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Online Broker Fined $5.5 Million for Ignoring Short Sale Red Flags

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.

FINRA Fines BD $550,000 for Weak AML Procedures Related to DVP Accounts

FINRA fined a broker-dealer $550,000 for failing to properly monitor and detect red flags related to small cap securities traded via delivery versus payment accounts.  According to FINRA, the respondent did not implement the same level of due diligence as it utilized with accounts held at the broker-dealer.  FINRA also alleges that the firm failed to enhance its compliance procedures even after warnings from the SEC and its clearing firm.  FINRA faults the firm for over-relying on branch managers to conduct surveillance and report red flags.

OUR TAKE: It’s never a good idea to rely on producers or their supervisors to monitor activities.  They are not regulatory professionals, and they often have a significant conflict of interest with respect to activities that affect their compensation.