Friday, November 11, 2011

SEC Charges UBS With Faulty Recordkeeping Related to Short Sales

The SEC charged UBS Securities, LLC for inaccurate recording practices when providing and recording “locates” to customers seeking to execute short sales. UBS settled the enforcement action by agreeing to pay an $8 million penalty and retain an independent consultant. A“locate” represents an approval by a broker-dealer that it has borrowed, arranged to borrow, or reasonably believes it could borrow the security to settle the short sale. It is common practice for a customer to ask a broker-dealer to locate stock for short selling. Broker-dealers are required under Regulation SHO to accurately record the basis for locates given out.

According to an SEC press release, "UBS employees routinely recorded the name of a lender’s employee even when no one at UBS had actually contacted the employee to confirm availability. The SEC’s investigation found that UBS employees sourced thousands of locates to lender employees who were out of the office and could not have provided any information to UBS on those days."

Broker-dealer employees often use electronic availability feeds sent by lenders to judge the availability of locates. At times it is necessary to directly speak with lenders to confirm the availability. According to the SEC's order, UBS's "locate log" inaccurately portrayed which locates had been based on electronic feeds or direct confirmation.

According to the SEC’s order, in judging the availability of shares for locates, broker-dealer employees often utilize electronic availability feeds that are sent by lenders to many different broker-dealers. At times, reliance on those feeds might not be reasonable, and it may be necessary to contact lenders directly to confirm actual availability of the security. UBS’s locate log purported to show which locates were granted based on direct confirmation of availability with a lender and which locates were based on electronic feeds. This practice made it difficult to discern whether UBS had reasonable basis for granting locates. The SEC’s order does not find that UBS executed short sales without reasonable basis for believing that it could borrow the stock to fulfill its settlement obligations.

SEC Charges UBS With Faulty Recordkeeping Related to Short Sales
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