FINRA Fines UBS Securities $2.5 Million for Regulation SHO Violations and Supervisory Failures

WASHINGTON, October 04, 2022--(BUSINESS WIRE)--FINRA announced today that it has fined UBS Securities LLC (UBS) $2.5 million for Regulation SHO (Reg SHO) violations and supervisory failures spanning a period of nine years.

Reg SHO is intended to address concerns regarding persistent failures to deliver and potentially abusive "naked" short selling (the sale of securities that an investor does not own or has not borrowed). 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. Limit orders or other delayed orders do not satisfy the close-out requirement. When a firm does not close out a failure to deliver, the rule prohibits the firm from accepting additional short sale orders in the security without first borrowing or arranging to borrow the security (commonly known as the "penalty box").

FINRA found that, from 2009 to 2018, UBS did not timely close out at least 5,300 failure to deliver positions and routed or executed more than 73,000 short sales in securities with an unsatisfied close-out requirement without first borrowing or arranging to borrow the shares.

UBS’s violations of Rule 204 of Reg SHO stemmed from several long-running issues, including:

  • Using revocable volume weighted average price (VWAP) transactions or limit orders to address buy-in obligations for failures to deliver;

  • Considering shares released from segregation in connection with customer long sales available to close out a failure to deliver; and

  • Certain order management systems not always restricting short sales in securities with an unsatisfied close-out requirement.

From 2009 to August 2022, UBS’s supervisory systems, including its written procedures, were not reasonably designed to achieve compliance with the requirements of Rule 204 of Reg SHO. Although UBS conducted annual reviews of its Rule 204 systems, it failed to identify its improper treatment of shares associated with a customer long sale. UBS also failed to detect red flags present in the firm’s books and records indicating that its VWAP algorithm routed certain buy-in orders as limit orders. UBS also identified its failure to fully enforce Rule 204’s "penalty box" only after 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."

In settling this matter, UBS consented to the entry of FINRA’s findings without admitting or denying the charges.

About FINRA

FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry—brokerage firms doing business with the public in the United States. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit www.finra.org.

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Contacts

Ray Pellecchia (212) 858-4387