ETF Authorized Participant Fined $675,000
FINRA and Nasdaq jointly fined a broker-dealer $675,000 for using its position as an ETF Authorized Participant to allow its client to engage in unlawful short selling. FINRA charges that the respondent knew or should have known that its broker-dealer customer was communicating naked redemption requests (i.e. redemptions without holding sufficient long positions) for several days in order to arbitrage price movements. FINRA asserts that the respondent violated its agreements with the ETFs and FINRA rules including a failure to implement adequate policies and procedures. John Zecca, Senior Vice President of Market Regulation for Nasdaq’s U.S. Markets, admonished, “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.”
OUR TAKE: Back in January, FINRA stated, in its Regulatory and Examinations Priorities Letter, that it would “review broker-dealers’ role as Authorized Participants (APs) in the ETF creation and redemption process.” (See http://blog2.cipperman.com/2016/01/finra-focuses-on-compliance-culture-in-2016-exam-priorities-letter/.) We expect both FINRA and the SEC to continue to look under the ETF rocks to examine the creation unit process.