FINRA Fines UBS $12M for Short Sale Supervisory Failures
The Financial Industry Regulatory Authority (FINRA) announced on October 25, 2011 that it had reached an agreement with UBS AG, Switzerland’s largest bank, for $12 million to settle charges that the firm had “significantly flawed” supervisory systems in place for the short sale of securities, according to Bloomberg. The Regulation SHO (Reg SHO) violation resulted in the mismarking of short sales and placing them to market without having reasonable grounds to believe the securities could be borrowed or delivered. This has been a tough couple of months for UBS. First it was hit with the trading scandal by London based Kweku Adoboli that lost $2.3 billion that raised eyebrows about who was guarding the henhouse and now another supervisory issue has surfaced. The mega bank just came out with the third quarter results posting a 39% decline in its net profit amid the scandal and the sharp global slowdown.
In a short sale, the seller is selling a security that it doesn’t own, betting the price will go down prior to the time to deliver the shares. Reg SHO says in part that broker-dealers cannot accept short sale orders unless they have reasonable grounds to believe that the security needed to cover the bets can be borrowed and available for delivery. It also requires broker-dealers to mark sales of securities as long or short. Prior to the submission of a short sale, broker-dealers are required to document “locate” information on the securities. FINRA’s investigation revealed that UBS placed numerous short sales without “locates”, including sales of securities that were known to be hard to borrow.
Brad Bennett, FINRA’s head of enforcement said that “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.” He further stated that “the duration, scope and volume of UBS’s locate and order-making violations created a potential harm to the integrity of the market.” It was discovered that UBS had mismarked millions of sales orders, showing them as being “long”, when in fact they were short sales, in addition to significant Reg SHO “locate violations. The FINRA investigation found that the supervisory system in place at UBS was insufficient to achieve compliance with Reg SHO until 2009.