More On Legal & Compliancefrom The Advisor's Professional Library
- Registration Requirements for Investment Advisor Representatives (IARs) When individuals launch an advisory firm, they must avoid marketing themselves or the firm as investment advisors before they are properly approved and registered. Otherwise, they are subject to severe penalties.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
"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
“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.