Clearpool Execution Services, LLC has agreed to pay a fine as a part of a settlement with the United States Financial Industry Regulatory Authority (FINRA) on short selling rule violations.
From April 27, 2015 through May 17, 2017, Clearpool incorrectly believed that it did not have to obtain a locate when effecting principal short sales to facilitate client short sale orders on a riskless principal basis, so long as its clients obtained locates for their short sale orders.
While trading as riskless principal, Clearpool, upon receipt of a client short sale order, effected a principal short sale in the same security on an exchange or other execution venue and then satisfied the client order by buying the security as principal at the same price. Accordingly, there were two short sales: (1) Clearpool accepted a short sale order from its client; and (2) Clearpool effected a short sale order for its own account.
Clearpool incorrectly believed that it was not required to obtain locates for its principal short sales, so long as its clients obtained locates for their short sale orders. However, Clearpool had a separate locate obligation with respect to the short sales it effected for its own account.
From April 27, 2015 through May 17, 2017, Clearpool effected an estimated 9.27 million short sale orders for its own account to facilitate client short sale orders on a riskless principal basis, without borrowing the securities, entering into bona-fide arrangements to borrow the securities, or having reasonable grounds to believe that the securities could be borrowed so that they could be delivered on the date delivery was due.
This way, Clearpool violated Exchange Act Rule 203(b)(1) and FINRA Rule 2010.
Also, Clearpool reported an estimated 9.28 million short sale transactions to the TRF without the short sale indicator.
In addition, from April 27, 2015 through May 17, 2017, Clearpool inaccurately recorded the riskless principal legs of its transactions on its purchases and sales blotters. When Clearpool purchased a security from its client to satisfy a client sale order, Clearpool inaccurately recorded the execution of a client sale order, rather than a purchase for its own account. Likewise, when Clearpool sold a security to its client to satisfy a client buy order, Clearpool inaccurately recorded the execution of a client buy order, rather than a sale for its own account.
This way, Clearpool violated Exchange Act § 17(a) and Rule 17a-3(a)(1) and FINRA Rules 4511(a) and 2010.
To settle the matter, the company consents to a censure and a $300,000 fine, of which $195,000 shall be paid to FINRA. FINRA investigated this matter on behalf of itself and NYSE Arca, Inc. The balance of the fine will be paid to NYSE Arca.
