The Financial Industry Regulatory Authority announced a fine against UBS Securities LLC over violations involving so-called “naked” short selling.
The firm was found to have violated Rule 204 of Regulation SHO (Reg SHO), and was fined $2.5 million. Without admitting or denying the charges, UBS consented to the entry of FINRA’s findings.
From 2009 to August 2018, UBS failed to timely close out at least 5,300 failure-to-deliver positions, according to FINRA. It also routed or executed more than 73,000 short sales without having first borrowed or arranged to borrow the needed shares. Reg SHO requires firms to take affirmative action to close out “failure to deliver” positions resulting from short sales in equity securities by borrowing or purchasing the securities by the beginning of regular trading hours the day after the settlement date.
FINRA also said UBS’ supervisory systems were not reasonably designed to achieve compliance with Reg SHO requirements. Despite annual reviews of its Rule 204 systems, it was determined that the firm had failed to identify the deficiencies that led to the violations and only discovered its failure to enforce the rule when a system malfunctioned.
“The short sale obligations imposed by Reg SHO afford critical protection to the markets and investors,” said Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement. “Effective supervision focuses on every stage of a firm’s Rule 204 compliance and includes testing to confirm that systems and programming operate as intended, without unplanned consequences.”
FINRA found that UBS’s violations of Rule 204 resulted from several long-running issues, including using revocable volume-weighted average price transactions or limit orders; considering shares released from segregation resulting from customer long sales as available to close out a failure to deliver; and certain order-management systems failing to restrict short sales in securities that had an unsatisfied close-out requirement.
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