UBS Financial Hit by FINRA for Violating Options Rules

Stoltmann Law Offices is investigating cases where brokers have violated rules on selling “naked shorts,” an extremely speculative options trading strategy.  In volatile markets, brokers transact strategies designed to make money on stocks their clients don’t own, known in the industry as “naked short selling.” In a recent regulatory action, Finra, the federal securities industry regulator,  announced that it has fined UBS Securities LLC (UBS) $2.5 million for violating Regulation SHO (Reg SHO) governing naked shorts for “violations and supervisory failures spanning a period of nine years.”

FINRA found that “from 2009 to 2018, UBS did not timely close out at least 5,300 ‘failure to deliver 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.”

According to the U.S. Securities and Exchange Commission, “in a naked short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard two-day settlement period. As a result, the seller fails to deliver securities to the buyer when delivery is due; this is known as a ‘failure to deliver’ or ‘fail.’” The agency last updated its rule on short selling in 2008 to curb abuses in the industry.

“In an ordinary short sale,” the SEC states, “the short seller borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price). But in an abusive naked short transaction, the seller doesn’t actually borrow the stock, and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions.”

FINRA also has extensive rules on short sales that “requires firms to address risks relating to market manipulation, market liquidity and investor confidence by regulating excessive and naked short sales so that purchasers of securities from short sellers receive their securities positions in a timely manner. Regulation SHO requires firms to appropriately mark their securities orders; confirm that they have deliverable securities to complete short sale transactions; and have a process to close-out fails to deliver within the required timeframes.”

“UBS’s supervisory systems, including its written procedures, were not reasonably designed to achieve compliance with the requirements of Rule 204 of Reg SHO,” FINRA stated. “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. UBS also 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. UBS also identified its failure to fully enforce Rule 204’s “penalty box” only after a system malfunctioned.”

In settling this matter, UBS consented to FINRA’s findings without admitting or denying the charges.

Investors can file FINRA arbitration complaints if these rules are broken. You can often avoid rogue broker-advisors by checking their backgrounds through BrokerCheck. Brokerage firms also have a legal obligation to supervise and monitor their brokers to ensure that they are not overtrading or “churning” accounts to generate excess fees and commissions.

If you invested with a broker-advisor and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!