Credit Suisse Securities has been fined $1.75 million by FINRA for failing to properly supervise short-selling activity.
From June 1, 2006 through December 2010, Credit Suisse Securities failed to comply with the locate and marking requirements of Regulation SHO as well as FINRA rules, NASD rules and federal securities laws, according to FINRA.
Specifically, FINRA fined Credit Suisse for Reg SHO violations and for failing to properly supervise short sales and the marking of sale orders. As a result, the financial services firm entered millions of short sales without reasonable grounds to believe that the securities could be borrowed and delivered and mismarked thousands of sales orders, FINRA charges.
The SEC enacted Regulation SHO in January 2005 to target abusive naked short selling by reducing failure to deliver securities, and by limiting the time in which a broker can permit failures to deliver.
“Credit Suisse’s REG SHO supervisory and compliance monitoring system was seriously flawed,” FINRA Executive Vice President and Chief of Enforcement Brad Bennett said. “Millions of short-sale orders were being entered in its systems for over four years because the firm did not have adequate Reg SHO technology in place.”
The FINRA fine was one of several leveled against the firm for Reg. SHO and related violations.
In 2006, for instamce, Credit Suisse was fined $250,000 for Reg. SHO violations and another $150,000 for erroneously identifying short sales as long sales.
According to FINRA, Credit Suisse's compliance and order marking problems were pervasive, extending across multiple aggregation units and trading systems as well as the firm’s technology and supervisory systems and procedures.
According to FINRA’s Letter of Waiver and Consent, Credit Suisse’s Reg SHO violations occurred due to (1) the failure to decrease available locate shares to account for short sale orders entered but unexecuted; (2) programming errors that resulted in trading systems failing to recognize the rejection of locate requests and/or using prior days’ approvals; (3) misapplication of the bona-fide market maker exception to the locate requirement; (4) trading systems and traders mismarking sale orders; and (5) the failure to adequately supervise locates and order marking.
As FINRA or Credit Suisse identified these problems, Credit Suisse says it implemented changes to its systems and procedures designed to prevent a reoccurrence of violations. The firm says it devoted significant recourses conducting an in-depth scrub of its short sale system.
In April 2009, Credit Suisse’s technology staff in consultation with its legal and compliance departments undertook an extensive review of the systems involved in short sales order marking and the procurement of locates and position tracking used to generate order marking. It also terminated its use of the third party systems that experienced most errors.
All issues of concern were corrected by the firm, the last over 16 months ago, Credit Suisse, which neither admitted nor denied FINRA’s charges.
A statement released by the firm states, “Credit Suisse has reached a settlement with FINRA concerning Regulation SHO. We are pleased that we have reached closure and this matter is now behind us.”
Laton McCartney writes for Securities Technology Monitor.
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