Three cheers for the United States Securities and Exchange Commission.
Washington D.C., Jan. 14, 2016 —The Securities and Exchange Commission today announced that Goldman, Sachs & Co. has agreed to pay $15 million to settle charges that its securities lending practices violated federal regulations.
According to the SEC’s order instituting a settled administrative proceeding, broker-dealers such as Goldman Sachs are regularly asked by customers to locate stock for short selling. Granting a “locate” represents that a firm has borrowed, arranged to borrow, or reasonably believes it could borrow the security to settle the short sale. The SEC finds that Goldman Sachs violated Regulation SHO by improperly providing locates to customers where it had not performed an adequate review of the securities to be located. Such locates were inaccurately recorded in the firm’s locate log that must reflect the basis upon which Goldman Sachs has given out locates.
“The requirement that firms locate securities before effecting short sales is an important safeguard against illegal short selling,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division. “Goldman Sachs failed to meet its obligations by allowing customers to engage in short selling without determining whether the securities could reasonably be borrowed at settlement.”
The SEC’s order finds that when SEC examiners questioned the firm’s securities lending practices during an examination in 2013, Goldman Sachs provided incomplete and unclear responses that adversely affected and unnecessarily prolonged the examination.
“SEC exams ensure that market participants are following the rules, so there will be consequences, including in the determination of remedies, when a registrant fails to provide complete and clear responses to examination staff,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.
According to the SEC’s order, Goldman Sachs employees who were members of the firm’s Securities Lending Demand Team routinely processed customer locate requests by relying on a function of the Goldman Sachs order management system known as “fill from autolocate,” which was accessed via the “F3” key. This function enabled employees to cause the system to grant locate requests based on the amount of reliable start-of-day inventory reported to Goldman Sachs by large financial institutions, even though its automated system had already deemed this inventory to be depleted based on locate requests processed earlier in the day.
The SEC’s order finds that when Goldman Sachs employees used this function to grant locate requests, they relied on their general belief that the automated model was conservative and the granting of additional locates would not result in failures to deliver when the securities became due for settlement. In doing so, the Goldman Sachs employees did not check alternative sources of inventory or perform an adequate review of the securities to be located.
The SEC’s order also finds that Goldman Sachs’s documentation of its compliance with Regulation SHO was inaccurate as it failed to sufficiently differentiate between the locates filled by its automated model and those filled by the Demand Team using the “fill from autolocate” function. In both cases, the locate log simply mentioned the term “autolocate” to refer to the start-of-day inventory utilized by the firm’s automated model as the source of securities underlying the grant of a locate.
The SEC’s order finds that Goldman Sachs violated Rule 203(b)(1) of Regulation SHO and Section 17(a) of the Securities Exchange Act. Without admitting or denying the findings, Goldman Sachs consented to the order and agreed to pay the $15 million penalty. The order censures Goldman Sachs and requires the firm to cease and desist from committing or causing any violations and any future violations of Rule 203(b)(1) of Regulation SHO and Section 17(a) of the Exchange Act relating to short sale locate records.
The SEC’s investigation was conducted by John C. Lehmann, Jason W. Sunshine, and Charles D. Riely of the New York Regional Office with substantial assistance provided by John L. Celio, Katy Chiu, Josephine LaFata, and Jennifer A. Grumbrecht of the National Exam Program. The case has been supervised by Sanjay Wadhwa.