Written by The White Law Group• October 6, 2022• 2:32 pm• Blog, Current Investigations

FINRA Fines UBS Securities $2.5 Million for Reg SHO Violations

UBS Sanctioned for Reg SHO Violations and Supervisory Failures

According to a press announcement this week, the Financial Industry Regulatory Authority (FINRA) has reportedly fined UBS Securities LLC (UBS) $2.5 million for Regulation SHO violations and supervisory failures spanning a period of nine years. UBS reportedly settled the matter without admitting or denying the charges.

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According to the announcement, 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.

What is Reg SHO?

“Reg SHO” is a rule that 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 (known as the “penalty box”).

According to FINRA, UBS’s alleged violations of Rule 204 of Reg SHO stemmed from several long-term issues, including the following:

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 allegedly failed to design or follow a supervisory system to achieve compliance with the requirements of Rule 204 of Reg SHO. UBS reportedly failed to identify its improper treatment of shares associated with a customer long sale. UBS also allegedly failed to detect red flags present in the firm’s books and records, according to FINRA. UBS also identified its failure to fully enforce Rule 204’s “penalty box” only after a system malfunctioned.

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The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Seattle Washington.