According to FINRA, Wilson-Davis & Co., Inc., along with principals Byron Bert Barkley and James C. Snow Jr., were sanctioned for multiple violations related to short selling and supervisory failures.
The firm was fined $490,000 for engaging in short selling that violated Rule 203(b)(1) of Regulation SHO. Specifically, the firm failed to obtain proper locates for 122 short sale transactions in four low-priced stocks. The firm claimed it was exempt from the locate requirement due to bona-fide market-making activities, but FINRA found this claim was not supported by the facts.
Barkley was fined $25,000 and suspended from principal capacities for six months. He must also requalify by examination as a General Securities Principal, Investment Banking Principal, and Compliance Officer before returning to those roles. Snow was fined $50,000 and similarly suspended for six months, with requirements to requalify as a General Securities Principal and Investment Banking Principal.
The supervisory failures were extensive. The firm's written supervisory procedures provided no guidance for supervisors to examine whether short sales were connected to legitimate market-making. There were no processes for locating or borrowing securities for short sales. The firm's supervisory assignment system through head count lists was described as "replete with erroneous lines of authority."
FINRA also found failures in heightened supervision oversight, instant message review, and anti-money laundering procedures. The firm's AML procedures were purchased from a vendor and never tailored to the specific risks of penny stock trading and liquidation.
For investors, this case highlights the importance of understanding how broker-dealers manage compliance with complex regulations like Regulation SHO. Firms must have robust supervisory systems, especially when dealing with higher-risk activities like penny stock trading. The sanctions underscore that claiming market-maker exemptions requires genuine market-making activity, and generic compliance procedures are insufficient.
