Two Firms Settle SEC Charges for Trade Reporting and Short Sale Violations
Two firms, one serving as an introducing broker-dealer and the other a clearing/executing broker, settled SEC violations for "failing to accurately report trading activity, comply with short sale rules, submit timely suspicious activity reports, maintain books and records, and safeguard customer information."
The SEC found that the two firms: (i) failed to promptly initiate reviews of potentially suspicious activity or complete those reviews in reasonable periods of time; (ii) failed to implement policies designed to detect identity theft in connection with customer accounts; (iii) failed to adequately address known risks posed by a vulnerability relating to remote access to their systems; (iv) used off channel platforms to communicate; (v) failed to maintain copies of their core operational databases in a manner that ensured that legally-required records were protected from being intentionally or inadvertently deleted or modified; and (vi) failed to maintain certain customer communications during certain periods because the total number of messages sent for archiving exceeded the limit a third-party vendor had in place.
The SEC found that the executing broker dealer also (i) made numerous EBS submissions that contained inaccurate information or omissions, resulting from eleven types of errors, (the SEC said that those errors resulted in the misreporting of EBS data for at least 392 million transactions) and (ii) did not timely close out "fails to deliver." The SEC said these failings effected millions of principal short sales relating to fractional shares trades that were mismarked as "long" because the firm lacked the ability to calculate its net proprietary position at the time of its sale orders. (The SEC found that the firm improperly marked the orders based on its customers' positions rather than its proprietary positions.) The SEC also found that the firm mismarked an additional 4.5 million riskless principal orders relating to fractional shares trades as "short exempt" even though the firm did not satisfy all the conditions for doing so.
As a result of these failures, the SEC found that the firm violated Rule 30(a) of Regulation S-P; Regulation S-ID Rule 201 ("Duties regarding the detection, prevention, and mitigation of identity theft"); SEA Section 17(a) ("Records and Reports") and Rules 17a-4 ("Records to be preserved by certain exchange members, brokers and dealers") and 17a-8 ("Financial recordkeeping and reporting of currency and foreign transactions") thereunder; and Rules 200(g) ("Definition of 'short sale' and marking requirements"), 203(b)(1) ("Borrowing and delivery requirements") and 204(a) ("Close-out requirement") of Reg SHO.
To settle the charges, the firms agreed to (i) a cease-and-desist orders, (ii) censures and (iii) pay $45 million in combined penalties.