FINRA fines Cantor Fitzgerald over short selling
08 March 2019 Washington
Image: Shutterstock
Financial Industry Regulatory Authority (FINRA), a private corporation that acts as a self-regulatory organisation, has fined Cantor Fitzgerald $2 million for regulation SHO (Reg SHO) violations and supervisory failures spanning a period of at least five years.
The Securities and Exchange Commission adopted Reg SHO to address concerns regarding persistent failures to deliver the sale of securities that an investor does not own or has not borrowed.
The rule requires firms to deliver the shares on the settlement date or take affirmative action to close out the “failure to deliver” shares by purchasing or borrowing the securities.
If the failure to deliver is not closed out, the firm may not accept additional short sale orders in the security without first borrowing or arranging to borrow the security.
FINRA found that from January 2013 through to December 2017, Cantor’s supervisory system was not reasonably designed to achieve compliance with the requirements of Reg SHO.
According to FINRA, Cantor’s use of a predominantly manual system to supervise its compliance with Reg SHO was not reasonable in light of the firm’s business expansion and increased trading activity—from 35 billion shares in 2013 to 79 billion shares in 2014.
Cantor’s enhancements to its supervisory systems and procedures were not fully effective and they failed to identify fails-to-deliver in accounts that were not monitored by its supervisory systems, FINRA revealed.
Additionally, Cantor failed to timely remediate issues identified by its personnel. As a result, Cantor did not timely close-out at least 4,879 fails-to-deliver.
As well as this it routed and/or executed thousands of short orders in those securities without borrowing the security or issuing notice of the need to pre-borrow to the broker-dealers for whom it cleared and settled the trades.
As part of a settlement, Cantor has agreed to retain an independent consultant to conduct a comprehensive review of the firm’s policies, systems, procedures and training related to REG SHO.
Susan Schroeder, FINRA’s executive vice president, department of enforcement, said: “Firms need to ensure that their supervisory systems are reasonably tailored to their business and once they become aware of deficiencies in their supervisory systems, they must promptly remediate them.”
Schroeder added: “As our annual examination priorities letters make clear, firms’ compliance with Regulation SHO is a continued focus for FINRA when evaluating operational risk and is necessary to preserve investor confidence.”
The Securities and Exchange Commission adopted Reg SHO to address concerns regarding persistent failures to deliver the sale of securities that an investor does not own or has not borrowed.
The rule requires firms to deliver the shares on the settlement date or take affirmative action to close out the “failure to deliver” shares by purchasing or borrowing the securities.
If the failure to deliver is not closed out, the firm may not accept additional short sale orders in the security without first borrowing or arranging to borrow the security.
FINRA found that from January 2013 through to December 2017, Cantor’s supervisory system was not reasonably designed to achieve compliance with the requirements of Reg SHO.
According to FINRA, Cantor’s use of a predominantly manual system to supervise its compliance with Reg SHO was not reasonable in light of the firm’s business expansion and increased trading activity—from 35 billion shares in 2013 to 79 billion shares in 2014.
Cantor’s enhancements to its supervisory systems and procedures were not fully effective and they failed to identify fails-to-deliver in accounts that were not monitored by its supervisory systems, FINRA revealed.
Additionally, Cantor failed to timely remediate issues identified by its personnel. As a result, Cantor did not timely close-out at least 4,879 fails-to-deliver.
As well as this it routed and/or executed thousands of short orders in those securities without borrowing the security or issuing notice of the need to pre-borrow to the broker-dealers for whom it cleared and settled the trades.
As part of a settlement, Cantor has agreed to retain an independent consultant to conduct a comprehensive review of the firm’s policies, systems, procedures and training related to REG SHO.
Susan Schroeder, FINRA’s executive vice president, department of enforcement, said: “Firms need to ensure that their supervisory systems are reasonably tailored to their business and once they become aware of deficiencies in their supervisory systems, they must promptly remediate them.”
Schroeder added: “As our annual examination priorities letters make clear, firms’ compliance with Regulation SHO is a continued focus for FINRA when evaluating operational risk and is necessary to preserve investor confidence.”
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