Sent to me by a friend... Shorts will pay!
FINRA Fines Deutsche Bank Securities, National Financial
Services A Total
of $925,000 for Systemic Short Sale ViolationsBoth Firms
Facilitated Customer Execution of Short Sales Through
Direct
Market Access Order Systems That Violated the 'Locate'
Requirement of Regulation SHO*
WASHINGTON, May 13, 2010 (BUSINESS WIRE) --The Financial
Industry Regulatory Authority (FINRA) announced today that
it has fined two broker-dealers a total of $925,000 for
executing numerous short sale orders in violation of
Regulation SHO and for related supervisory violations.
FINRA
fined New York's Deutsche Bank Securities $575,000 and
Boston's National Financial Services (NFS) $350,000.
Regulation SHO requires that a broker or dealer may not
accept or effect a short sale order in an equity security
without reasonable grounds to believe that the security can
be borrowed, so that it can be delivered on the date
delivery is due. Identifying a source from which to borrow
such security is generally referred to as obtaining a
"locate." Locates must be obtained and documented prior to
effecting a short sale.
Both Deutsche Bank and NFS implemented Direct Market Access
trading systems for their customers that were designed to
block the execution of short sale orders unless a "locate"
had been obtained and documented. But FINRA found that
Deutsche Bank disabled its system in certain instances and
NFS created a separate system for certain customers -- so
that in both instances, the systems no longer blocked some
short sale orders that did not have valid, associated
locates.
"The locate requirement is an essential component of
ensuring that short sales are executed properly," said
James
S. Shorris, FINRA Executive Vice President and Acting Chief
of Enforcement. "The failure to design, implement and
supervise systems that reasonably ensure that shares of a
security are available to be borrowed before a short sale
is
executed significantly undermines the effectiveness of
Regulation SHO."
FINRA's review of a sample of short sale orders at both
firms revealed that some short sale orders entered through
the Direct Market Access trading systems were released for
execution without any evidence that a locate had actually
been obtained.
In Deutsche Bank's case, the firm's systems sometimes
experienced outages that prevented the importing of locate
data and, as a result, short sale orders placed for
execution were automatically rejected, even when a client
had already obtained a valid and properly documented
locate.
FINRA found that during these system outages, Deutsche Bank
disabled the system's automatic block, permitting client
short sale orders to automatically proceed for execution
without first confirming the presence of an associated
locate.
FINRA found that in addition to its automated process, NFS
created a separate manual locate request and approval
process for approximately 12 of the firm's prime brokerage
clients, which preferred to obtain locates in multiple
securities prior to commencement of the trading day.
Requests for, and approvals of, the multiple simultaneous
locates were transmitted via email exchanges with account
representatives on the firm's Prime Services Desk, and were
not required to be entered into the firm's stock loan
system
at the time of approval. Further, prime clients were
allowed
to enter and execute their orders through automated
platforms that did not have the functionality to
automatically block execution of a short sale order that
did
not have a valid and documented locate.
FINRA also found that neither Deutsche Bank nor NFS
performed a meaningful post-trade date review of short sale
orders to identify short sale orders executed without a
valid, associated locate having been obtained or
documented.
Further, FINRA found that both firms implemented inadequate
supervisory systems in connection with their Regulation SHO
compliance. Deutsche Bank was aware that its system to
block
short sale orders in the absence of locates was
periodically
disabled over a period of more than four years (from
January
2005 through September 2009), but failed to devise or
implement a replacement procedure. Similarly, NFS created a
flawed system for certain customers that failed to ensure
that certain short sale orders had valid and timely locates
associated with them. NFS's flawed system operated for
nearly four years (from January 2005 through August 2008).
Investors can obtain more information about, and the
disciplinary record of, any FINRA-registered broker or
brokerage firm by using FINRA's BrokerCheck. FINRA makes
BrokerCheck available at no charge. In 2009, members of the
public used this service to conduct 18.5 million reviews of
broker or firm records. Investors can access BrokerCheck at
www.finra.org/brokercheck or by calling (800) 289-9999.
FINRA is the largest non-governmental regulator for all
securities firms doing business in the United States. FINRA
is dedicated to investor protection and market integrity
through effective and efficient regulation and
complementary
compliance and technology-based services. FINRA touches
virtually every aspect of the securities business -- from
registering and educating all industry participants to
examining securities firms, writing and enforcing rules and
the federal securities laws, informing and educating the
investing public, providing trade reporting and other
industry utilities, and administering the largest dispute
resolution forum for investors and registered firms. For
more information, please visit our Web site at
www.finra.org.
SOURCE: Financial Industry Regulatory Authority (FINRA)
Financial Industry Regulatory Authority (FINRA) Nancy
Condon, 202-728-8379 or Brendan Intindola, 646-315-7277
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