FINRA Fines UBS $12 Million Over Short Sales

UBS Securities makes changes to system for tracking sales in wake of FINRA investigation

More On Legal & Compliance

from The Advisor's Professional Library
  • Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients’ privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
  • Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients’ financial well-being may be jeopardized.  RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.   

The Financial Industry Regulatory Authority announced Tuesday that it fined UBS Securities $12 million for violating Regulation SHO and failing to properly supervise short sales of securities.

"Firms must ensure their trading and supervisory systems are designed to prevent the release of short sale orders without valid locates, and properly mark sale orders, in order to prevent potentially abusive naked short selling,” said Brad Bennett, FINRA executive vice president and chief of enforcement, in a press release. “The duration, scope and volume of UBS' locate and order-marking violations created a potential for harm to the integrity of the market."

For its part, UBS said in a statement that it “is pleased to have resolved this matter. This investigation is concluded, and all issues identified by FINRA and UBS have been remediated.”

According to FINRA, investors making short sales are selling securities that they do not own, and when it is time to deliver the securities, they must either purchase or borrow the securities in order to make the delivery.

“Reg SHO requires a broker-dealer to have reasonable grounds to believe that the security could be borrowed and available for delivery before accepting or effecting a short sale order,” the regulatory group said in a press release. Firms are required to obtain and document this "locate" information before short sales occur, which reduces the number of potential failures to deliver securities. In addition, Reg SHO mandates that broker-dealers mark sales of equity securities as long or short.

In its finding, FINRA said that UBS' Reg SHO supervisory system regarding locates and the marking of sale orders “was significantly flawed and resulted in a systemic supervisory failure that contributed to serious Reg SHO failures across its equities-trading business.”

FINRA found that UBS placed millions of short sale orders into the market without locates, including in securities that were known to be hard to borrow. These locate violations, FINRA says, involved numerous trading systems, desks, accounts and strategies, and “impacted UBS' technology, operations, and supervisory systems and procedures.”

Second, FINRA says that UBS mismarked millions of sale orders in its

trading systems, notably short sales that were mismarked as "long," resulting in additional significant violations of Reg SHO's locate requirement. Third, UBS had “significant deficiencies related to its aggregation units that may have contributed to additional significant order-marking and locate violations,” the regulatory group explains. 

“UBS made a substantial investment to upgrade systems and procedures, including supervisory protocols, IT change control processes, and compliance programs to tighten its Reg SHO controls,” the company said in a statement.

“UBS is also pleased that FINRA has acknowledged the corrective actions UBS took during the course of the investigation, as well as the substantial assistance provided by UBS in undertaking an internal review of its Reg SHO supervisory policies, procedures and systems and providing the results to FINRA," the investment bank said.

Page 1 of 2
Single page view Reprints Discuss this story
This is where the comments go.