FINRA fines Canaccord Genuity over deficient close out practices, short sale rules violations

Maria Nikolova

During a period of approximately two years, Canaccord failed to timely close out 28 fail to deliver positions, and executed 15 short sale orders while in the “penalty box”.

Institutional broker-dealer Canaccord Genuity LLC has agreed to pay a fine of $80,000 as a part of a settlement with the Financial Industry Regulatory Authority (FINRA). The settlement concerns securities rules violations that occurred during the period from December 1, 2016 to November 16, 2018.

In summary, during the relevant period, Canaccord failed to timely close out 28 fail to deliver positions and executed 15 short sale orders while in the penalty box. In addition, because the Firm’s close out practices in connection with its market making activities were non-compliant with the requirements of SEC Rule 204(a)(3). Also, Canaccord’s supervisory system and written supervisory procedures were not reasonably designed to achieve compliance with SEC Rule 204(a)(3) in violation of FINRA Rules 3110 and 2010.

In 28 instances during the relevant period, Canaccord failed to close out a fail to deliver position in an equity security attributable to market making activity by the time required under SEC Rule 204(a)(3), i.e., by market open on the third day after the settlement date. In these cases, the firm, rather than purchase or borrow securities of like kind and quantity by market open on the close out date, generally displayed at market open a bid-only quote to the over-the-counter markets at FINRA Rule 6433’s minimum quote size, which, on some occasions, was less than the number of shares necessary to close out the fail to deliver position. Thus, Canaccord violated SEC Rule 204(a)(3) and FINRA Rule 2010.

In 15 instances during the relevant period, Canaccord executed a short sale order in an equity security for which it had a fail to deliver position that it had not yet closed out without having first borrowed or entered into a bona fide arrangement to borrow the security. Thus, Canaccord violated SEC Rule 204(b) and FINRA Rule 2010.

Moreover, during the relevant period, with respect to certain less liquid OTC equity securities, Canaccord adopted a practice of displaying a bid-only quote (typically at the minimum quote size) to close out certain fail to deliver positions attributable to its market making activities. This practice was inconsistent with the close out requirements of SEC Rule 204(a)(3) and led to the 28 violations of Rule 204(a)(3). FINRA says that the firm’s 2016 written supervisory procedures did not provide guidance as to the firm’s actual practice, while the firm’s 2017 written supervisory procedures were vague and did not describe any steps to be taken by the firm to supervise the close out activity.

As a result, FINRA concludes that the firm’s supervisory system and its written supervisory procedures were not reasonably designed to achieve compliance with SEC Rule 204(a)(3). Thus, Canaccord violated FINRA Rules 3110 and 2010.

On top of the fine, the firm has agreed to censure.

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