FINRA imposes $5.5m fine on Interactive Brokers for violations of short-selling regulation

Maria Nikolova

FINRA says Interactive Brokers did not timely close-out more than 2,300 fails-to-deliver.

The United States Financial Industry Regulatory Authority (FINRA) has imposed a $5.5 million fine on electronic trading major Interactive Brokers LLC over violations of Regulation SHO and a range of supervisory failures.

In its announcement, FINRA explains that in order to limit ongoing naked short positions, firms are required to comply with the Securities and Exchange Commission Reg SHO. It requires that after completion of a short sale transaction firms have 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.

In addition, Regulation SHO prohibits the execution or display of short sale in a “covered security” at a price that is less than or equal to the current national best bid when the price of the security has fallen by 10% or more in one day.

FINRA found that from July 2012 through June 2015, Interactive Brokers’s supervisory system, including its written supervisory procedures, was not reasonably designed to achieve compliance with the requirements of Regulation SHO. Also, Interactive Brokers repeatedly ignored “red flags,” including internal audit findings, multiple internal warnings from its clearing and compliance personnel, its own annual risk assessments, and FINRA exam findings, indicating that its Regulation SHO supervisory systems and procedures were unreasonable.

Although the broker has been informed of these supervisory deficiencies, it did not implement remedial measures until mid-2015. As a result, Interactive Brokers did not timely close-out more than 2,300 fails-to-deliver, and accepted and executed short orders in those securities without first borrowing (or arranging to borrow) the security approximately 28,000 times. Furthermore, Interactive Brokers permitted the execution or display of more than 4,700 short sale orders in covered securities at a price less than or equal to the current national best bid.

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

Interactive Brokers has relevant disciplinary history.

  • On December 22, 2011, the broker consented to censure and $50,000 fine in connection with FINRA’s findings that Interactive violated Regulation SHO when it failed to close-out FTD positions in certain threshold securities during the second and fourth quarters of 2007.
  • On July 2012, the firm consented to censure, a fine of $550,000 and disgorgement of commissions in connection with FINRA’s findings that (inter alia) it violated Regulation SHO by failing to timely effect buy-ins with respect to approximately 34,000 short sale positions during the period from October 2008 to December 2011.
  • On January 2013, the firm consented to censure and a fine of $15,000 as a result of FINRA’s findings that Interactive violated Regulation SHO by failing to close-out an FTD position in a threshold security for a period of 30 settlement days.
  • On March 6, 2015, the firm consented to a censure and a fine of $17,500 as a result of FINRA’s findings that Interactive violated Regulation SHO by accepting or effecting short sales without having effected the necessary borrows on 130 occasions from January 1, 2011 to August 2, 2011.

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