Wedbush Securities Inc., agreed to pay a fine of US $675,000 to the Financial Industry Regulatory Authority and Nasdaq Stock Market LLC, to resolve charges brought by FINRA related to the firm’s allegedly impermissible short sales on behalf of a client involving almost 300 million shares of 14 exchange-traded funds from January 1, 2010, through March 16, 2012. According to FINRA, during this time, Scout Trading, LLC, a correspondent broker-dealer client of Wedbush, on multiple occasions, submitted orders to Wedbush to redeem ETF shares on the primary market and to sell ETF shares in the secondary market. However, said FINRA, these transactions resulted in a substantial number of fails by Wedbush, which were allocated to Scout. Scout typically closed out its ETF fails on the sixth day following the initial trade date (T + 6) by creating new ETF shares through placement of a creation order through Wedbush. In doing so, Scout relied on an exemption for market-makers from the ordinary requirement to close out fails by the fourth day after trade date. However, according to FINRA, Scout would promptly re-establish its short position by redeeming or selling shares of the same ETF the next trading day after it closed out the related ETF fail. FINRA claimed that Scout was not entitled to rely on the market-maker exemption to permit T+6 cover of fails and implied that Wedbush should not have permitted Scout to re-establish its short positions promptly afterwards. As a result, said FINRA, Wedbush violated its rule requiring all members to “observe the high standards of commercial honor and just and equitable principles of trade” because the firm did not follow up on Scout’s “recurring, cyclical fails.” (Click here to access a publication by the Securities and Exchange Commission, Key Points About Regulation SHO.)