FINRA Fines Interactive Brokers $5.5 Million for Violating SEC Regulation

The broker was charged with supervisory failings regarding naked short positions for a period of at least three years.

The Financial Industry Regulatory Authority (FINRA) announced on Monday that it has fined Interactive Brokers LLC, a global electronic brokerage, $5.5 million for violating Security and Exchange Commission (SEC) Regulation SHO and supervisory failings regarding naked short positions for a period of a minimum of three years.

Naked short selling is the sale of shares that a trader has neither borrowed nor made arrangements to borrow. As required by the SEC, after completing a short sale transaction, firms are required to purchase or borrow the securities to limit ongoing naked short positions.

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According to the statement, between July 2012 to June 2015 FINRA found that the broker’s supervisory system was not up to scratch to comply with the SEC’s regulations. In addition, Interactive continuously ignored “red flags” that indicated that the supervisory systems and procedures in place were unsatisfactory. This was alerted through internal audit findings, multiple internal warnings from its clearing and compliance personnel, the broker’s own annual risk assessments, and FINRA exam findings.

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Despite Interactive being aware of the deficiencies of its systems, the broker didn’t make any changes to improve this until the middle of 2015. This meant Interactive didn’t timely close-out more than 2,300 fails-to-deliver. The broker also accepted and executed short orders in those securities without first borrowing (or arranging to borrow) the security around 28,000 times.

Interactive Brokers Failed to Act in Time

Susan Schroeder, FINRA
Susan Schroeder
Source: LinkedIn

Commenting on the ruling, Susan Schroeder, the Executive Vice President of FINRA, Department of Enforcement, said: “firms that are aware of deficiencies in their supervisory systems must promptly remediate them. In this case, the firm internally identified the problems, yet did not revise its supervisory systems for more than three years, creating the potential for negative impact to the markets and investor harm.”

While Interactive did consent to the entry of FINRA’s findings, the broker has neither admitted to nor denied the charges, the statement says.

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