Courtesy of Larry Doyle.
Last summer I tagged Wall Street’s industry funded police at FINRA as being little more than meter maids. With a recent review of FINRA’s largest fine imposed in its history, I now realize that I have actually done a serious disservice to those diligent and hard working meter maids patrolling our cities and towns. How so?
Let’s navigate and look more deeply into FINRA’s $12 million fine imposed on those paragons of virtue who ran Union Bank of Switzerland’s equity operations.
What did UBS do to deserve FINRA’s “largest” fine?
As highlighted last summer by Securities Technology Monitor:
UBS SECURITIES LLC – $12,000,000
The firm mismarked millions of sale orders in its trading systems at various times. Extrapolating from the quantified violations indicated that the firm likely mismarked tens of millions of sale orders during the Relevant Period. Many of these mismarked orders were short sales that were mismarked as “long,” resulting in additional significant violations of Reg SHO’s locate requirement.
What exactly is Reg SHO? From the very agreement between FINRA and UBS, we learn a wealth of information including:
Reg SHO requires a broker-dealer to have reasonable grounds to believe the security can be borrowed so that it can be delivered in time for settlement before effecting a short sale in that security. Identifying a source from which to borrow such security is generally referred to as obtaining a “locate.” Reg SHO requires that the “locate” must be obtained and documented prior to effecting the short sale.
When was Reg SHO enacted?
On July 28, 2004, the Securities and Exchange Commission (the “SEC”) adopted 17 CFR Part 242 (“Reg SHO”) under the Securities Exchange Act of 1934 (“Exchange Act”), effective September 7, 2004, with a compliance date of January 3, 2005.
When did UBS fall into line and decide that it might want to comply with Reg SHO?
It was not until at least 2009 that the Firm’s supervisory framework over its equities trading business was reasonably designed to achieve compliance with the requirements of Reg SHO and the other securities laws, rules and regulations described herein.
As set forth below, the Firm failed to comply with certain requirements of Reg SHO, FlNRA Rules, NASD Rules and federal securities laws during the period covering, in whole or in part, January 3, 2005 through March 2010, with several violations continuing through December 31,2010 (the “Relevant Period”).
There you go. Five plus years before the crowd at UBS decides to play by the rules. One only wonders what the “meter maids” were doing during this period to see that the rules were being enforced. Lots of coffee and donuts, perhaps? Maybe a few crossword puzzles, bridge perhaps, or working on the summer outing?
How egregiously did UBS fail to comply with Reg SHO?
In particular, UBS’s supervisory and compliance monitoring flaws included a failure to: (1) establish and maintain a supervisory structure that was sufficient to adequately supervise its compliance with Reg SHO, especially in light of the complexity of its equities trading activities; (2) establish, maintain and enforce written supervisory procedures for each of its trading desks that were reasonably designed to achieve compliance with Reg SHO, (3) develop and implement effective supervisory reports to monitor for compliance with Reg SHO; (4) establish adequate information technology implementation and change control procedures relating to Reg SHO; (5) adequately educate and train certain personnel with regard to compliance with Reg SHO; and (6) establish an adequate Reg SHO compliance monitoring program.
The Firm’s failure to comply with Reg SHO’s locate requirement extended to numerous Firm trading systems, desks, accounts and strategies, and also impacted the Firm’s technology, operations. and supervisory systems and procedures .
System-wide. Must have been plenty of rea$on$ not to “play by the rules.” But how many trades are we talking about in which UBS failed to comply with Reg SHO?
As a result of these failures, the Firm improperly entered millions of proprietary and customer short sale orders at various times during the Relevant Period without having reasonable grounds to believe that the securities could be borrowed and available for delivery. A significant number of these short sale orders were in hard-to-borrow securities. Extrapolating from the quantified violations indicates that during the Relevant Period, the Firm likely entered tens of millions of proprietary and customer short sale orders without having reasonable grounds to believe that the securities could be borrowed and available for delivery.
Tens of millions? Begs the question whether UBS transacted every piece of business in this manner. What again was the size of the fine that FINRA’s “meter maids” imposed?
Censure and Fine in the amount of $12,000,000.
Let’s do the math. Let’s say that it was an even 10 million customer and proprietary short sales that failed to comply with Reg SHO. Let’s see, $12,000,000/10,000,000 . . . anybody got a calculator? Yep, that is a fine of $1.20 (one dollar and twenty cents, folks!) for each and every violation of Reg SHO by UBS.
$1.20/violation? I knew free market capitalism was on the decline but I had no idea it was trading this cheaply.
Meter maids? I do not know about you, but most parking violations I get hit with are a minimum of $15.00 and often more than that.
What are the real costs of UBS’ transgressions?
The duration, scope and volume of the trading created a potential for harm to the integrity of the market.
FINRA sold out the integrity of the market for $1.20/violation.
The real question needing to be answered are the names of those stocks that UBS shorted or allowed to be shorted. What happened to those companies, their employees, and their livelihoods? Think they might be worth a little more than $1.20? Little wonder why investors, consumers, and American taxpayers have such little trust and confidence in Wall Street, Washington, and our financial regulators.
$1.20 . . . you cannot make this stuff up. For those interested in reviewing the entire 26 page “ticket’ that serves as the agreement between UBS and FINRA, I welcome submitting the following (click on image to access PDF document):
I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.