FINRA Sanctions ACS Execution Services, TradeZero America for Violations

The Financial Industry Regulatory Authority (FINRA) announced today that it has censured and fined two broker-dealer firms a total of $500,000 for violations related to securities short selling requirements, improper influencer marketing practices, and deficient privacy disclosures to customers.

ACS Execution Services Violated Reg SHO Locate Rules

Red Bank, NJ-based execution services firm ACS Execution Services, LLC was censured and fined $250,000 for violating the Securities and Exchange Commission's Regulation SHO rule requiring firms to locate sources of borrowable shares prior to effecting short sales.

From at least June 2017 through the present, ACS improperly executed over 10 million short sale trades for its own account when facilitating customer orders, without first borrowing the securities or having reasonable grounds to believe the shares could be borrowed and delivered by the settlement date, as mandated by Reg SHO Rule 203(b)(1).

FINRA's order found that ACS failed to establish and maintain a reasonably designed supervisory system and written procedures to ensure compliance with the SEC's short sale locate requirement. The firm's procedures incorrectly stated ACS could rely on its broker-dealer clients having obtained a locate, rather than being responsible for obtaining locates when trading as principal.

As part of the settlement, ACS must certify within 60 days that it has implemented reasonable supervisory procedures and controls to prevent future violations of Reg SHO's locate rules.

TradeZero America Faulted on Influencer Marketing, Privacy Practices

Online broker TradeZero America, Inc., headquartered in Brooklyn, NY, was censured and fined $250,000 by FINRA for violations relating to its use of social media influencers for marketing, as well as deficient privacy disclosures provided to firm customers.

From July 2020 to October 2022, TradeZero paid popular influencers on social media platforms like YouTube, Instagram and TikTok to promote the firm's trading services. However, the influencers' posts contained exaggerated, unbalanced or promissory statements about the likelihood of trading profitably with TradeZero, violating FINRA's rules regarding communications with the public.

FINRA found TradeZero failed to have a qualified principal pre-approve the influencer marketing videos before they were posted on social media. The firm also did not maintain records of the dates and content of the influencer posts as required under SEC record-keeping rules.

TradeZero lacked reasonable supervisory procedures governing the influencer marketing activities, including any process to review the posts for compliance with FINRA's advertising rules and content standards.

Additionally, from January 2020 to January 2022, TradeZero provided over 22,000 new customer accounts with privacy notices that inaccurately described the types of personal information the firm could share with third parties for marketing purposes. This violated SEC rules requiring clear and accurate privacy disclosures to customers.

In the disciplinary orders, FINRA emphasized that firms must implement robust supervisory systems to ensure compliance with rules around core areas such as short selling, marketing and communications with the public, and privacy requirements.

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