Goldman Sachs fined for improper sec lending practices
15 January 2016 New York
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Goldman Sachs has agreed to pay $15 million to settle charges of improper securities lending practices that violated federal regulations.
The bank’s broker-dealer was accused of violating Rule 203(b)(1) of Regulation SHO and Section 17(a) of the Securities Exchange Act by improperly providing locates for short selling purposes to customers where it had not performed an adequate review of the securities to be located.
Goldman Sachs did not admit or deny the accusations, but consented to the cease and desist order and agreed to pay the penalty.
“The requirement that firms locate securities before effecting short sales is an important safeguard against illegal short selling,” said Andrew Ceresney, director of the Securities and Exchange Commission’s (SEC) enforcement division.
“Goldman Sachs failed to meet its obligations by allowing customers to engage in short selling without determining whether the securities could reasonably be borrowed at settlement.”
“SEC exams ensure that market participants are following the rules, so there will be consequences, including in the determination of remedies, when a registrant fails to provide complete and clear responses to examination staff,” said Andrew Calamari, director of the SEC’s New York regional office.
The SEC found that the locates were inaccurately recorded in the bank’s locate log, which must reflect the basis upon which Goldman Sachs has given out locates.
Members of the bank’s securities lending demand team routinely processed customer locate requests by relying on a function of the Goldman Sachs order management system known as ‘fill from auto-locate’, which was accessed via the ‘F3’ key, according to the SEC.
This function caused the system to grant locate requests based on the amount of reliable start-of-day inventory reported to Goldman Sachs by large financial institutions, even though its automated system had already deemed this inventory to be depleted based on locate requests processed earlier in the day.
When Goldman Sachs employees used this function to grant locate requests, they relied on their general belief that the automated model was conservative and the granting of additional locates would not result in failures to deliver when the securities became due for settlement.
In doing so, the employees did not check alternative sources of inventory or perform the necessary reviews of the securities to be located.
Goldman Sachs’s documentation of its compliance with Regulation SHO was also inaccurate as it failed to sufficiently differentiate between the locates filled by its automated model and those filled by the demand team using the fill from auto-locate function.
In both cases, the locate log simply mentioned the term ‘auto-locate’ to refer to the start-of-day inventory utilised by the bank’s automated model as the source of securities underlying the grant of a locate.
The US regulator accused Goldman Sachs of providing “incomplete and unclear responses that adversely affected and unnecessarily prolonged the examination”, during a review into its securities lending practices in 2013.
Goldman Sachs is yet to respond to a request for comment.
The bank’s broker-dealer was accused of violating Rule 203(b)(1) of Regulation SHO and Section 17(a) of the Securities Exchange Act by improperly providing locates for short selling purposes to customers where it had not performed an adequate review of the securities to be located.
Goldman Sachs did not admit or deny the accusations, but consented to the cease and desist order and agreed to pay the penalty.
“The requirement that firms locate securities before effecting short sales is an important safeguard against illegal short selling,” said Andrew Ceresney, director of the Securities and Exchange Commission’s (SEC) enforcement division.
“Goldman Sachs failed to meet its obligations by allowing customers to engage in short selling without determining whether the securities could reasonably be borrowed at settlement.”
“SEC exams ensure that market participants are following the rules, so there will be consequences, including in the determination of remedies, when a registrant fails to provide complete and clear responses to examination staff,” said Andrew Calamari, director of the SEC’s New York regional office.
The SEC found that the locates were inaccurately recorded in the bank’s locate log, which must reflect the basis upon which Goldman Sachs has given out locates.
Members of the bank’s securities lending demand team routinely processed customer locate requests by relying on a function of the Goldman Sachs order management system known as ‘fill from auto-locate’, which was accessed via the ‘F3’ key, according to the SEC.
This function caused the system to grant locate requests based on the amount of reliable start-of-day inventory reported to Goldman Sachs by large financial institutions, even though its automated system had already deemed this inventory to be depleted based on locate requests processed earlier in the day.
When Goldman Sachs employees used this function to grant locate requests, they relied on their general belief that the automated model was conservative and the granting of additional locates would not result in failures to deliver when the securities became due for settlement.
In doing so, the employees did not check alternative sources of inventory or perform the necessary reviews of the securities to be located.
Goldman Sachs’s documentation of its compliance with Regulation SHO was also inaccurate as it failed to sufficiently differentiate between the locates filled by its automated model and those filled by the demand team using the fill from auto-locate function.
In both cases, the locate log simply mentioned the term ‘auto-locate’ to refer to the start-of-day inventory utilised by the bank’s automated model as the source of securities underlying the grant of a locate.
The US regulator accused Goldman Sachs of providing “incomplete and unclear responses that adversely affected and unnecessarily prolonged the examination”, during a review into its securities lending practices in 2013.
Goldman Sachs is yet to respond to a request for comment.
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