The Financial Industry Regulatory Authority (FINRA) has fined UBS Securities $12 million for violating Regulation SHO (Reg SHO) and failing to properly supervise short sales of securities. As a result of these violations, millions of short sale orders were mismarked and/or placed to the market without reasonable grounds to believe that the securities could be borrowed and delivered.
Reg SHO requires a broker-dealer to have valid locates to support the belief that a security could be borrowed and available for delivery before accepting or effecting a short sale order. In addition, Reg SHO requires a broker-dealer to mark sales of equity securities as long or short.
FINRA found 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. First, FINRA 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. Second, FINRA found that UBS mismarked millions of sale orders in its trading systems. Many of these mismarked orders were short sales that were mismarked as “long. Third, FINRA found that UBS had significant deficiencies related to its aggregation units that may have contributed to additional significant order-marking and locate violations.
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. The regulators investigation caused UBS to conduct a substantive review of its systems and monitoring procedures for Reg SHO compliance.
UBS neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.