The U.S financial regulatory authority (FINRA) has reportedly fined Wedbush Securities for violating the requirements for reporting short positions. On several occasions between March 2016 and October 2016, FINRA claimed that Wedbush falsely stated its positions on short securities.
As a result of the false representation, the company will be censored and pay a fine of $90,000, based on the settlement agreement on the rule violation.
Misreporting short positions against FINRA’s rules
The FINRA 4560 Rule states that security companies are obliged to periodically report any information about short positions in all proprietary and customer accounts. To fulfill the requirement, the company must report the short position information at least twice monthly. Also, according to the rule, firms are only going to report settled short positions or positions that their settlement times will some before the end of the reporting date.
During the period under review, Wedbush securities utilized a system that recorded same-day sales and purchases of equities. To record the short positions, it offset sales and purchases, recording the sales in the cash account of the customer, and purchase in the customer’s margin account. When the company settled the trades the next day, the short positions were netted out.
With this type of method, the cash account would seem it’s in a short position, while the system did not take notice of such a position when recording short positions. Consequently, the Wedbush misreported its short equity positions throughout the period under review.
During that period, the company reported about 1,911 short positions, which amounts to more than 23 million shares. However, FINRA said the actual figure for short positions should have been 1,704. This means that the actual short position was overstated by 207and more than 2 million shares.
Wedbush’s long list of offenses in the past
This is not the first time Wedbush has been fined for misreporting its short positions. In Sep 2013, the company was fined by FINRA for a related offense of misreporting its short term positions. As at that time, it was fined $87,500 and was censored as well. In June 2010, the company was fined again for supervisory deficiencies and was made to pay $12, 500. Wedbush was also in trouble in Sep. 2017 when it was again fined for three counts of violations, which includes reporting of short interest.