In addition to the censure and fine, UBS must submit a written certification “by one or more principal(s) and officer(s) of UBS with supervisory authority … that, as of the date of the certification, the firm’s supervisory systems and written procedures are reasonably designed to achieve compliance with Rule 204 of Regulation SHO,” the FINRA order states.
Reg SHO is intended to address concerns regarding persistent failures to deliver and potentially abusive “naked” short selling. Naked short selling is the illegal practice of selling shares a short seller has neither borrowed, owns, nor intends to buy, resulting in a “failure to deliver” (FTD).
Reg SHO requires firms to take affirmative action to close out FTD 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,” FINRA said. “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 (commonly known as the “penalty box”).”
Case details
From 2009 to 2018, UBS did not timely close out at least 5,300 FTD 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, FINRA said.
According to FINRA, UBS’s violations of Rule 204 of Reg SHO resulted from several long-running issues, including:
- 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’s supervisory systems, including its written procedures, were “not reasonably designed to achieve compliance with the requirements of Rule 204 of Reg SHO. Although UBS conducted annual reviews of its Rule 204 systems, it failed to identify its improper treatment of shares associated with a customer long sale,” FINRA stated.
UBS further “failed to detect red flags present in the firm’s books and records indicating that its VWAP algorithm routed certain buy-in orders as limit orders,” FINRA stated. “UBS also identified its failure to fully enforce Rule 204’s penalty box only after a system malfunctioned.” 
Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.