Interactive Brokers violations now prompts illegal short selling inquiries due to the creation and increase of deficits in securities.
Interactive Brokers LLC has reached a settlement with the Financial Industry Regulatory Authority (FINRA) and will pay a fine of $475,000.
The settlement stems from issues that occurred between June and December 2021, during which Interactive Brokers inaccurately calculated the excess shares of stocks listed on European exchanges that it could return to customers from whom it had borrowed those shares as part of its fully paid securities lending program.
This miscalculation led the firm to return borrowed shares in over 800 instances when it should not have, resulting in the creation or increase of deficits for the affected securities.
Retail investors are scrutinizing the firm for the possibility of toying with the market using the illegal practice of ‘naked short selling’.
Naked short selling is the illegal practice of selling a stock without first borrowing the shares or ensuring that they can be borrowed.
The company’s actions violated Exchange Act §15(c), Exchange Act Rule 15c3-3(b)(1), and FINRA Rule 2010.
During the same period, Interactive Brokers also failed to establish and maintain an adequate supervisory system, including written supervisory procedures (WSPs), to meet its possession and control obligations under Exchange Act §15 and Rule 15c3-3(b)(1).
This oversight constituted a violation of FINRA Rules 3110 and 2010.
Additionally, from January 2021 to December 2023, the firm permitted an unregistered associated person to lead software development for its securities finance business, including its securities lending program.
Since securities lending is a regulated function, this individual was required to be registered with FINRA as an Operations Professional.
By allowing this unregistered individual to take on such a role, the firm violated FINRA Rules 1210 and 2010.
The miscalculation of excess shares that Interactive Brokers returned may lead to situations where shares are sold short without the necessary arrangements to borrow them first.
This could contribute to naked short selling if the firm fails to properly account for borrowed shares.
By returning shares improperly, the firm may create or exacerbate deficits.
In the context of short selling, this could mean that shares sold short aren’t actually available in the marketplace, potentially leading to naked short selling scenarios where shares are sold without being secured.
The violations related to supervisory systems and control obligations suggest a lack of oversight that could allow for improper trading practices, including naked short selling.
Regulatory bodies require firms to ensure that shares are borrowed before being sold short to prevent such practices.
If a firm’s securities lending program is not properly managed, it could inadvertently facilitate naked short selling by failing to ensure that all borrowed shares are accounted for and returned correctly.
In addition to the $475,000 fine, Interactive Brokers has also agreed to receive a censure.
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Also Read: Two Overseas Firms Are Now Indicted For Naked Short Selling
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