SEC WILL LOOK AT INVESTMENT ADVISERS WHO WERE NEVER-BEFORE EXAMINED

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Announces Initiative Directed at Never-Before Examined Registered Investment Advisers
  FOR IMMEDIATE RELEASE

2014-35 Washington D.C., Feb. 20, 2014 — The Securities and Exchange Commission today announced that its Office of Compliance Inspections and Examinations (OCIE) is launching an initiative directed at investment advisers that have never been examined, focusing on those that have been registered with the SEC for three or more years.  OCIE previously announced that examining these advisers is a priority in 2014.
As part of the initiative, OCIE will conduct examinations of a significant percentage of advisers that have not been examined since they registered with the SEC.  These examinations will concentrate on the advisers’ compliance programs, filings and disclosure, marketing, portfolio management, and safekeeping of client assets.  Additional details on the examinations are available here.

“Our examinations will focus on areas most important to protecting investors,” said Jane Jarcho, national associate director of OCIE’s Investment Adviser/Investment Company examination program. “We will also promote compliance by engaging with these advisers through outreach efforts.”

Starting later this year, OCIE will invite SEC-registered investment advisers who have yet to be examined to attend regional meetings where they can learn more about the examination process.  Advisers also can find information regarding their obligations under the Investment Advisers Act of 1940 and other useful guidance on the SEC’s website.

SEC ISSUED RISK ALERT TO DETECT OPTIONS TRADES THAT CIRCUMVENT SHORT-SALE RULE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Washington D.C., Aug. 9, 2013 — 

The Securities and Exchange Commission issued a Risk Alert to help market participants detect and prevent options trading that circumvents an SEC short-sale rule.

The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued the alert after its examiners observed options trading strategies that appear to evade certain requirements of the short-sale rule.  The alert describes the strategies used by some customers, broker-dealers and clearing firms, summarizes related enforcement actions, and notes practices that some firms have found to be effective in detecting and preventing trading intended to evade the rule, known as Regulation SHO.

Regulation SHO tightened requirements for short sales, which involve sales of borrowed securities. Short sellers profit from price declines by replacing borrowed securities at a lower price.  Under Regulation SHO, short sellers who fail to deliver securities after the settlement date are required to close out their position immediately, unless they qualify as bona fide market makers for a limited amount of extra time to close-out.  As noted in the alert, the trading strategies observed by the OCIE staff may give the impression of satisfying the Regulation SHO “close-out requirement,” while in effect evading it.  These sham close-outs violate the SEC rule, which aims to ensure that trades settle promptly, thereby reducing settlement failures.

“This Risk Alert encourages awareness of options trading activity used to avoid complying with the close-out requirements under Regulation SHO,” said OCIE Director Andrew Bowden.  “The alert describes these trading activities in detail to help broker-dealers and their correspondent clearing firms avoid the regulatory and reputational risks that are posed by these activities.”

In addition, the Risk Alert describes activities that the staff has observed that may indicate an attempt to circumvent Regulation SHO.  These include:

Trading exclusively or excessively in hard-to-borrow securities or threshold list securities, or in near-term listed options on such securities

Large short positions in hard-to-borrow securities or threshold list securities
Large failure to deliver positions in an account, often in multiple securities
Continuous failure to deliver positions

Using buy-writes, married puts, or both, particularly deep in-the-money buy-writes or married puts, to satisfy the close-out requirement

Using buy-writes with little to no open interest aside from that trader’s activity, resulting in all or nearly all of the call options being assigned

Trading in customizable FLEX options in hard-to-borrow securities or threshold list securities, particularly very short-term FLEX options

Purported market makers trading in hard-to-borrow or threshold list securities claiming the exception from the locate requirement of Regulation SHO; often these traders do not make markets in these securities, but instead make trades only to take advantage of the option mispricing

Multiple large trades with the same trader acting as a contra party in several hard-to-borrow or threshold list securities; often traders assist each other to avoid having to deliver shares

Eric Peterson and Tom Mester of the National Exam Program staff contributed substantially to the preparation of this Risk Alert.  They received valuable input from the Division of Trading and Markets and the Division of Economic and Risk Analysis.