UBS Fined $2.5 Million By FINRA Due To Violations and Failures

According to the US regulator, from 2009 to 2018, UBS failed to close out at least 5,300 failure to deliver positions and routed or executed more than 73,000 short sales in securities with an unfulfilled close-out requirement without first borrowing or arranging to borrow the shares.

“The short sale duties established by Reg SHO provide vital protection to the markets and investors,” Jessica Hopper, Executive Vice President and Head of FINRA's Department of Enforcement, stated.“ ”Effective supervision focuses on every step of a firm's Rule 204 compliance, including testing to ensure that systems and programming function as intended and without unintended effects.

Reg SHO prohibits “naked” short selling.

Reg SHO targets recurrent delivery problems as well as possibly abusive “naked” short selling (the sale of securities that an investor does not own or has not borrowed).

The regulation compels businesses to take deliberate action to close out “failure to deliver” positions arising from short sells of equity securities by borrowing or acquiring the securities before the start of normal trading hours the following day.

Close-out requirements are not met by limit orders or other delayed transactions. When a business fails to close out a failure to deliver, the regulation precludes the firm from taking new short sell orders in the security without first borrowing or arranging to borrow the security (often referred to as the “penalty box”).

Certain buy-in orders were routed as limit orders using UBS's VWAP algorithm.

According to FINRA, UBS violated Regulation SHO Rule 204 by:

• Using revocable volume weighted average price (VWAP) transactions or restricting orders to address buy-in obligations that fail to be fulfilled

• Consider shares freed from segregation as a result of client long sales that are available to close out a failure to deliver; and

• Certain order management systems do not always block short sales in securities with an unfulfilled close-out requirement.

FINRA determined that UBS's supervisory systems were not adequately structured to achieve compliance with the standards of Reg SHO Rule 204 from 2009 to August 2022. The bank failed to recognize its unlawful handling of shares related to a customer-long sale.

UBS also ignored red warnings in its books and records showing that its VWAP algorithm routed some buy-in orders as limit orders. UBS also admitted to only fully enforcing Rule 204's “penalty box” following a technology breakdown.

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