The Financial Industry Regulatory Authority said it fined Credit Suisse Group AG $1.75 million for allegedly violating Regulation SHO and failing to properly supervise short sales and marking sale orders.
In a short sale, the seller sells a security it doesn't own, in anticipation that the security will drop in price. The seller can then buy it back at a lower price and return it to the original owner while making a profit on the transaction.
Short sales have long been controversial because investors who engage in them have a vested interest in seeing stock prices decline.
Regulation SHO requires that a broker or dealer to have reasonable grounds to believe that the security could be borrowed and available for delivery before moving forward with a short-sale order.
Credit Suisse allegedly entered into millions of short-sale orders without those grounds and mismarked thousands of sales orders, according to Finra.
The independent regulator for all securities firms doing business in the U.S., Finra said it found that from June 2006 through December 2010 Credit Suisse's Reg SHO supervisory system was flawed and resulted in a systemic supervisory failure that contributed to significant short-sale regulations failures across its equities trading business.
Many of Credit Suisse's violations were not detected or corrected by the company until after Finra's investigation caused Credit Suisse to conduct a substantive review of its systems and monitoring procedures for Reg SHO compliance, Finra said.
"We are pleased that we have reached closure and this matter is now behind us," the company said.
A representative added that the Regulation SHO issues did not affect systems involving clients and instead involved internal systems.
In concluding this settlement, Credit Suisse neither admitted nor denied the charges. It did, however, consent to the entry of Finra's findings.
The fine follows a similar investigation into UBS AG's broker-dealer unit, UBS Securities LLC, which resulted in a $12 million fine in October for alleged Reg SHO violations and supervisory failures.
