US SEC fines BNP Paribas Securities Corp for Regulation SHO violations
30 June 2020 New York
Image: welcomia/Shutterstock
BNP Paribas Securities Corp has settled charges and accepted a six-figure fine for breaking US short selling rules in 2016 when it was known as BNP Paribas Prime Brokerage (BNPP).
The US Securities and Exchange Commission (SEC) has concluded an investigation into the activities of BNPP, prior to its merger into BNP Paribas Securities Corp in March 2018, that finds it in violation of Regulation SHO.
According to the commission, the broker failed in its due diligence by repeatedly loaning securities to a brokerage client to settle long sale orders it had submitted despite the client not delivering the assets to its account on time or providing proof it owned them on numerous occasions.
The SEC's order states that BNPP loaned securities to an institutional hedge fund to settle purported long sales on at least 35 occasions over a four-month period in violation of rule 203(a)(1) of Regulation SHO, which prohibits such transactions.
Between April and July, the US broker’s customer repeatedly submitted sale orders marked as long to another broker for execution, which were subsequently submitted to BNPP for clearing.
For each of those long sales, the customer did not have sufficient shares in its prime brokerage account at BNPP on the morning of the settlement date to cover the sale order.
When the customer failed to deliver the shares by the settlement date, BNPP loaned the customer shares to cover the sale.
Between June and July, BNPP loaned its client shares to settle long sale orders in a security on 16 consecutive trading days.
On other occasions, the broker loaned shares to the fund to settle long sales when the client still owed BNPP shares that it had borrowed to settle prior sales in the same security.
In total, BNPP loaned its customer more than 8 million shares in the securities of three different issuers over the period.
In its order, the SEC explains that at the time of the hedge fund’s long sale orders, BNPP “did not take steps necessary to reasonably ascertain that the client owned the securities, nor did the fund’s assurances reasonably inform BNPP that it would deliver the securities to its account prior to the scheduled settlement date”.
The commission further notes that although the fund routinely made assurances to BNPP that its orders were properly marked as long and that it would deliver the securities to its account prior to settlement date, “it was not reasonable for BNPP to rely on such representations because BNPP was on notice of its client’s repeated failures to deliver the securities to its account by settlement date”.
As such, the US securities markets regulator concluded that BNPP “willfully violated” Regulation SHO and handed a penalty of $250,000 to BNP Paribas Securities Corp.
BNP Paribas Securities Corp accepted the fine without admitting or denying the findings and agreed to be censured to cease-and-desist from violating the rule.
It has also voluntarily undertaken remedial efforts concerning its securities lending practices for long sale transactions and implemented new policies and procedures to address situations in which a customer’s long sale transaction results in an oversell of the customer’s position in a security in its account at BNPP.
The US Securities and Exchange Commission (SEC) has concluded an investigation into the activities of BNPP, prior to its merger into BNP Paribas Securities Corp in March 2018, that finds it in violation of Regulation SHO.
According to the commission, the broker failed in its due diligence by repeatedly loaning securities to a brokerage client to settle long sale orders it had submitted despite the client not delivering the assets to its account on time or providing proof it owned them on numerous occasions.
The SEC's order states that BNPP loaned securities to an institutional hedge fund to settle purported long sales on at least 35 occasions over a four-month period in violation of rule 203(a)(1) of Regulation SHO, which prohibits such transactions.
Between April and July, the US broker’s customer repeatedly submitted sale orders marked as long to another broker for execution, which were subsequently submitted to BNPP for clearing.
For each of those long sales, the customer did not have sufficient shares in its prime brokerage account at BNPP on the morning of the settlement date to cover the sale order.
When the customer failed to deliver the shares by the settlement date, BNPP loaned the customer shares to cover the sale.
Between June and July, BNPP loaned its client shares to settle long sale orders in a security on 16 consecutive trading days.
On other occasions, the broker loaned shares to the fund to settle long sales when the client still owed BNPP shares that it had borrowed to settle prior sales in the same security.
In total, BNPP loaned its customer more than 8 million shares in the securities of three different issuers over the period.
In its order, the SEC explains that at the time of the hedge fund’s long sale orders, BNPP “did not take steps necessary to reasonably ascertain that the client owned the securities, nor did the fund’s assurances reasonably inform BNPP that it would deliver the securities to its account prior to the scheduled settlement date”.
The commission further notes that although the fund routinely made assurances to BNPP that its orders were properly marked as long and that it would deliver the securities to its account prior to settlement date, “it was not reasonable for BNPP to rely on such representations because BNPP was on notice of its client’s repeated failures to deliver the securities to its account by settlement date”.
As such, the US securities markets regulator concluded that BNPP “willfully violated” Regulation SHO and handed a penalty of $250,000 to BNP Paribas Securities Corp.
BNP Paribas Securities Corp accepted the fine without admitting or denying the findings and agreed to be censured to cease-and-desist from violating the rule.
It has also voluntarily undertaken remedial efforts concerning its securities lending practices for long sale transactions and implemented new policies and procedures to address situations in which a customer’s long sale transaction results in an oversell of the customer’s position in a security in its account at BNPP.
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