Two Merrill Lynch entities —Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corporation— agreed to pay aggregate sanctions of approximately US $11 million to the Securities and Exchange Commission to resolve administrative charges related to their alleged violation of Regulation SHO – the SEC’s regulation governing the short sales of securities. Under Reg SHO, 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. The SEC charged the Merrill Lynch entities with violating Reg SHO from 2008 to the present by amending their ETB lists during the course of days by effectively removing equity securities, but not stopping its electronic execution platforms from relying on the ETB lists as if not changed. In addition, under Reg SHO, ETB lists should not be older than 24 hours. The SEC also charged the Merrill Lynch entities with sometimes relying on outdated ETB lists from 2008 until 2012 because of a system design error. Apparently, if the firm failed to include an equity security on its ETB list, the system would assume the last known number of shares for that security were still available –whether true or not. In such circumstance, a current ETB list would contain information within and outside 24 hours. To resolve this matter, the Merrill Lynch entities agreed to pay a fine of US $9 million, engage a compliance consultant to review the firms’ Reg SHO policies and procedures, and to pay disgorgement and prejudgment interest of almost US $2 million. Last year the Financial Industry Regulatory Authority settled a disciplinary proceeding with the same two Merrill Lynch entities for their failure to comply with certain Reg SHO requirements within the same time period as well as supervisory lapses. The firms agreed to pay an aggregate fine of US $6 million to resolve that matter.