In September 2022, FINRA was censured and fined Wedbush Securities Inc. $900,000 for trading violations. Additionally, the firm must certify in writing within 90 days that the firm has supervisory systems and written procedures in place that are “reasonably designed to achieve compliance with Rule 204 (a) and (c) of Regulation SHO.”
The SEC adopted the Regulation 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,” according to the AWC. “Regulation SHO imposes certain requirements on broker-dealers with respect to sales of equity securities to promote market stability, preserve investor confidence, and increase short sale transparency.”
According to the FINRA Acceptance, Waiver and Consent (AWC), between January 2016 and July 2020 as well as December 2020 and April 2021, Wedbush Securities, Inc. failed to timely close out more than 2,000 fail-to-deliver positions on almost 400 occasions and failed to place these securities in the “penalty box,” as required. FINRA found that the firm “failed to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with Regulation SHO Rules 204(a) and (c).”
FINRA found that Wedbush Securities Inc. “failed to establish and maintain a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with Rules 204(a) and (c). The firm’s system for complying with Rule 204(a) first relied on an automated in-house system to attempt to borrow or recall shares necessary to effectuate a close-out, and then, when the firm did not obtain such shares, on a manual process to obtain the shares. However, the firm’s WSPs included only summary instructions to close out FTDs and 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 the firm was closing out each FTD.”
Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, Wedbush Securities Inc. may be liable for investment or other losses suffered by its customers.
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