Here is the proof "Rule 204, adopted in response to the financial crisis, addresses the negative effects that fails to deliver have on markets. Penson violated the rule when it loaned securities held in customer margin accounts to third parties and the margin customers sold those securities, but waited until the settlement date (T+3) to recall the stock loans.
“This practice resulted in serial failures to deliver at the firm level. Rule 204 required Penson to purchase or borrow sufficient shares to close out those failures to deliver no later than the beginning of regular market hours on the sixth business day after the sale (T+6),” according to the SEC.
Johnson and Wetzig allowed the firm-level failures to deliver to persist until the borrowers returned the recalled shares, which often did not happen until the close of business on T+6
FINRA Fines UBS Securities $12 Million for Regulation SHO Violations and Supervisory Failures
For Release:
Friday, October 21, 2011
Contact(s):
Nancy Condon (202) 728-8379
WASHINGTON — The Financial Industry Regulatory Authority (FINRA) announced today that it has fined UBS Securities LLC $12 million for violating Regulation SHO (Reg SHO) and failing to properly supervise short sales of securities. As a result of these violations, millions of short sale orders were mismarked and/or placed to the market without reasonable grounds to believe that the securities could be borrowed and delivered.
