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October 27, 2014 at 06:08 AM
The Financial Industry Regulatory Authority announced Monday that it has censured and fined two divisions of Merrill Lynch — Merrill Lynch Professional Clearing Corp. and its affiliated broker-dealer, Merrill Lynch, Pierce, Fenner & Smith Inc. — a total of $6 million for Regulation SHO violations and supervisory failures.
Merrill’s Professional Clearing Corp. must pay $3.5 million for violating Regulation SHO, a Securities and Exchange Commission rule that established a regulatory framework to govern short sales and prevent abusive naked short selling, while Merrill Lynch, Pierce, Fenner & Smith Inc. must pay $2.5 million for failing to establish, maintain and enforce supervisory systems and procedures related to Regulation SHO and other areas.
Regulation SHO is also designed to reduce the number of instances in which sellers fail to timely deliver securities, FINRA explains, and requires a firm to timely “close out” any fail-to-deliver positions by borrowing or purchasing securities of like kind and quantity.
Reg SHO also permits firms to reasonably allocate fail-to-deliver positions to its broker-dealer clients that caused or contributed to the firm’s fail-to-deliver position.
Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said in a statement that ”firms must ensure that their supervisory systems are designed to address and ensure compliance with Regulation SHO. In these cases, each firm’s failure to establish systems and procedures to properly close out its fail-to-deliver positions could have potentially negative market impact, which could harm investors.”
