The Financial Industry Regulatory Authority (Finra) has fined UBS Securities $12 million for failing to properly supervise short sales of securities.
Finra officials say the violations resulted in millions of short-sale orders being mismarked and/or placed to the market without reasonable grounds to believe that the securities could be borrowed and delivered.
In a short sale, the seller sells a security it does not own. When it is time to deliver the security, the short seller either purchases or borrows the security in order to make the delivery.
Finra also said that UBS violated Reg SHO, which
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. Requiring firms to obtain and
document this "locate" information before the short sale occurs reduces
the number of potential failures to deliver in equity securities. In
addition, Reg SHO requires a broker-dealer to mark sales of equity
securities as long or short.
As part of its settlement with Finra, UBS neither admitted nor denied the charges, but consented to the entry of its findings. Finra is the largest independent regulator for all securities firms doing business in the U.S.
Finra officials claim that UBS' supervisory failures resulted in many of the company's violations not being detected or corrected until after Finra's investigation forced UBS to conduct a substantive review of its systems and monitoring procedures for Reg SHO compliance.
Finra found that UBS' supervisory framework over its equities trading business was not reasonably designed to achieve compliance with the requirements of Reg SHO and other securities laws, rules and regulations until at least 2009.
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.
"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 addition, Finra officials say they found that UBS placed millions of short-sale orders to the market without locates, including in securities that were known to be hard to borrow. These locate violations extended to numerous trading systems, desks, accounts and strategies, and impacted UBS' technology, operations, and supervisory systems and procedures.
Finra also contends that UBS mismarked millions of sale orders in its trading systems. Many of these mismarked orders were short sales that were mismarked as "long," resulting in additional significant violations of Reg SHO's locate requirement.
Finra officials said it also found that UBS had "significant deficiencies" related to its aggregation units that may have contributed to additional significant order-marking and locate violations.