Goldman Sachs Execution & Clearing, LP requested and obtained relief from the Securities and Exchange Commission related to certain of its close-out obligations under Regulation SHO.
Regulation SHO requires a firm to close-out short sales where an account has failed to deliver the required security by certain deadlines. Close-out is achieved by the firm borrowing or purchasing the like kind and quantity of the relevant security. However, a firm will not be deemed to have satisfied its Regulation SHO requirements, if, on the same day of its mandatory close-out activity, it re-establishes a short position without being able to demonstrate a legitimate economic purpose. By end of a required close-out deadline day, a firm on an aggregate net basis, including all its cleared client activity, must be a net purchaser of the number of relevant shares at least equal to its close-out obligation.
Goldman Sachs claimed it had difficulty meeting its requirement for various operational reasons, including that some of its clients effect transactions very near market close, while a substantial majority of its custodial customers execute transactions through other broker-dealers where often it is not informed of the trades until “well after” market close.
To address SEC staff’s concerns regarding subsequent sales and its operational challenges, Goldman Sachs proposed a “new approach” that would authorize it to close out impermissible positions of derelict clients through so-called "buy-ins" (purchases) of relevant securities by no later than the beginning of the trading day on the day following the ordinary close-out deadline. However, in return, among other steps, the firm would endeavor better to identify and hold accountable relevant clients to their own close-out obligations and escalate problematic customers and transactions to the firm’s compliance department for consideration of other actions.
Earlier this year, Goldman Sachs paid a US $325,000 fine to the Financial Industry Regulatory Authority for not having adequate supervisory policies and procedures in connection with its Regulation SHO close-out procedures during two time periods from April 1, 2006 through September 9, 2013.
(Click here for further details regarding this fine. Click here for further information on this extended relief in the article, “SEC Provides Relief to GSEC from Rule 204 Close-out Requirements” in the October 31 edition of Corporate & Financial Weekly Digest by Katten Muchin Rosenman LLP.)
Compliance Weeds: Regulation SHO, although superficially straight forward, poses many operational hurdles for firms endeavoring to comply, and reports of violations on the FINRA website read like a who’s who of principal US broker-dealers. As seen in the Merrill Lynch matter elsewhere reported on this website (click here for access), FINRA nowadays increasingly couples allegations of Reg SHO violations with other violations, including those related to anti-money laundering. It is encouraging to see the SEC take this practical approach to address Goldman Sach’s operational issues. Further information on Regulation SHO can be found on the SEC’s website (click here for access).