In the largest penalty of its type, Swiss bank UBS AG was fined $12 million by a U.S. brokerage regulator over its systemic failure to properly handle millions of short-sale orders.
The Financial Industry Regulatory Authority said violations by the bank's UBS Securities LLC broker-dealer unit caused the orders to be mismarked or filled without reasonable grounds to believe the underlying securities could be located.
In short sales, investors sell securities they do not own, hoping the prices will fall so they can repurchase the securities later at the lower price, repay the lender and pocket the difference as profit. Regulators fear that abuses can distort markets, and accelerate declines in share prices.
FINRA said UBS's violations lasted from 2005 to 2010, and that the bank likely processed tens of millions of short sale orders for equities and exchange-traded funds improperly.
Many problems were not detected until FINRA's probe caused UBS to review its systems, the brokerage regulator said.
Broad, systemic failures is the best way to describe it, Brad Bennett, FINRA's chief of enforcement, said in an interview. The fine reflects the gaps in the system that we found. We didn't identify any specific delivery failures, but that could means the bank just got lucky.
FINRA said UBS has made changes to systems and procedures that were designed to prevent a recurrence of the violations. The bank did not admit wrongdoing in agreeing to settle, and also accepted a censure.
UBS spokesman Christiaan Brakman said the bank was pleased to settle, made a substantial investment to improve systems and oversight, and has remediated all identified issues.
NAKED SHORT-SALE ABUSES FEARED
FINRA said UBS violated Regulation SHO, a rule imposed in 2005 by the U.S. Securities and Exchange Commission to thwart abusive 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 borrowing the underlying shares or making sure they can be borrowed.
While the practice is not always illegal in the United States, the SEC has taken steps to limit abuse, including during the 2008 financial crisis when it restricted short sales of some financial stocks.
In July 2009, the SEC adopted a rule requiring that fails to deliver in all equity securities be promptly closed out.
If there were failures to deliver, short selling would have the ability to affect the market, especially in hard-to-borrow, thinly traded stocks, Bennett said.
In the last two years, FINRA has fined Deutsche Bank AG $575,000, Milwaukee-based Robert W. Baird & Co $900,000 and Boston-based National Financial Services Inc $350,000 for Regulation SHO violations over their handling of short-sale orders. None admitted wrongdoing.
Bennett said FINRA will bring more enforcement cases over Regulation SHO and short sales. The independent regulator oversees nearly 4,500 brokerages.