SEC fines broker-dealer for Reg SHO violations

ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, PURSUANT TO SECTIONS 15(b) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934 AND NOTICE OF HEARING

From at least November 2011 through May 2013, WDCO willfully violated Regulation SHO by taking advantage of the bona-fide market making exception to the “locate” requirement for short sales in Rule 203(b)(2)(iii) without being entitled to rely on the exception. Rule 203(b)(1) of Regulation SHO requires a broker-dealer, prior to effecting a short sale in an equity security for its own account, to “locate” a source of borrowable securities that can be delivered on the date that delivery is due, and document such locate. Rule 203(b)(2)(iii) provides a limited exception to the locate requirement for short sales effected by a market maker in connection with bona-fide market making activities in the securities for which the exception is claimed. During the relevant time, WDCO considered all of its proprietary trading to be bona-fide market making activity and relied on the bona-fide market making exception in Rule 203(b)(2)(iii). This reliance was improper because much of WDCO’s trading was not, in fact, bona-fide market making. As a result, WDCO violated Rule 203(b)(1) of Regulation SHO. While improperly availing itself of the exception, WDCO engaged in numerous short sales in over-the-counter equity securities that resulted in significant and improper trading profits.

The full order is available at https://www.sec.gov/litigation/admin/2016/34-79580.pdf

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