This Louisville-based firm, with some 75 offices and 680 registered reps, agreed to settle FINRA charges related to its handling of customer short sales.  J.J.B. Hilliard, W.L Lyons, LLC, has been in business since 1936. From 12/1/98 to 3/31/08, Hilliard Lyons was a subsidiary of The PNC Financial Services Group.  During that time, the firm served as the clearing broker for PNC Investments, an affiliated introducing broker.  On 3/31/08 Hilliard Lyons was acquired by HL Financial Services,a company owned by employees of Hilliard Lyons and their financial partner, Houchens Industries, Inc., a nonmember firm. FINRA's Allegations. From September 2008 through July 2010, Hilliard Lyons allegedly accepted orders for short sales without either borrowing or entering into an arrangement to borrow the shares, or having reasonable grounds to believe that it could borrow shares so they could be delivered by the settlement date.

1.  The firm failed to document its compliance with Reg SHO Rule 203’s borrowing and locate requirements with respect to additional short sales such that the firm could not demonstrate that it entered the short sale orders only after it had a reasonable basis to believe that shares could be delivered by the settlement date.

2.  The firm did not comply with Reg SHO Rule 204’s close-out requirements with respect to fail-to-deliver positions.

3.  The firm did not have adequate procedures in place to ensure that it complied with the locate provisions of Reg SHO Rule 203 or the closeout provisions of Reg SHO Rule 204.  While the firm made several revisions to its procedures, the revisions were not adequate to bring the firm into compliance with those rules.

4.  While, its RRs were required to contact the Settlements Department so that a locate could be performed, and a spreadsheet was used to track and monitor locates obtained, Hilliard Lyons had no systematic controls to prevent an RR from electronically entering a short sale order into its system without a locate.  This resulted in the firm continuing to accept certain short sale orders without first obtaining a locate.

5.  The firm had a system for reviewing short sales on T+1;  however, FINRA found that it was not in compliance with Reg SHO Rule 203.  The program was developed in house to review all short sales, on T+1, for an approved locate that was obtained prior to the order being entered into the firm’s systems.  Those lacking were immediately closed out on the system.

Broker-dealers ware required to have reasonable grounds to believe a security can be borrowed prior to the acceptance of a short sale order.

As of August 2011, FINRA found that Hilliard Lyons had closed a gap in its system, by preventing RRs from electronically entering a short sale into the Firm’s order entry system. Finally, with respect to the close out provisions of Rule 204, during one year, the firm’s WSPs allegedly did not address the resolution of fail-to-deliver positions related to long and short sales. FINRA Sanctions. J.J.B. Hilliard, W.L Lyons was fined fined $30,000.   For further details, go to:   [FINRA AWC #2010023303101].   [Disciplinary Actions for October 2011.]