SEC, FINRA Enforcement: UBS, Merrill Fined for Disclosure Failures

Among recent actions by the SEC were charges against a Miami trader for short-selling the stock of a Chinese company ahead of its offering.

FINRA took action against firms for statement and confirmation delivery and disclosure failures.

FINRA Fines UBS $575,000 for Statement Glitches

UBS Securities LLC was censured and fined $575,000 by FINRA for violations ranging from failure to deliver account statements and trade confirmations and in some cases sending those documents without required disclosures.

According to FINRA, the firm discovered during routine testing that sometimes it either failed to produce or send paper and electronic trade confirmations and account statements, or sent such confirmations and account statements without some required disclosures to certain U.S. institutional clients. Also, trade confirmations for OTC equity derivative transactions lacked certain required disclosures. In some cases, these failures went back to 2003.

Improper coding caused the system to fail to recognize that certain transactions required confirmations to be issued. Instead, the executing firm foreign affiliate produced and sent the confirmation electronically, the firm generated a confirmation without the disclosure or no confirmation was produced at all.

In addition, staff failed to enter client data that, if entered completely and accurately, would have triggered the generation of a required confirmation. Also, supervisory failures meant that the firm did not uncover the fact that institutional customers failed to receive paper or electronic confirmations, and did not uncover missing or incorrect customer addresses except primarily through returned mail.

The agency acknowledged that UBS discovered the violations itself during internal testing, and worked on correcting them before self-reporting them to FINRA, in addition to assisting FINRA during its investigation. For its part, UBS neither admitted nor denied FINRA’s findings, but consented to their entry and to the sanctions.

Merrill Fined $325,000 on Omission of Disclosure Info from Reports

Merrill Lynch was censured and fined $325,000 by FINRA on findings that it failed to provide appropriate disclosure information in research reports, resulting in violations of NASD Conduct Rules 2711 and 2110, and FINRA Rule 2010.

Thanks to an acquisition, the firm’s research department was required to consider a company’s relationship with the companies that were the subject of the research report (covered companies) in determining which required disclosures to include in research reports the firm issued. But because of the acquisition’s compressed timeline, the company still used separate systems from the firm after the acquisition, and research and technology teams from both entities had to aggregate information about the entities’ respective relationships with covered companies to generate complete and accurate required disclosures in research reports. The aggregation process resulted in errors that the firm did not discover for more than a year.

An upstream company file used to match companies covered by the firm’s research department with the company revenues and client relationships included inaccurate data, and the process designed to update that file failed. That meant that the company information the firm’s research data repository used to determine disclosures was stale and resulted in the omission of required disclosures in approximately 19,200 research reports.

An additional disclosure deficiency began at some point when a third-party vendor provided incomplete data to the firm relating to covered companies. As a result, research reports relating to the covered companies failed to disclose whether the firm had managed or co-managed a public offering of the covered company’s securities in the past 12 months. The missing data was discovered and corrected, but it has not been determined when the disclosure deficiency began or how many research reports were impacted by it.

Also, in September of 2008, a new third-party vendor began providing the firm with stock price information that contained incorrect data related to certain covered companies that had been impacted by a stock split. The data problem occurred in each monthly file from the vendor until March 16, 2011, and impacted nearly 14,000 fundamental equity research reports. As a result, a significant number of these reports included a price chart that retroactively adjusted the historical stock price of the covered company to reflect a subsequent stock split but did not provide the same retroactive adjustment to the historical price targets included in the chart, thus showing a distorted relationship between the historical stock price and the historical price target. These errors were also reflected on the firm’s price charts website during this period. FINRA found that while procedures were in place to address some of these issues, they did not adequately function. In determining the censure and fine, FINRA took into account that that the firm promptly self-reported all the deficiencies; took significant remedial action to prevent their recurrence; and in early 2011, engaged an independent consultant for a 22-month period to assist an internal task force with, among other things, introducing new technologies and processes designed to remedy the problems that had been caused by inaccurate upstream data.

The firm neither admitted nor denied the findings, but consented to their entry and to the fine.

J.P. Turner Order to Pay $700,000 for Unsuitable ETF Sales