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Goldman Fined $15M by SEC Over Reg SHO Violations

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Goldman, Sachs & Co. agreed Thursday to pay $15 million to settle Securities and Exchange Commission charges that its securities lending practices violated Regulation SHO.

According to the SEC’s order instituting a settled administrative proceeding, broker-dealers like Goldman Sachs are regularly asked by customers to locate stock for short selling. Granting a “locate” represents that a firm has borrowed, arranged to borrow, or reasonably believes it could borrow the security to settle the short sale. 

The SEC finds that Goldman Sachs violated Regulation SHO by improperly providing locates to customers where it had not performed an adequate review of the securities to be located. Such locates were inaccurately recorded in the firm’s locate log that must reflect the basis upon which Goldman Sachs has given out locates.

“The requirement that firms locate securities before effecting short sales is an important safeguard against illegal short selling,” said Andrew Ceresney, director of the SEC’s Enforcement Division. “Goldman Sachs failed to meet its obligations by allowing customers to engage in short selling without determining whether the securities could reasonably be borrowed at settlement.”

When SEC examiners questioned the firm’s securities lending practices during an exam in 2013, Goldman Sachs provided “incomplete and unclear responses that adversely affected and unnecessarily prolonged the examination,” according to the SEC.

Andrew Calamari, director of the SEC’s New York Regional Office, added that SEC exams “ensure that market participants are following the rules, so there will be consequences, including in the determination of remedies, when a registrant fails to provide complete and clear responses to examination staff.”

According to the SEC’s order, Goldman Sachs employees who were members of the firm’s Securities Lending Demand Team routinely processed customer locate requests by relying on a function of the Goldman Sachs order management system known as “fill from autolocate,” which was accessed via the “F3” key. 

“This function enabled employees to cause the system to grant locate requests based on the amount of reliable start-of-day inventory reported to Goldman Sachs by large financial institutions, even though its automated system had already deemed this inventory to be depleted based on locate requests processed earlier in the day,” the order states.  

The SEC’s order finds that when Goldman employees used this function to grant locate requests, they relied on their general belief that the automated model was conservative and the granting of additional locates would not result in failures to deliver when the securities became due for settlement.  In doing so, the employees did not check alternative sources of inventory or perform an adequate review of the securities to be located.

The SEC’s order also finds that Goldman’s documentation of its compliance with Regulation SHO was inaccurate as it failed to sufficiently differentiate between the locates filled by its automated model and those filled by the Demand Team using the “fill from autolocate” function.  In both cases, the locate log simply mentioned the term “autolocate” to refer to the start-of-day inventory utilized by the firm’s automated model as the source of securities underlying the grant of a locate.

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