US-based Financial Industry National Regulatory Authority (FINRA), along with the Nasdaq Stock Market LLC (Nasdaq), today announced a joint censure and fine against Wedbush Securities in connection with its Regulation SHO Obligations related to a leveraged ETF offering for one of its clearing customers Scout Trading LLC.
The fine from Nasdaq and FINRA totaled $675,000 against Wedbush Securities in connection with its oversight while handling the clearing for Scout Trading LLC. This was a broker-dealer client which had been fined $3 million in a previous related action from Nasdaq. Wedbush acted as an authorized participant of various ETFs to Scout Trading, according to the update.
“Authorized Participants, as gatekeepers and conduits to the primary ETF markets, play vital roles in ensuring they carry out their obligations consistent with applicable securities laws and do not become a vehicle for misconduct. We will continue to monitor firms for adherence to Regulation SHO and adequate supervisory systems to ensure such compliance,” said John Zecca, Senior Vice President of Market Regulation for Nasdaq’s U.S. Markets, commenting in the press release.
295 million Shares across 11 ETFs
Scout Trading submitted at least 255 naked redemption orders through Wedbush in 11 ETFs, totaling over 295 million shares. This naked redemption activity, along with short selling of the ETFs on the secondary market by Scout Trading, resulted in substantial, repeated failures to deliver by Wedbush, and perpetuated a vicious cycle. Wedbush consented to the settlement without either admitting or denying the charges.
Thomas Gira, FINRA Executive Vice President and Head of Market Regulation commented regarding the announcement: “Timely delivery of securities is a critical component of sales activity in the markets, particularly in ETFs that rely on the creation and redemption process. Naked trading strategies that result in a pattern of systemic and recurring fails flout such principle and do not comply with Regulation SHO. Authorized Participants and their broker-dealer clients need to have adequate supervisory procedures and controls in place to ensure that they are properly redeeming and creating shares of ETFs.”
