Regulators fined Interactive Brokers, an automated electronic brokerage firm, $5.5 million for violations and supervisory failures tied to short sale practices, or Regulation SHO, from 2012 to 2015.
According to the Financial Industry Regulatory Authority, Interactive was aware of its supervisory issues but did not implement any changes until mid-2015. As a result, the broker-dealer did not close out more than 2,300 fails-to-deliver, while accepting and executing short orders in securities without first borrowing (or arranging to borrow) the security roughly 28,000 times.
Plus, Interactive let over 7,400 short sale orders be executed or displayed in covered securities at a price less than or equal to the current best bid.
“Firms that are aware of deficiencies in their supervisory systems must promptly remediate them,” said Susan Schroeder, head of FINRA’s Enforcement Department. “In this case, the firm internally identified the problems, yet did not revise its supervisory systems for more than three years, creating the potential for negative impact to the markets and investor harm.”
Reg SHO requires that, after completion of a short sale transaction, firms much deliver the shares on the settlement date or take action to close out the “failure to deliver” shares by purchasing or borrowing the securities. If such actions are not taken, the firm may not accept more short sale orders in the security without first borrowing or arranging to borrow the security.
The rules also prohibits firms from executing or displaying short sales via a “covered security” at a price that is less than or equal to the current best bid, when the price of the security has fallen by 10% or more in one day.
According to the letter of acceptance, waiver and consent regarding the fine, Interactive Brokers “ultimately revised its automated systems, its supervisory systems and its [written supervisory procedures] to address the majority of its SEC Rule 204 issues in mid-2015.”
FINRA found that from July 2012 through June 2015, Interactive’s supervisory system did not achieve compliance with Reg SHO requirements and that the BD repeatedly ignored “red flags,” such as internal audit findings, internal warnings from clearing and compliance staff, yearly risk assessments and FINRA exam findings.
“The firm did not admit or deny FINRA’s allegations,” Interactive said in a statement. It also “cooperated with FINRA during its inquiry and took corrective action on the matters raised by FINRA in 2015.”
— Check out Number of BDs, Reps Drops for Second Straight Year, New FINRA Report Says on ThinkAdvisor.