The Financial Industry Regulatory Authority has fined UBS Securities LLC US$12 million for failing to properly supervise short sales.
In concluding this settlement, UBS neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. FINRA said that, 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.
FINRA found that UBS’ supervisory system regarding locates and the marking of sale orders was significantly flawed and resulted in a systemic supervisory failure that contributed to serious failures across its equities trading business. It 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. It also found that the firm mismarked millions of sale orders in its trading systems, including many short sales that were mismarked as ‘long’. And, FINRA found that 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 the firm to conduct a substantive review of its systems and monitoring procedures for short sale supervisory compliance. FINRA found that UBS’ supervisory framework over its equities trading business was not reasonably designed to achieve compliance with the requirements until at least 2009.
“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,” said Brad Bennett, FINRA executive vice president and chief of enforcement.