UBS Securities has once again been penalized for its improper handling of short sales. This time, the fine from the SEC is for $8 million and follows a $12 millon fine imposed by FINRA less than two weeks ago.

At that time, FINRA said that UBS had made changes to sysetms and procedures designed to prevent its poor recordkeeping practices from recurring.

In its filing on Thursday, the SEC echoed FINRA's findings. UBS, the SEC says,  had inaccurate recordkeeping practices in providing and recording so-called "locates" to customers seeking to execute short sales.

In short sales, investors sell securities they do not own hoping the prices will fall so they can repurchase those same securities later at a lower price and repay the lender. They pocket the difference as profit. roker-dealers are often asked by customers to locate stock for short-selling and a "locate" means that the broker-dealer believes it has borrowed or can borrow the security to settle the short sale.

Broker-dealers are required under Regulation SHO to accurately record the basis on which it has given out locates. Adopted in 2005 by the Securities and Exchange Commission, Reg SHO is designed to prevent "naked" short selling and ensure that brokerages can deliver shares on short-sale transactions they process.Naked short sales occur when investors sell short without first borrowying the underlying shares or ensuring that they can be borrowed.

Over the past two years FINRA has fined Deutsche Bank $575,000; Milwaukee-based Robert W. Baird & Co. $900,000 and Boston-based National Financial Services $350,000 for violations of Regulation SHO. None admitted any wrongdoing. 

In determining that shares are available, employees at broker-dealers rely on electronic feeds sent by lenders to many broker-dealers. Because those feeds may not always be reliable, broker-dealers must also contact those lenders directly.

What did UBS do? 

"It permitted its  employees to create records that do not accurately convey the basis upon which its employees granted locates:"says George Canellos, director of the SEC's New York regional office.

According to the SEC's order, UBS' employees recorded the name of the lender's employee on a "locate log" even when no one at UBS had actually contacted the employee to confirm the shares were available. An SEC investigation uncovered that the employees of the lending firms were out of the office and could not have provided any information to UBS on the days in question.

"UBS' practices obscured inquiry into whether UBS hd a reasonable basis for granting locates, and created a risk of located being granted based on sources that c ould nto be relied upon if shares were needed for settlement," says the SEC's order.

UBS settled the enforcement action by agreeing to pay the $8 million penalty and retain an independent consultant.

-- This article first appeared on Securities Technology Monitor.



Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access