FINRA imposes $2m fine on Cantor Fitzgerald over violations of short-selling regulation

The United States Financial Industry Regulatory Authority (FINRA) has imposed a $2 million fine on Cantor Fitzgerald & Co. for Regulation SHO (Reg SHO) violations and supervisory failures during a period of at least five years. As part of a settlement announced today Cantor agreed to the fine, as well as to retain an independent consultant to conduct a comprehensive review of the firm’s policies, systems, procedures and training related to Reg SHO.

The Securities and Exchange Commission (SEC) adopted Reg SHO to address concerns regarding persistent failures to deliver and potentially abusive “naked” short selling, e.g., the sale of securities that an investor does not own or has not borrowed. The rule requires firms to deliver the shares on settlement date or take affirmative action to close out the “failure to deliver” shares by purchasing or borrowing the securities. If the failure to deliver is not closed out, the firm may not accept additional short sale orders in the security without first borrowing or arranging to borrow the security.

FINRA alleges that, from January 2013 through December 2017, Cantor’s supervisory system, including its written supervisory procedures (WSPs), was not designed to achieve compliance with the requirements of Reg SHO. Cantor’s use of a predominantly manual system to supervise its compliance with Reg SHO was not reasonable given the firm’s business expansion and increased trading activity – from 35 billion shares in 2013 to 79 billion shares in 2014.

Furthermore, FINRA has found that Cantor’s compliance personnel identified red flags in 2013, 2014 and 2015 indicating that the firm had systemic issues with Reg SHO and that its supervisory systems were not reasonably tailored to its business. Whereas Cantor made some changes, it did not adapt and enhance its supervision to address the deficiencies its personnel identified, commit additional staffing to monitoring its compliance with Reg SHO, or implement WSPs relating to its new lines of business until 2016. Moreover, Cantor’s enhancements to its supervisory systems and procedures were not fully effective.

FINRA also found that Cantor failed to timely remediate issues identified by its personnel. As a result, Cantor did not timely close-out at least 4,879 fails-to-deliver, and routed and/or executed thousands of short orders in those securities without first borrowing (or arranging to borrow) the security or issuing notice of the need for a pre-borrow to the broker-dealers for whom it cleared and settled trades.

In settling this matter, Cantor neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Let’s recall that in August 2018, in a similar action, FINRA imposed a fine of $5.5 million on Interactive Brokers LLC over violations of Regulation SHO and a range of supervisory failures.