SEC Settles Short Selling Charges Against Utah Broker-Dealer

Investing

Published: December 19, 2016 3:30 pm

Last Updated: January 12, 2020 4:37 pm

The U.S. Securities and Exchange Commission (SEC) recently announced that it has settled cease-and-desist proceedings against the CEO of a Utah-based broker-dealer and two registered persons associated with the firm for causing the firm’s violations of SEC market structure rules.

The proceedings involve a former proprietary trader at Wilson-Davis & Co., a Utah-based broker-dealer, the firm’s vice president/head trader, and the firm’s CEO and chairman. Regulation SHO requires that, before a broker-dealer effects a short sale, the broker-dealer must “locate” a source of borrowable securities that can be delivered on the date that delivery is due. The rule includes a limited exception for short sales executed in connection with bona fide market making.

From at least November 2011 to May 2013, Wilson-Davis relied on the bona-fide market making exception for all short sales by its proprietary trading group. This reliance was improper for certain Wilson-Davis trades because much of Wilson-Davis’s proprietary trading activity was not, in fact, bona-fide market making.

While improperly availing itself of the exception, Wilson-Davis engaged in numerous short sales in over-the counter equity securities, which violated SEC rules and resulted in improper trading profits.

Additionally, Wilson-Davis failed to have controls and supervisory procedures, or establish, document and maintain a system for regularly reviewing the effectiveness of the risk management controls and supervisory procedures. Wilson-Davis’s CEO violated the certification requirement because the certification was inadequate and he signed without being familiar with the rule, not knowing who at the firm was responsible for compliance with it nor making reasonable inquiries about the firm’s annual review and the results of any such review.

This is the first time that the SEC has charged the CEO of a broker-dealer with violating the CEO certification requirement of the Market Access Rule.

Andrew J. Ceresney, Director of the SEC’s Enforcement Division, commented:

We allege that Wilson-Davis violated SEC rules that help ensure fair markets, including the rules for short sales and for market access. Public confidence in our markets depends on careful compliance with these market structure rules.

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