FINRA Decision: UBS Securities Fined $12 Million

On October 21, the Financial Industry Regulatory Authority (FINRA) announced its decision to fine UBS Securities $12 million in securities arbitration. The fine is for charges of Regulation SHO violation and failure to supervise. UBS Securities did not properly supervise short sales and the result was millions of mismarked short sale orders, some of which were “placed to the market without reasonable grounds to believe that the securities could be borrowed and delivered,” according to the FINRA press release.

Short sales occur when a security is sold by a seller that does not own it. When delivery is due, it is either purchased or borrowed by the short seller so that the delivery can be made. Regulation SHO requires that there are reasonable grounds for the broker-dealer to believe it could be borrowed and available for delivery. Regulation SHO reduces potential failures to deliver and states that broker-dealers must mark the trades as long or short. FINRA’s findings indicated that the supervisory system used by UBS was significantly flawed. Furthermore the flaws “resulted in a systemic supervisory failure that contributed to serious Reg SEO failures across its equities trading business,” according to FINRA documents.

FINRA’s investigation found that UBS Securities mismarked millions of sale trading orders, placed millions of short sale orders without locates and had significant aggregation unit deficiencies. Because of UBS’ supervisory failures, it wasn’t until after FINRA’s investigation and the resulting review of its systems and monitoring that many of its violations were corrected. According to FINRA, it wasn’t until at least 2009 that UBS’ supervisory framework was able to achieve compliance with certain securities laws, rules and regulations.

UBS consented to FINRA’s ruling but did not admit nor deny the allegations. FINRA Executive Vice President and Chief of Enforcement Brad Bennett said, “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. The duration, scope and volume of UBS’ locate and order-marking violations created a potential for harm to the integrity of the market.”