The Industrial and Commercial Bank of China Financial Services LLC agreed to settle allegations by the Securities and Exchange Commission that it violated Regulation SHO because it failed to close out on a timely basis short equity sales positions of correspondent brokers when the brokers failed to deliver the requisite securities. ICBC agreed to pay a fine of US $1.25 million resolve this matter. According to the SEC, from April 2013 through August 2016, ICBC claimed lawfully available credits against its close out obligations when it did not fully comply with technical obligations to claim such credits. Moreover, alleged the SEC, during the relevant time, ICBC had “institutional knowledge” of its ongoing failure to deliver positions resulting from its impermissible claims of credit through generation of a daily operational report; however, said the SEC, ICBC did not review this report to identify its prolonged failure to deliver positions until January 2015. The SEC noted that it credited ICBC’s remedial acts and cooperation in agreeing to the settlement.
Compliance Weeds: Under Reg SHO (click here to access this regulation at 15 USC § 240.15c3-5), a broker-dealer accepting a short sale of an equity security from a customer (or engaging in a short sale in its own proprietary account) must first borrow the security, enter into a bona fide arrangement to borrow the security, or have reasonable grounds to believe the security can be borrowed before the delivery date. Broker-dealers comply with this so-called “locate requirement” by maintaining so-called “easy to borrow” lists, which set forth equity securities they reasonably believe they can borrow. Absent an authorized basis, brokers that are participants on a registered clearing agency must close out failure to delivery transactions by no later than the beginning of trading on the settlement day following settlement day of the relevant securities (T+4). However, if the participant can demonstrate that a fail occurred from a long sale or is attributable to bona fide market maker activities, it must close out the relevant securities by no later than the beginning of trading on the third consecutive settlement following the settlement date (T+6). Many other very technical requirements may apply. (Click here for background regarding Reg SHO in an SEC publication, Key Points About Regulation SHO.)