J.P. Morgan Securities LLC

J.P. Morgan Clearing Corporation nka J.P. Morgan Securities LLC was fined a total of $300,000 for failing to comply with SEC Regulation SHO Rule 204 in that the firm attempted to allocate certain fail to deliver positions caused by two introducing broker-dealers.

To determine whether it needed to purchase securities to close out a fail, the firm did not look to its books and records but instead looked to the individual account that caused the fail. If the account had sufficient subsequent purchase activity, the firm would not take any further action. As a result, the firm risked not closing out a fail to deliver position within the timeframe and in a manner specified under Regulation SHO.

If the firm determined there was an open fail caused by one of the broker-dealers, it would send the introducing broker-dealer a spreadsheet via email that included the security and the close out date. The emails, however, did not make reasonably clear that the firm was allocating a close out requirement. As a result, the introducing brokers understood that they were being provided notices of potential buy ins.

In addition, the email notifications sent to one of the broker-dealers did not expressly state the amount of the fail being allocated to it, based on the firm’s understanding that the amount being allocated was in each instance the entire amount of the fail. As a result of the flaws in the notices, the firm remained responsible for the fails.

Further, because it had not allocated the fails, the firm was required to enforce the pre-borrow or penalty box requirements, which it did not do. The findings also stated that the firm’s supervisory system with respect to compliance with Regulation SHO was unreasonable.

The firm did not conduct a reasonable supervisory review of its email notifications to determine whether they provided clear notice of an allocation. The firm’s supervisory system with respect to allocations focused on tracking the fail to deliver positions that it had attempted to allocate and did not include a review to determine whether the email notifications achieved compliance with Regulation SHO’s notice requirements.

In addition, although the firm used a checklist to document its supervisory reviews for compliance with Regulation SHO, it did not describe this aspect of its supervisory system in its WSPs.