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Cantor's Latest Reg. SHO Violations Will Cost $2 Million
by Howard Haykin
Cantor Fitzgerald & Co. agreed to pay a $2 million fine to settle FINRA charges that it violated Regulation SHO and committed supervisory failures over a period spanning at least 5 years. Under the settlement, Cantor must also retain an independent consultant, who will conduct a comprehensive review of the firm’s policies, systems, procedures and training related to Reg SHO.
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The rule requires firms to deliver the shares on settlement date or take affirmative action to close out the “failure to deliver” shares by purchasing or borrowing the securities.
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If the failure to deliver is not closed out, the firm may not accept additional short sale orders in the security without first borrowing or arranging to borrow the security.
WHAT WENT WRONG. From 2013 through 2017, Cantor’s deficient supervisory system, including its written supervisory procedures (“WSPs”), was incapable of achieving compliance with the requirements of Reg SHO.
- Cantor used a predominantly manual system of supervision that was inadequate in light of the firm’s business expansion and increased trading activity - from 35 billion shares in 2013 to 79 billion shares in 2014.
- Cantor failed to adequately respond to red flags identified in 2013, 2014 and 2015 that indicated systemic issues with the firm’s ability to comply with Reg SHO - e.g., the firm failed to: (i) adapt and enhance its supervision to address the identified deficiencies; (ii) commit additional staffing to monitor its compliance with Reg SHO; or, (iii) implement WSPs relating to its new lines of business until 2016.
Cantor also failed to timely remediate issues identified by its personnel, which was not reasonable given the firm’s prior disciplinary history relating to Reg SHO.
- Cantor did not timely close-out at least 4,879 fails-to-deliver;
- Cantor routed and/or executed thousands of short orders in those securities without first borrowing (or arranging to borrow) the security or issuing notice of the need for a pre-borrow to the broker-dealers for whom it cleared and settled trades.
RELEVANT DISCIPLINARY HISTORY. In 2011, Cantor settled FINRA charges that, among other things, it failed to close out fail-to-deliver ("fail" or "FTD") positions in threshold securities and engaged in proprietary short sales without performing a pre-borrow while it had an FTD. In 2012, Cantor again settled FINRA charges addressing many of the same violations that FINRA cited just one year earlier.
BASIS FOR FINRA’S SANCTIONS. In determining the sanctions imposed, FINRA considered the following factors: (i) Cantor’s prior disciplinary history relating to Reg SHO; (ii) that Cantor's misconduct occurred over a 5-year period; (iii) Cantor’s failure to address red flags in a timely manner; (iv) Cantor’s continuing supervision deficiencies; and, (v) Cantor’s efforts to improve its supervisory systems.
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Cantor must hire an Independent Consultant to conduct comprehensive reviews of the adequacy of the Firm's policies, systems, and procedures (written and otherwise) and training relating to Rule 204 of Regulation SHO;
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Cantor must retain that Independent Consultant for a period of 2 years from completion of the engagement;
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Cantor must adopt and implement the recommendations of the Independent Consultant; and,
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Cantor must certify to FINRA as to how the recommendations were implemented.
For further details, go to ... FINRA Disciplinary Actions Online, and refer to Case #2014041817001.
