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UBS Securities Fined $8 Million for Short Sale Violations

Tuesday, November 15, 2011

Yoomi Lee | Bloomberg Law SEC Press Release No. PR-2011-240 (Nov. 10, 2011); Administrative Proceeding File No. 3-14620 (Nov. 10, 2011) The Securities and Exchange Commission (SEC) announced that UBS Securities LLC (UBS) settled charges for inaccurately providing and recording "locates" to its customers seeking to execute short sales. The SEC charged that UBS violated Section 17(a) of the Securities Exchange Act of 1934 and Rule 203(b) of Regulation SHO. Without admitting or denying the SEC's charges, UBS agreed to (1) cease and desist from committing or causing any future violations; (2) pay $8 million in penalties; and (3) retain an independent consultant to conduct a comprehensive review of its securities lending desk's policies, procedures, and practices regarding granting locate requests.

Locate Requirement Violations

According to the SEC, since at least 2007, UBS' securities lending desk inaccurately documented locates for short sales without a reasonable basis due to the firm's inaccurate locate documentation practices. Generally, customers ask broker-dealers to locate stock for short selling, and broker-dealers, under Regulation SHO, must record accurately the basis upon which it has given out locates. A "locate" indicates that the broker-dealer has borrowed, arranged to borrow, or reasonably believes it could borrow the security to settle the short sale. The SEC charged that UBS failed to distinguish whether locates were granted based on (1) UBS contacting a lender's employee to confirm the availability of shares, or (2) an electronic feed that lenders use to broadcast simultaneously to many broker-dealers. Although the locate log purported to make this distinction, UBS allegedly recorded the names of lenders' employees even when no one at UBS actually had contacted them to confirm the availability of shares to borrow. The practice of recording locates sourced to lender employees who were never contacted was "pervasive" said the SEC. Moreover, the SEC alleged that it may not have been reasonable for UBS to rely solely on an electronic feed to grant locates. UBS also was charged for allowing lending desk traders to duplicate and reuse locate approval information from prior locates to document new locate approvals sourced to the same lender so that the lending desk traders could save time documenting locates. This increased the probability that the locates sourced to lender employees were not confirmed. As such, UBS' locate documentation practices created a risk of locates being granted based on sources that could not be relied upon if shares were needed for UBS or another executing broker's settlement obligations. DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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