← Broker database 2022-09-27
Wedbush Securities Fined $900,000 for Regulation SHO Violations
According to FINRA, Wedbush Securities Inc. was fined $900,000 for failing to comply with Rules 204(a), (b) and (c) of Regulation SHO and for failing to establish adequate supervisory systems for such compliance.
The findings revealed that the firm failed to timely close out fail to deliver (FTD) positions as required by Rule 204(a). The failures occurred because the firm did not timely borrow shares, recall shares that were out on loan, or otherwise acquire and deliver shares in accordance with regulatory requirements. On certain occasions, the firm also failed to place securities with unclosed FTDs into the penalty box as required by Rule 204(b), and failed to send required notices that it had positions in equity securities that had not been closed out, as mandated by Rule 204(c).
The firm's supervisory system was fundamentally flawed. While the system relied first on an automated in-house system to attempt to borrow or recall shares necessary to effectuate close-outs, the firm's written supervisory procedures included only summary instructions to close out FTDs. The procedures failed to offer reasonable guidance on the steps that firm staff needed to take to execute buy-ins if the automated process did not result in closing an FTD. The firm also failed to effectively delegate responsibility for ensuring that each FTD was properly closed out.
Particularly concerning, the firm was on notice that its process for closing out FTDs was unreasonable. In prior FINRA examinations, FINRA identified FTDs to the firm that were not properly closed out, which the firm acknowledged. However, the firm failed to institute effective remedial measures to its supervisory system in response to these red flags. Additionally, the firm did not maintain any written supervisory procedures for complying with Rule 204(c).
Regulation SHO is a critical regulation designed to address abusive short selling practices and promote market stability. Rule 204 requires firms to close out FTD positions by borrowing or purchasing securities, and the penalty box provisions prevent firms from accepting short sale orders in securities where they have failed to deliver, with certain limited exceptions. These requirements help ensure that short selling does not result in extended failures to deliver that can be used to manipulate markets or create artificial supply.
This case demonstrates the serious consequences when firms fail to maintain adequate systems for Regulation SHO compliance, particularly when they fail to address deficiencies identified in regulatory examinations. The substantial fine reflects both the violations and the firm's failure to take corrective action after being put on notice of problems. Investors should understand that Regulation SHO protections are essential for maintaining orderly markets and preventing abusive short selling practices that can harm stock prices and market integrity.