BNP Paribas Securities agrees to pay $250,000 to settle SEC charges

Maria Nikolova

This matter concerns BNP Paribas Securities’s violations of Rule 203(a)(1) of Regulation SHO, which prohibits lending shares to settle sale orders marked as “long.”

The United States Securities and Exchange Commission (SEC) has accepted an offer of settlement submitted by BNP Paribas Securities (BNPP).

The matter concerns BNPP’s violations of Rule 203(a)(1) of Regulation SHO, which prohibits lending shares to settle sale orders marked as “long.” From April 2016 through July 2016, BNPP routinely loaned a hedge fund prime brokerage customer securities on settlement date to settle purported “long” sales. These sale orders were all executed away from BNPP at another broker-dealer (“Broker-Dealer A”) on behalf of the Hedge Fund.

On at least 35 occasions over a four-month period, the Hedge Fund submitted to Broker-Dealer A sale orders marked “long” for execution, and those sale orders subsequently were submitted to BNPP for clearing. But for each of those “long” sales, on the morning of settlement, the Hedge Fund did not have sufficient shares of the securities in its account at BNPP to sufficiently cover the sale order. BNPP served as the clearing broker for each of these transactions and was routinely alerted on the morning following the trade date that the Hedge Fund lacked sufficient shares in its BNPP account to cover the orders.

When the settlement date for each of those sale orders arrived and the Hedge Fund had not delivered sufficient shares to its account at BNPP to cover the sale, BNPP loaned the Hedge Fund shares to settle the sale. In total, BNPP loaned the Hedge Fund more than eight million shares in the securities of three different issuers to settle purported “long” sales that had been submitted to BNPP for clearing.

The SEC finds that, at the time of the Hedge Fund’s “long” sale orders, BNPP did not take steps necessary to reasonably ascertain that the Hedge Fund owned the securities, nor did the Hedge Fund’s assurances to BNPP reasonably inform BNPP that the Hedge Fund would deliver the securities to its BNPP account prior to the scheduled settlement date.

In addition, although the Hedge Fund routinely made assurances to BNPP that its orders were properly marked as “long” and that it would deliver the securities to its BNPP account prior to settlement date, it was not reasonable for BNPP to rely on such representations because BNPP was on notice of the Hedge Fund’s repeated failures to deliver the securities to its BNPP account by settlement date. Instead, BNPP automatically loaned the shares to settle these “long” sales and did not conduct any analysis or consider the known facts and circumstances, including the Hedge Fund’s history of failing to deliver enough shares to its BNPP account prior to scheduled settlement, to determine whether it would be reasonable to conclude that the Hedge Fund in fact owned the securities or would deliver them to its BNPP account prior to settlement.

According to the SEC, in light of the Hedge Fund’s conduct, it was unreasonable for BNPP to rely on the Hedge Fund’s statements that the Hedge Fund’s orders were properly marked “long” and that the Hedge Fund would deliver the securities to its BNPP account prior to scheduled settlement.

BNPP has been found to have violated Rule 203(a)(1) on at least 35 occasions when it loaned the Hedge Fund securities to settle sale orders marked as “long.”

There are a number of sanctions agreed to in BNPP’s offer. The company will pay a civil money penalty in the amount of $250,000 to the SEC. BNPP will cease and desist from committing or causing any violations and any future violations of Rule 203(a)(1) of Regulation SHO, promulgated under the Exchange Act. Also, BNPP is censured.

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