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SEC Charges UBS With Faulty Recordkeeping Related to Short Sales


Washington, D.C., Nov. 10, 2011 – The Securities and Exchange Commission today 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.

Broker-dealers are routinely asked by customers to locate stock for short selling, and a “locate” represents a determination by a broker-dealer that it has borrowed, arranged to borrow, or reasonably believes it could borrow the security to settle the short sale. Broker-dealers are required under Regulation SHO to accurately record the basis upon which it has given out locates.

According to the SEC’s order instituting settled administrative proceedings, 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.

“Regulators must be able to rely on a firm’s records to mean what they say, especially when those records are meant to provide the key evidence of a firm’s compliance with the law and safeguard against illegal short selling,” said George S. Canellos, Director of the SEC’s New York Regional Office. “UBS permitted its employees to create records that do not accurately convey the basis upon which its employees granted locates.”

According to the SEC’s order, in judging the availability of shares for locates, broker-dealer employees often have access to 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.

The SEC’s investigation found that since at least 2007, UBS’s “locate log” that records the locates it granted inaccurately portrayed which locates were based on electronic feeds or direct confirmation with specific lenders. UBS’s practices obscured inquiry into whether UBS had a reasonable basis for granting locates, and created a risk of locates being granted based on sources that could not be relied upon if shares were needed for settlement. The SEC’s order does not find that UBS executed short sales without a reasonable basis for believing that it could borrow the stock to fulfill its settlement obligations.

The SEC’s order finds that UBS violated Section 17(a) of the Exchange Act and Rule 203(b) of Regulation SHO thereunder. Without admitting or denying the SEC’s findings, UBS consented to the order and agreed to pay the $8 million penalty and retain an independent consultant to conduct a comprehensive review of the UBS Securities Lending Desk’s policies, procedures and practices with respect to granting locate requests. The order also requires UBS to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Exchange Act and Rule 203(b) of Regulation SHO thereunder.

The SEC’s investigation was conducted by Stephanie Shuler, Adam Grace, and Elzbieta Wraga of the SEC’s New York Regional Office with the assistance of Daphne Downes in the New York Regional Office’s Broker-Dealer Inspection Program.

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For more information about this enforcement action, contact:

George S. Canellos
Director, SEC’s New York Regional Office
(212) 336-1020

Bruce Karpati
Co-Chief, Asset Management Unit, SEC Division of Enforcement
(212) 336-0104



Modified: 11/10/2011