FINRA fines JPMorgan Securities for failure to comply with Regulation SHO

JP Morgan Clearing Corporation, now known as JP Morgan Securities LLC, has agreed to pay a fine of $300,000 as a part of a settlement with the Financial Industry Regulatory Authority (FINRA).

The settlement stems from the firm’s alleged violations of Regulation SHO.

The Securities and Exchange Commission (SEC) adopted Regulation SHO to address concerns regarding potentially abusive “naked” short selling. Regulation SHO imposes requirements on broker-dealers with respect to sales of equity securities.

These requirements include the so-called “penalty box” provision, which restricts short selling in securities when the close out requirement is not satisfied unless the broker-dealer borrows or arranges to borrow the security.

The regulation also provides that a broker-dealer may allocate a close out obligation to another broker-dealer. The notice of allocation must be clear as to the allocation of responsibility and quantity of the fail to deliver.

From July 2009 through September 2015, JP Morgan sent emails to allocate the responsibility of close out fail to deliver positions to two introducing broker-dealers. JP Morgan’s allocation notices, however, did not make it reasonably clear that the firm was allocating responsibility for closing out the fails to the IBs.

As a result, certain fail to deliver positions the firm sought to allocate were not closed as required by Regulation SHO and securities that were subject to the close out requirement were not put in the “penalty box”.

In addition, rather than looking at its own books and records, the firm determined whether to purchase securities to close out a fail by reviewing whether fails were closed out on an account level basis.

FINRA has also found that JP Morgan’s supervisory system was not reasonably designed to achieve compliance with Regulation SHO’s Rule 204 (d). This is despite the firm’s reliance on allocations to close out fails on a daily basis.

On top of the fine, JP Morgan has agreed to a censure.

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