UBS will pay the Securities and Exchange Commission (SEC) $8 million to settle claims that employees of the bank inaccurately recorded locates for a short sale transaction.
The SECs investigation found that UBS violated Regulation SHO (Reg SHO) which requires a broker-dealer to have valid locates to support the belief that a security could be borrowed and available for delivery before accepting or effecting a short sale order. UBS executed short sales without a reasonable basis for believing that it could borrow the stock to fulfill its settlement obligations, it found.
According to the SECs investigation, UBS employees routinely recorded the name of a lenders employee even when no one at UBS had actually contacted the employee to confirm availability. UBS employees sourced thousands of locates to lender employees who were out of the office and could not have provided any information to UBS on those days, said the SEC.
The SECs investigation found that since at least 2007, UBSs locate log that records the locates it granted inaccurately portrayed which locates were based on electronic feeds or direct confirmation with specific lenders. Additionally, the investigation found that UBSs practices obscured inquiry into whether UBS had a reasonable basis for granting locates, and created a risk of locates being granted based on sources that could not be relied upon if shares were needed for settlement.
UBS purported to show which locates were granted based on direct confirmation of availability with a lender and which locates were based on electronic feeds, said the SEC.
Regulators must be able to rely on a firms records to mean what they say, especially when those records are meant to provide the key evidence of a firms compliance with the law and safeguard against illegal short selling, said George Canellos, director of the SECs New York Regional Office. UBS permitted its employees to create records that do not accurately convey the basis upon which its employees granted locates.
While consenting to paying the fine, UBS also agreed to conduct a comprehensive review of the UBS Securities Lending Desks policies, procedures and practices with respect to granting locate requests. A statement from the company said: UBS is pleased to have resolved this matter with the SEC. UBS has implemented enhancements to its Securities Lending Desks procedures and systems.
Last month, the US Financial Industry Regulatory Authority (FINRA) fined UBS Securities $12 million for violating Reg SHO and failing to properly supervise short sales of securities. As a result of these violations of the law, which also requires a broker-dealer to mark sales of equity securities as long or short, 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.
(JDC)