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Goldman Sachs to Pay $15M for SEC Claims

(CN) - Goldman Sachs will pay $15 million for making short-sales without first locating the securities or keeping track of them, the Securities and Exchange Commission announced.

The SEC says Goldman Sachs violated Regulation SHO Rule 203(b)(1), which bans a broker-dealer from making short-sales in equity securities for its own account, unless it has borrowed, arranged to borrow, or believes it could borrow the security.

Plus, the broker dealer must document its compliance with this the agency's "locate requirement." In finance, a "locate" is an approval from a broker that needs to be obtained prior to effecting a short sale in any equity security.

To comply with the regulation, finance firms typically keep a "locate log" that lists the reason for effecting the short sale, the regulation states.

When the SEC questioned Goldman Sachs' securities-lending practices during an examination in 2013, the firm gave incomplete and unclear responses, the agency claims.

From November 2008 to mid-2013, Goldman Sachs provided locates to customers without adequately reviewing the securities to be located, and inaccurately recorded the reasons for giving them, the SEC says.

Goldman's Securities Lending Demand Team of 10 to 12 employees routinely processed customer locate requests using a system where most were handled by an automated model, according to the SEC.

The team used a Goldman Sachs order management system function known as "fill from autolocate," accessed via the "F3" key, to make the system grant locate requests based on the start-of-day inventory reported by large financial institutions, the SEC says.

Yet Goldman Sachs' automated system had already decided that inventory was depleted based on locate requests processed earlier in the day, according to the SEC.

As a result, assuming that the automated model was conservative, the Goldman Sachs employees did not check alternative sources of inventory, the SEC says.

On Thursday, SEC Secretary Brent Fields ordered Goldman Sachs to cease and desist from violating the law, censured the firm, and ordered it to pay $15 million within 10 days.

"Over the course of the relevant period, the number of locate requests that pended to the Demand Team grew significantly, reaching more than 20,000 locate requests per day at its peak," Fields wrote. "The volume of locate requests became far more than the Demand Team could manually handle on a request-by-request basis. Thus, instead of manually identifying an alternative source of securities to satisfy these pended requests, the Demand Team processed approximately 98 percent of the pended requests by relying on a function of Goldman's order management system referred to as 'fill from autolocate.'"

"[F]or certain customers, 3,000 to 4,000 locate requests were sometimes selected at one time," and once, a team member granted over 5,486 locates in a 35 minutes, the order states.

Without admitting or denying the findings, Goldman Sachs consented to the order and agreed to pay the $15 million, the SEC said.

"The requirement that firms locate securities before effecting short sales is an important safeguard against illegal short-selling," Andrew Ceresney, Director of the SEC's Enforcement Division, said in a written statement.

"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," Ceresney added.

SEC spokeswoman Judith Burns declined to comment further on the order.

Goldman Sachs spokeswoman Tiffany Galvin said the firm is "pleased to have resolved this matter with the SEC."

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