More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
The Securities and Exchange Commission on Monday charged the Schwab-owned online options firm optionsXpress, as well as four officials at the firm and a customer, in an alleged abusive naked short selling scheme.
The SEC’s Division of Enforcement claims the Chicago-based firm “failed to satisfy its close-out obligations under Regulation SHO by repeatedly engaging in a series of sham ‘reset’ transactions designed to give the illusion that the firm had purchased securities of like kind and quantity.”
The firm and a customer, Jonathan Feldman, engaged in these “sham reset transactions in a number of securities, resulting in continuous failures to deliver,” according to the SEC’s complaint.
Regulation SHO requires the delivery of equity securities to a registered clearing agency when delivery is due, generally three days after the trade date in what’s known as “T+3”. If no delivery is made by that time, the firm must purchase or borrow the securities to close out the failure-to-deliver position by no later than the beginning of regular trading hours on the next day (T+4).
The former chief financial officer at optionsXpress, Thomas Stern, was named in the SEC’s administrative proceeding along with optionsXpress and Feldman. Three other officials—the head of trading and customer service, Peter Bottini, and the compliance officers Phillip Hoeh and Kevin Strine—were named in a separate administrative proceeding and settled with the SEC.
“Feldman and optionsXpress used sham reset transactions to avoid, sometimes for months, compliance with Reg. SHO’s stock delivery requirements,” Robert Khuzami, director of the SEC’s Division of Enforcement, said in a statement. “In effect, they ‘kited’ shares of stock, thus depriving buyers of the benefit of their bargain—prompt delivery of their shares.”
The SEC says the allegations stem from at least October 2008 to March 2010. In September 2011, optionsXpress became a wholly owned subsidiary of The Charles Schwab Corp.
The SEC also alleges that the sham reset transactions impacted the market for the issuers. From Jan. 1, 2010 to Jan. 31, 2010, optionsXpress customers including Feldman accounted for an average of 47.9% of the daily trading volume in one of the securities. In 2009 alone, the optionsXpress customer accounts engaging in the activity purchased approximately $5.7 billion worth of securities and sold short approximately $4 billion of options, according to the SEC. In 2009, Feldman purchased at least $2.9 billion of securities and sold short at least $1.7 billion of options through his account at optionsXpress.
In a separate case, which was settled, Bottini, Hoeh, and Strine agreed to an order finding that they caused optionsXpress’s violations of rules 204 and 204T of Regulation SHO and ordering them to cease and desist from committing or causing violations of Rule 204. They neither admitted nor denied the SEC’s findings.