According to FINRA, Citigroup Global Markets Inc. was censured, fined $1,500,000, and required to certify that it has remediated the issues and implemented a reasonable supervisory system for compliance with Rule 200(f) of Regulation SHO.

The firm improperly included securities positions of non-broker-dealer affiliates in two of its aggregation units when calculating the net positions of the AGUs. Rather than separately calculating the net position of the firm accounts within the AGU and the net position of each affiliate, as required by Regulation SHO, the firm marked all sell orders based upon the net position of all accounts in the AGU. As a result, the firm did not accurately calculate the net positions of, or assess long and short sales by, two of its AGUs.

Additionally, the firm failed to take reasonable steps to timely act upon known Rule 200(f) deficiencies. The firm did not begin the process of removing its non-broker-dealer affiliates from the AGUs until six years after becoming aware that the inclusion of non-broker-dealer affiliates was not permissible under Rule 200(f).

Regulation SHO was designed to prevent abusive short selling and ensure proper location of securities before executing short sales. The rule's aggregation unit provisions allow affiliated entities to net positions for purposes of determining whether a sale is long or short, but only under specific conditions. By improperly including non-broker-dealer affiliates in its AGUs, Citigroup potentially mismarked orders and undermined the regulatory framework designed to prevent naked short selling.

This case demonstrates that even large, sophisticated firms can have compliance failures, particularly when they fail to promptly address known deficiencies. The six-year delay in correcting the issue after becoming aware of it is particularly concerning. Investors should be aware that proper compliance with short sale regulations protects market integrity and helps prevent manipulative trading practices.