Posted On: October 25, 2011 by Shepherd Smith Edwards & Kantas LTD LLP

UBS Fined $12M for Supervisory Failures and Regulation SHO Violations in Securities Short Sales

UBS Securities has agreed to pay FINRA a $12 million fine over violations that led to millions of short sale orders of securities being mismarked or entered into the market even though there was no reasonable basis for thinking that they could be delivered or borrowed. FINRA says that UBS did not properly supervise the short sales and violated Regulation SHO. In settling, the financial firm is not denying or admitting to the charges. UBS has, however, agreed to an entry of FINRA’s findings.

Per Reg SHO, a broker must have reason to believe that a security can be delivered or borrowed before allowing a short sale order. Financial firms have to document this “locate information” prior to the sale happening so as to decrease the amount of potential failed deliveries. Broker-dealers also are supposed to designate an equity securities sale as either short or long.

Short sales involve sellers that don’t own the security that they are selling. To deliver the security, the short seller has to either borrow or buy it.

FINRA says that UBS had a flawed Reg SHO supervisory system when it came to locates and marking sale orders and that this resulted in supervisory failure, which played a role in serious regulation failures showing up throughout the investment bank’s equities trading business. In addition to putting into the marketplace millions of short order sales without locates (involving supervisory and trading systems, accounts, desks, strategies, the financial firm’s technology operations, and procedures), millions of sale orders were also mismarked—many of them as “long” —which led to more Reg SHO violations. FINRA also claims that “significant deficiencies” involving UBS’s aggregation units could have played a role in more locate violations and significant order-marking.

Because of UBS’s alleged supervisory failures, many of the violations weren’t fixed or detected until after the FINRA probe prompted the financial firm to evaluate its systems and procedures. UBS has since taken steps to upgrade these in an effort to have stricter Reg SHO controls.

Per FINRA Chief of Enforcement Brad Bennett, financial firms are responsible for making sure that they have the proper supervisory and trading systems so that naked short selling that is “potentially abusive” doesn’t happen. He noted that the violations committed by UBS could have hurt the market’s integrity.

Supervisory failures is a type of broker misconduct. It is a brokerage firm’s responsibility to create and execute written procedure that do the job of monitoring its employees’ activities so securities fraud and mistakes don’t happen that can cause investors to suffer losses and/or the market to go into chaos.

FINRA Fines UBS Securities $12 Million for Regulation SHO Violations and Supervisory Failures, FINRA, October 25, 2011

FINRA Fines UBS $12 Million Over Short Sales, AdvisorOne, October 25, 2011

FINRA


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