Credit Suisse agreed to pay $1.75 million to settle FINRA charges it violated Reg SHO, failed to properly supervise short sales of securities and markings of sales orders.  According to FINRA, Credit Suisse allegedly entered millions of short sale orders without having reasonable grounds to believe the securities could be borrowed and delivered, and allegedly mismarked thousands of sales orders. FINRA Findings and Allegations. From June 2006 through December 2010, Credit Suisse's Reg SHO supervisory system regarding locates and the marking of sale orders was allegedly flawed, resulting in a systemic supervisory failure that contributed to significant Reg SHO failures across its equities trading business. Millions of short sale orders were released to the market without locates, including threshold and hard to borrow securities.  The locate violations extended to numerous trading systems, aggregation units and strategies.  In addition, Credit Suisse mismarked tens of thousands of sale orders in its trading systems. The mismarked orders included short sales that were mismarked as "long," resulting in additional violations of Reg SHO's locate requirement.

Credit Suisse’s failure to comply with Reg SHO‘s locate and order marking requirements extended across multiple Firm aggregation units and trading systems, as well as the Firm’s technology and supervisory systems and procedures. The Firm’s Reg SHO violations occurred due to, among other things: (1) the failure to decrease available locate shares to account for short sale orders entered but unexecuted; (2) programming errors that resulted in trading systems failing to recognize the rejection of locate requests and/or using prior days’ locate approvals; (3) misapplication of the bona-fide market maker exception to the locate requirement; (4) trading systems and traders  mismarking sale orders; and (5) the failure to adequately supervise locates and order marking.

The supervisory failures prevented the firm from preventing or detecting many of its violations, and thus correcting them as soon as practicable.  Instead, the errors were identified during FINRA's investigation - which prompted Credit Suisse to conduct a substantive review of its systems and monitoring procedures for Reg SHO compliance.

[C-I Note: It's interesting to note that these systemic issues with Credit Suisse supervisory framework were not addressed for 4-1/2 years - 52 months! During that time, it is inconceivable that FINRA did not test CS's handling of short sales and Reg SHO compliance - either during routine exams or during a Reg SHO sweep.  And presuming the area was tested, why did FINRA not pick up the alleged or apparent errors?]

In concluding this settlement, Credit Suisse neither admitted nor denied the charges, but consented to the entry of FINRA's findings. For further details, go to:   [FINRA News Release, 12/27/11]   and   [FINRA AWC #20080144512]