According to FINRA, M1 Finance LLC was censured and fined $400,000 for violations of Regulation SHO rules governing short sales and order marking.
The firm incorrectly treated all sales as long, effecting sell orders that required compliance with Regulation SHO Rule 203(b)(1) without obtaining the required locate for short sales. M1 Finance violated Rule 200(g) by incorrectly marking sell orders as long sales when the orders should have either been split into separate orders (one marked long and one marked short) or marked as a single short order. The firm also incorrectly marked sell orders as executed in an agent capacity when portions of the orders actually represented shares purchased for the firm's inventory account executed in a principal capacity. Similarly, buy orders at the end of trading windows were incorrectly marked as agent when portions were executed in a principal capacity. These marking errors resulted in inaccurate order memoranda and books and records.
Beyond the technical violations, FINRA found that M1 Finance failed to establish and maintain a supervisory system reasonably designed to achieve compliance with Regulation SHO's locate and order marking requirements. While the firm's written supervisory procedures required a principal to conduct daily reviews of transactions for compliance, the procedures provided no guidance on how these reviews should be conducted—they didn't identify who was responsible, how many trades to review, what to monitor for, or what materials to use. After implementing procedures addressing order marking requirements, the firm still failed to implement any systems, surveillance, or reviews to monitor compliance.
This case illustrates that technical compliance requirements exist for important reasons—they ensure market integrity and transparency. Firms using automated trading systems must implement robust controls and supervision to ensure their systems comply with regulatory requirements. Investors rely on accurate trade reporting and proper handling of short sales to ensure fair and orderly markets.
