The Financial Industry Regulatory Authority said Tuesday that it has fined Cantor Fitzgerald & Co. $2 million over failures to properly supervise its short sales.
FINRA found that, from January 2013 through December 2017, Cantor’s supervisory system, including its written supervisory procedures, was not reasonably designed to achieve compliance with the Securities and Exchange Commission’s Regulation SHO.
Reg SHO requires firms to deliver the shares on the short-sale settlement date or take affirmative action to close out a “failure to deliver” position by purchasing or borrowing the securities, FINRA explains. If the failure to deliver is not closed out, the firm may not accept additional short sale orders in the security without first borrowing or arranging to borrow the security.
“Cantor’s use of a predominantly manual system to supervise its compliance with Reg SHO was not reasonable in light of the firm’s business expansion and increased trading activity — from 35 billion shares in 2013 to 79 billion shares in 2014,” FINRA states.
Further, Cantor’s compliance personnel identified red flags in 2013, 2014 and 2015 indicating that the firm had systemic issues with Reg SHO and that its supervisory systems were not reasonably tailored to its business.
“While Cantor made some changes, it did not adapt and enhance its supervision to address the deficiencies its personnel identified, commit additional staffing to monitoring its compliance with Reg SHO, or implement WSPs relating to its new lines of business until 2016,” FINRA said.
“Moreover, Cantor’s enhancements to its supervisory systems and procedures were not fully effective. For example, Cantor failed to identify fails-to-deliver in accounts that were not monitored by its supervisory systems,” according to FINRA.
“Firms need to ensure that their supervisory systems are reasonably tailored to their business and once they become aware of deficiencies in their supervisory systems, they must promptly remediate them,” said Susan Schroeder, head of FINRA enforcement, in a statement. “As our Annual Examination Priorities letters make clear, firms’ compliance with Regulation SHO is a continued focus for FINRA when evaluating operational risk and is necessary to preserve investor confidence.”
FINRA also found that Cantor failed to “timely remediate issues identified by its personnel,” which was “not reasonable considering, among other things, the firm’s prior disciplinary history relating to Reg SHO.”
As a result, Cantor “did not timely close out at least 4,879 fails-to-deliver, and routed and/or executed thousands of short orders in those securities without first borrowing (or arranging to borrow) the security or issuing notice of the need for a pre-borrow to the broker-dealers for whom it cleared and settled trades,” FINRA found.
As part of the settlement, Cantor also agreed to retain an independent consultant to conduct a comprehensive review of the firm’s policies, systems, procedures and training related to Reg SHO.
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