The Financial Industry Regulatory Authority (FINRA) has slammed a $2.5 million penalty on UBS Securities LLC, the New York-based brokerage arm of Swiss banking group, UBS.
The self-regulatory organization, which supervises brokerage firms in the United States, said UBS Securities violated Rule 204 of the US Securities and Exchange Commission’s Regulation SHO (Reg SHO).
Additionally, the brokerage’s supervisory failures to uphold Reg SHO rules within a period of nine years attracted the penalty, FINRA announced on Wednesday.
Reg SHO, a set of rules introduced in 2005, regulates the practice of short sales or the sale of borrowed securities in the United States.
According to FINRA, the rule “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.”
However, the private regulator said it found at least 5,300 ‘failure to deliver’ positions in UBS' systems between 2009 and 2018.
FINRA added that UBS routed or executed over 73,000 ‘naked’ shorts sales, that is, sold securities it did not have, borrowed or arranged to borrow.
The non-profit organization said that the broker sold these securities “with an unsatisfied close-out requirement.”
FINRA said UBS has agreed to settle the charges without admitting or denying them.
The independent markets supervisor added that three longstanding issues contributed to these violations including the broker’s use of revocable volume weighted average price (VWAP) transactions or limit orders to address buy-in obligations for ‘failures to deliver’.
Furthermore, UBS Securities depended on using customers’ long sales segregated shares to close out ‘failure to deliver positions', FINRA said.
Additionally, some of the broker’s order management systems did not regularly prohibit short sales when there was an unsatisfied close-out requirement, the private watchdog said.
Supervisory Failures
According to FINRA, between 2009 and August 2022, the supervisory systems of UBS Securities, its written inclusive procedures, could not have tallied with Rule 204 of Reg SHO as they “were not reasonably designed to achieve compliance .”
The self-regulatory organization noted that although the broker held yearly reviews of its Rule 204 systems, the firm failed to fish out “improper treatment of shares” related to customers’ long sales.
FINRA added that while limit orders or other delayed orders do not satisfy the close-out requirement of Reg SHO, UBS books and records indicate that its VWAP algorithm routed certain buy-in orders as limit orders.
Moreover, the private American corporation noted that UBS failed to detect red flags in its record, adding that the broker only detected its failure to fully enforce Rule 204’s ‘penalty box’ only after a system had malfunctioned.
Meanwhile, the US SEC recently fined UBS Securities $125 million alongside 14 other broker-dealers and one affiliated investment adviser for “pervasive off-channel communications.”
Barclays Capital Inc., Bank of America (BofA) Securities Inc., Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC were among the penalized firms.
