UBS Fined $12 Million for Failing to Supervise Short Sales

by Wall Street Fraud on November 7, 2011

Securities fraud attorneyIt seems the big banks still haven’t learned their lesson with respect to securities compliance. Just last week, UBS LLC was hit with a $12 fine by the Financial Industry Regulatory Authority (FINRA).

According to FINRA, UBS violated Regulation SHO (Reg SHO) and failed to properly supervise short sales of securities. As a result, 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.

What Are Short Sales?

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. Reg SHO 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.

The UBS Violations

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. The specific violations detailed below:

  • 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'
  • 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.
  • UBS had significant deficiencies related to its aggregation units that may have contributed to additional significant order-marking and locate violations.

As a result of its supervisory failures, many of UBS' violations were not detected or corrected until after FINRA's investigation caused 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.

Source: FINRA

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