Finra fines Interactive Brokers $5.5 million for short-sale violations

Regulator says firm did not have adequate procedures in place to comply with regulations

The Financial Industry Regulatory Authority Inc. has fined Interactive Brokers $5.5 million for violating short-sale rule violations and for supervisory failures between 2012 and 2015 in connection with short sales.

During that period, according to Finra, Interactive was aware of supervisory deficiencies but did not implement remedial measures until mid-2015. As a result, the firm did not close out more than 2,300 fails-to-deliver in a timely manner, and it accepted and executed short orders in those securities without first borrowing (or arranging to borrow) the security approximately 28,000 times. Interactive also 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.

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To limit ongoing naked short positions, the Securities and Exchange Commission’s Reg SHO requires that firms, after completion of a short sale transaction, 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. Regulation SHO also prohibits the execution or display of a 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 said that Interactive repeatedly ignored internal audit findings, multiple internal warnings from its clearing and compliance personnel, its own annual risk assessments and Finra exam findings that indicated that its Regulation SHO supervisory systems and procedures were unreasonable.

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