According to FINRA, Gar Wood Securities, LLC was censured and fined $100,000 for failing to comply with the locate requirement of Regulation SHO and for inaccurately reporting trade capacity symbols.

The firm inadvertently misconfigured its delivery-versus-payment client accounts, allowing short sale orders to route for execution without obtaining required locates. This violated Rule 203 of Regulation SHO, which requires broker-dealers to have reasonable grounds to believe securities can be borrowed before executing short sales. Additionally, one of the firm's order management systems was incorrectly coded to send a principal capacity symbol for client agency orders, causing transactions to be reported with the wrong capacity designation.

The firm's supervisory system failed to achieve compliance with the locate requirement. While procedures required locate reviews, the firm inadvertently excluded DVP accounts from this review. For custodial accounts, the firm's locate review incorrectly excluded short sales orders that were accepted but did not execute. The firm also lacked any review to confirm that all required trade information, including capacity, was accurately reported to the FINRA TRF.

Locate requirements under Regulation SHO were implemented to prevent abusive naked short selling and ensure securities can be delivered by settlement date. Proper capacity reporting (principal versus agency) is important for market transparency and accurate transaction cost analysis. While these were inadvertent technical violations, they represent serious compliance failures that could impact market integrity. Investors should understand that regulatory requirements like locate rules and accurate trade reporting protect them from manipulative practices and ensure orderly markets. The firm has since corrected the coding errors and switched all agency order routing to a properly configured system.