Regulation SHO and Bona-Fide Market Making
The SEC has instituted administrative proceedings against Wilson-Davis & Company (WDCO), a Utah broker-dealer, and certain associated persons for, among other things, improperly claiming the “bona- fide market making” exception to the requirement in Rule 203 of Regulation SHO to obtain a “locate” of stock before effecting short sales. https://www.sec.gov/litigation/admin/2016/34-79580.pdf
Of note, the firm has not settled with the SEC, while the CEO, Head of proprietary trading, and the trader that caused the violations have settled. https://www.sec.gov/news/pressrelease/2016-266.html
The Order Instituting Proceedings (OIP) pulls together many of the SEC’s extant statements on what constitutes “bona-fide market making” in the context of Rule 203(b)(2)(iii) of Regulation SHO which is “a limited exception to the locate requirement for short sales effected by a market maker in connection with bona-fide market making activities in the securities for which the exemption is claimed.” [OIP at 2] As the SEC explains, this “narrow” exception is available only to:
The OIP quotes the SEC’s statement in 2008 that “a market maker engaged in bona-fide market making is a ‘broker-dealer that deals on a regular basis with other broker-dealers, actively buying and selling the subject security as well as regularly and continuously placing quotations in a quotation medium on both the bid and ask side of the market.’” [OIP at 3] More specifically, indicia of bona-fide market making include:
The order also references the SEC’s previous examples of situations that do and do not indicate bona-fide market making activity, and notes that it is the obligation of the person claiming the exception to demonstrate eligibility. [OIP at 3-4]
The proceeding focusses on WDCO’s proprietary trading group. The firm took the position, which was reflected in its written supervisory procedures (WSPs), that all of its proprietary trading was bona-fide market making activity, and therefore it did not require traders to obtain, nor did it have processes or procedures to require, locates for short sales. [OIP at 4-5] The OIP charges that the firm improperly claimed the exception because:
The OIP provides examples that were typical of WDCO’s activity:
As a result of this activity, WDCO allegedly reaped millions of dollars in “illicit trading profits.”
Larry E. Bergmann (202) 661-7032 firstname.lastname@example.org.
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