More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
The SEC charged UBS Securities (UBS) Thursday with faulty record-keeping practices related to short sales, and UBS agreed to pay an $8 million penalty to settle the enforcement action. The bank will also retain an independent consultant as a result of the regulatory group’s action.
“Regulators must be able to rely on a firm’s records to mean what they say, especially when those records are meant to provide the key evidence of a firm’s compliance with the law and safeguard against illegal short selling,” said George S. Canellos, director of the SEC’s New York regional office, in a press release. “UBS permitted its employees to create records that do not accurately convey the basis upon which its employees granted locates.”
Broker-dealers are required under Regulation SHO to accurately record the basis upon which it has given out “locates,” a confirmation that a broker-dealer has borrowed, arranged to borrow, or reasonably believes it could borrow the security to settle the short sale.
For its part, UBS said in a statement that it “is pleased to have resolved this matter with the SEC [and] has implemented enhancements to its Securities Lending Desk’s procedures and systems.”
According to the SEC, UBS employees routinely recorded the name of a lender’s employee even when no one at UBS had actually contacted the employee to confirm availability. The SEC’s investigation found that UBS employees sourced thousands of locates to lender employees who were out of the office and could not have provided any information to UBS on those days.
The SEC’s investigation found that since at least 2007, UBS’ “locate log” (or records) inaccurately portrayed which locates were based on electronic feeds or direct confirmation with specific lenders.
“UBS’s practices obscured inquiry into whether UBS had a reasonable basis for granting locates, and created a risk of locates being granted based on sources that could not be relied upon if shares were needed for settlement,” according to the SEC.
The SEC added, however, that it did not find that UBS executed short sales without a reasonable basis for believing it could borrow the stock to fulfill its settlement obligations.