The Financial Industry Regulatory Authority (FINRA), the largest independent regulator for all securities firms doing business in the United States, has fined Cantor Fitzgerald & Co. $2 million for violating ‘naked short selling’ rules over a period of at least four years.
Short selling – which allows investors to make gains in a falling market by borrowing a security they don’t own, selling it and agreeing to buy it back at a lower price – plays an important role in developed capital markets since it makes price discovery more efficient and smooths volatility whilst providing investors with a host of risk-management tools.
FINRA said Cantor’s supervisory system was not reasonably designed to achieve compliance with the federal requirements known as ‘Reg SHO’ from January 2013 through December 2017.
Regulation SHO requires firms to deliver the shares, after completion of a short sale transaction, on the settlement date or take affirmative action to close out the “failure to deliver” shares by purchasing or borrowing the securities. To limit ongoing naked short positions, the broker has no choice but to reject any additional sale orders if the securities were not delivered or closed out within legally required time frames.
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Regulation SHO also prohibits the execution of short sales in covered securities at a price that is less than or equal to the best bid when the price of the security has fallen by 10 percent or more in one day.
Cantor ignored “red flags”
During that period, according to FINRA, Cantor was aware of supervisory deficiencies but did not implement remedial measures until 2016. As a result, the firm did not close out more than 4,879 fails-to-deliver in a timely manner, while it accepted and executed short orders in those securities without first borrowing (or arranging to borrow).
Wall Street’s self-regulator also said Cantor Fitzgerald repeatedly ignored “red flags,” including internal audit findings and multiple internal warnings from its staff.
The global financial services group neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. Also, Cantor has agreed to implement enhancements to meet regulatory reporting requirements and retain an independent consultant to remedy issues related to short sales, as part of its settlement with the FINRA.