By Reece Wallace · June 29, 2020
BNP Paribas Securities was sanctioned by the U.S. Securities and Exchange Commission over repeated violations of regulations prohibiting lending of shares to settle sale orders marked as “long,” which the agency alleged was for the benefit of a hedge fund client.
The agency issued a cease-and-desist order against the broker-dealer on Monday over the practice, noting that it had violated “Rule 203(a)(1) of Regulation SHO,” which deals with the delivery of shares when orders are settled. The broker-dealer consented to the entry of the order without admitting to or denying the findings.
The order, issued against the American broker-dealer affiliate of French lender BNP Paribas, comes in response to “at least 35 occasions over a four-month period” from April 2016 through July 2016 during which BNP loaned securities to a hedge fund which was a client of its institutional prime brokerage unit to settle the fund’s long sales. It includes a monetary penalty of $250,000.
Rule 203(a) covers delivery requirements on long sales of securities. It “requires that if a broker-dealer knows or should know that a sale of an equity security is marked long, the broker-dealer must make delivery when due and cannot use borrowed securities to do so,” according to the SEC’s interpretation.
While the sale orders were executed at another broker-dealer, BNP, serving as the clearing broker for the transactions, ignored alerts following each trade date that the hedge fund lacked sufficient shares to cover the orders. At the time of the settlement date for each order, BNP violated regulations by loaning the hedge fund the shares needed to settle the sale, according to the SEC.
Although the hedge fund repeatedly assured BNP that its orders were properly designated as “long” and that it would send the relevant securities to its BNP account on time, the SEC said it was “not reasonable” for BNP to take the fund manager at its word.
Nevertheless, BNP allegedly “automatically loaned the shares to settle these ‘long’ sales” without considering the hedge fund’s questionable track record or conducting any other analysis to determine whether the fund really owned the securities or would deliver them to the BNP account on time.
“In total, BNPP loaned the hedge fund more than eight million shares in the securities of three different issuers to settle purported ‘long’ shares” that had been submitted to the broker-dealer for clearing, the Commission said.
Besides paying the penalty, BNPP has agreed to cooperate with future investigations into its interactions with the hedge fund over the relevant time period. It has received a formal censure and an order to “cease and desist from committing or causing any violations and any future violations of Rule 203(a)(1) of Regulation SHO.”