The Financial Industry Regulatory Authority (FINRA) has fined Credit Suisse Securities for failing to properly supervise its short selling activities.
The US$1.75 million fine has been issued for a violation of FINRA’s short selling regulations, Reg SHO, which require a broker or dealer to have reasonable grounds to believe that a security could be borrowed and available for delivery before accepting or effecting a short sale order.
FINRA said Credit Suisse entered “millions of short sale orders” without reasonable grounds to believe that the securities could be borrowed and delivered and mismarked thousands of sales orders.
The regulations also require firms to obtain and adequately document information before a short sale is entered, reducing the number of potential failures to deliver in equity securities.
“Credit Suisse’s Reg SHO supervisory and compliance monitoring system was seriously flawed,” said Brad Bennett, FINRA chief of enforcement. “Millions of short sale orders were being entered in its systems without ‘locates’ for over four years because the firm did not have adequate Reg SHO technology and procedures in place.”
From June 2006 to December 2010, the watchdog said Credit Suisse’s supervisory system resulted in a systemic supervisory failure that contributed to significant Reg SHO failures across its equities trading business. In that time, the Swiss bank released millions of short sale orders to the market without adequate documentation. The violations extended to numerous trading systems, aggregation units and strategies. FINRA said Credit Suisse also mismarked tens of thousands of sale orders in its trading systems. The mismarked orders included short sales that were mismarked as “long”, resulting in additional violations of Reg SHO’s requirements.
FINRA said Credit Suisse’s supervisory framework over its equities trading business was not reasonably designed to achieve compliance with the requirements of Reg SHO and other securities laws, rules and regulations throughout the period concerned.
Credit Suisse has neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.