FINRA fined a global online broker $5.5 Million for allowing naked short selling in violation of Regulation SHO despite red flags raised by FINRA as well as its own compliance and internal audit departments. FINRA maintains that, over a three-year period, the BD did not timely close out fail-to-deliver positions, unlawfully routed short sale orders, and did not issue required client pre-borrow notices. The firm’s Compliance Technology Department had advised senior management to fix systems that failed to account for segregation deficits. The firm’s Internal Audit Department also highlighted deficiencies. FINRA noted red flags in three consecutive examinations.
OUR TAKE: The regulators will react swiftly and harshly to a registrant that knows about compliance problems but appears to flout the requirements by failing to take remedial action. When assessing compliance programs, senior executives should first ask whether the firm has addressed previously-identified deficiencies.