedly executed and reported more than eight million cross transactions, which were also short sales, without including a short sale modifier.
FINRA fined another firm $250,000 in 2013 for allegedly leaving short sale indicators off some of the firm’s electronic “Blue Sheet” reports over a four-year period. FINRA stated that this issue occurred because some short sale information was not passed from the firm’s middle office system to the back office. FINRA noted that these allegations impacted only 360 short sale transactions, out of 121,000 total trades, over a four-year period, but still fined the firm $250,000.
These two recent cases show that even administrative issues can lead to significant fines, said the law firm.
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