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A broker-dealer settled FINRA charges for misapplying the Multi-Day Approach in calculations of the pre-fail credits and close-out obligations of five affiliated foreign broker-dealers.
In a Letter of Acceptance, Waiver, and Consent, FINRA found that the broker-dealer acted in contravention of conditions for the Multi-Day Approach as set out in the SEC Division of Trading and Markets 2013 no-action letter when the broker-dealer netted the affiliates' trading accounts to calculate fail-to-deliver ("FTD") positions on a collective basis. FINRA further found that the broker-dealer used the customers' combined pre-settlement date purchases to calculate the pre-fail credit, which the broker-dealer then used as a basis to reduce how many shares it needed to close out the FTDs, in violation of Rule 204 ("Close-out requirement") of Regulation SHO.
In addition, FINRA found that the broker-dealer:
- included the trading positions of three foreign affiliates in its position calculations for two aggregation units, in violation of Rule 200(f) ("Determining Net Position") of Regulation SHO; and
- failed to address Rule 200(f) compliance and identify an individual responsible for such compliance in its written supervisory procedures, in violation of FINRA Rule 3110 ("Supervision").
FINRA determined that the above-enumerated violations also constituted a violation of FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade").
To settle the charges, the firm agreed to (i) a censure and (ii) an $850,000 fine.
Commentary Steven Lofchie
Reg. SHO has become so complicated that the policy of the regulation has become almost divorced from and subordinate to the technical requirements of the regulation. If one begins with the policy of the Regulation, that broker-dealers not fail on their delivery obligations, why should it matter that a U.S. firm aggregates the positions and trades of its foreign affiliates, rather than treating each of them separately, so long as, at the end of the day, the firm is able to make deliveries on its sales? See also the comment in Firm Settles FINRA and NYSE Arca Charges for Short Sale Violations.
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