FINRA fines Wedbush Securities for Regulation SHO violations
The Financial Industry Regulatory Authority (FINRA) has fined Wedbush Securities for alleged violations of Regulation SHO.
During the periods of January 1, 2016 through July 31, 2020 and December 9, 2020 through April 7, 2021, Wedbush Securities, Inc. violated Regulation SHO Rules 204(a), (b), and (c) and FINRA Rule 2010 by failing to timely close out approximately 2,056 fail-to-deliver positions as required by Rule 204(a), and, on approximately 390 occasions failing to place securities in the “penalty box” as required by Rule 204(b) and failing to comply with the notice requirement of Rule 204(c).
The Securities and Exchange Commission adopted Regulation SHO to address concerns regarding persistent failures to deliver and potentially abusive “naked” short selling, e.g., the sale of securities that an investor does not own or has not borrowed.
Regulation SHO imposes certain requirements on broker-dealers with respect to sales of equity securities to promote market stability, preserve investor confidence, and increase short sale transparency. These requirements include Regulation SHO Rule 204(a)’s close out provisions, Rule 204(b)’s “penalty box” provision, which restricts short selling in securities when the close out requirement is not satisfied unless the broker-dealer borrows or arranges to borrow the security, and Rule 204(c)’s notice provision, which requires a firm to provide written notice to any customer for whom the firm clears and settles trades when it enters and leaves the penalty box.
A fail to deliver (FTD) occurs when a seller fails to deliver securities to the buyer when delivery is due.
When Wedbush had an FTD, a firm automated system attempted to identify the FTD and to borrow or recall shares to close out it out. If the automated system failed to acquire the shares, firm staff was required to borrow, recall or buy-in shares to close out the FTD. Firm staff, however, failed to timely recall shares that had been out on loan or execute buy-ins where the firm initiated a stock loan recall but did not receive the shares in time to deliver them to the Continuous Net Settlement System (“CNS”).
During the relevant periods, the firm failed to timely close out approximately 2,056 FTD positions due to the firm failing to timely borrow shares, recall shares that were out on loan or otherwise acquire shares and deliver them in accordance with the requirements of Rule 204(a).
In addition, during the period between January 1, 2016 through July 31, 2020, on approximately 390 occasions, the firm further failed to place a security in which it had failed to obtain a close-out into the penalty box, as required by Regulation SHO Rule 204(b) and to send the notice that the firm had a position in any equity security that had not been closed out, as required by Regulation SHO Rule 204(c).
Therefore, Respondent violated Regulation SHO Rules 204(a), (b) and (c) and FINRA Rule 2010.
During the relevant periods, the firm further violated FINRA Rules 3110 and 2010 by failing to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with Regulation SHO Rules 204(a) and (c).
The firm has agreed to a censure and a $900,000 fine (of which $450,000 will be allocated to FINRA).