On December 27, 2011, the Financial Industry Regulatory Authority (FINRA) announced its securities arbitration decision to fine USA-based Credit Suisse Securities LLC $1.75 million. The fine is a result of Credit Suisse’s failure to properly mark sale orders and supervise short sales. These violations resulted in millions of short sales orders that were conducted “without reasonable grounds to believe that the securities could be borrowed and delivered and mismarked thousands of sales orders,” according to the FINRA press release.
A short sale occurs when a security is sold that is not owned by the seller. Upon delivery, the security is either purchased or borrowed by the short seller to make the delivery. A broker or dealer must have reasonable grounds to believe the security can be available for delivery in order to perform a short sale order, according to Reg SHO. The “locate” requirement effectively reduces potential failures to deliver, protecting the investment. Furthermore, a broker or dealer must mark the sales as long or short. Failure to do so results in broker misconduct that is potentially dangerous for clients.
FINRA Executive Vice President and Chief of Enforcement Brad Bennett stated that “Credit Suisse’s Reg SHO supervisory and compliance monitoring system was seriously flawed. 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.”
In addition, tens of thousands of sales orders were mismarked, including short sale orders that were incorrectly labeled “long.” Credit Suisse’s violations occurred from June 2006 through December 2010.
Because of the flawed supervisory systems, many violations went undetected until after FINRA’s investigation. Credit Suisse consented to FINRA’s findings but did not admit nor deny the charges.
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