FINRA Penalizes UBS Securities $2.5M for 73,000 ‘Naked’ Short Sales

The Financial Industry Regulatory Authority (FINRA) has slammed a $2.5 million penalty on UBS Securities LLC, the New York-based brokerage arm of Swiss banking group, UBS.

Take Advantage of the Biggest Financial Event in London. This year we have expanded to new verticals in Online Trading, Fintech, Digital Assets, Blockchain, and Payments.

The self-regulatory organization, which supervises brokerage firms in the United States, said UBS Securities violated Rule 204 of the US Securities and Exchange Commissions Regulation SHO (Reg SHO).

The brokerages supervisory failures to uphold Reg SHO rules within a period of nine years also attracted the penalty, FINRA announced on Wednesday.

Reg SHO, a set of rules introduced in 2005, regulates the practice of short sales—or the sale of borrowed securities— in the United States.

According to FINRA, 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.”

However, the private regulator said it found at least 5,300 ‘failure to deliver’ positions in UBS systems between 2009 and 2018.

Supervisory Failures

According to FINRA, between 2009 and August 2022, the supervisory systems of UBS Securities, its written procedures inclusive, could not have tallied with Rule 204 of Reg SHO as they “were not reasonably designed to achieve compliance.”

The self-regulatory organization noted that although the broker held yearly reviews of its Rule 204 systems, the firm failed to fish out “improper treatment of shares” related to customers long sales.

FINRA added that while limit orders or other delayed orders do not satisfy the close-out requirement of Reg SHO, UBS books and records indicate that its VWAP algorithm routed certain buy-in orders as limit orders.

The private American corporation also noted that UBS failed to detect red flags in its record, adding that the broker only detected its failure to fully enforce Rule 204‘s ’penalty box only after a system malfunctioned.