Two large affiliated firms agreed to pay $175,000 each to settle FINRA charges that they both violated numerous rules and regs and had deficient supervisory programs for their respective Fully-Paid Lending activities. 

    UBS Financial Services, Inc. (Weehawken, NJ) and UBS Securities LLC (Stamford, CT) each was fined $175,000, and required to establish and maintain a system, including WSPs, re: Fully Paid Lending or a similar program reasonably designed to achieve compliance with applicable internal controls, rules and regulations prior to soliciting or facilitating any new fully paid loans from customers.  In addition, an officer of the firms shall certify that the firms’ system and written procedures relating to Fully Paid Lending are in compliance with NASD Rule 3010(a) and (b) prior to soliciting or facilitating any new fully paid loans from customers. 

    Firms allegedly:  (i) enabled their customers to lend their fully paid securities to the firms on a solicited and unsolicited basis to facilitate, among other things, short selling by other customers of the firms, in that customers who lent securities received monthly interest payments - calculated as a percentage of the market value of the securities and secured by a 3rd-party LofC; 

(ii) acting through the supply desk within the firms’ Securities Lending Department, identified from firm databases those customers owning fully-paid shares - with the intent of borrowing securities-in-demand from these customers after their usual internal and external sources were exhausted;

(iii) acting through Security Lending, determined the interest rate that firms were willing to pay the customer to borrow the securities, although there was no oversight and no supervisory approval required for setting or changing interest rates;  thereafter, staff would contact the customer’s RR to ask whether the customer would be interested in lending the security;

(iv) acting through Securities Lending staff, did not provide standardized information or materials to RR's about Fully Paid Lending or provide any information to the RR's supervisor, branch manager, or anyone else at the branch re: the requested loan securities;  instead, RR's - who hadn't received training or consistent information in this area, were provided with a proposed customer securities loan agreement ("CSLA:) for execution;  

(v) failed to disclose, or to adequately disclose, material facts in the CSLA, the customer’s monthly account statement or customer's confirmation of the initial lending transaction, that FINRA deemed necessary in order to make the statements made, in light of the circumstances under which they
were made, not misleading. 

    Disclosures That Needed to be Made.   Firms allegedly failed to disclose or adequately disclose: (i) that the security was hard to borrow due to short selling, and was frequently being borrowed to facilitate short selling;  (ii) that the firms could reduce the interest rates;  (iii) that RRs received commissions for the duration of the loan;  (iv) that while securities were on loan, dividends were paid as a “cash-in-lieu” payment and, therefore, were subject to higher tax rates;  and, (v) that shares on loans could be sold at any time.

    WSP and System Deficiencies.   Firms allegedly:  (i) failed to establish and maintain a system to supervise the activities of each RR, Reg'd Principal and other associated person related to Fully Paid Lending so as to comply with internal controls and applicable rules and regulations;  (ii) failed to provide any training regarding Fully Paid Lending to its registered persons, and failed to supervise its RR's with respect to the Fully Paid Lending process or their communications with customers about Fully Paid Lending;  (iii) failed to have procedures for notifying branch managers that customers in their branches were participating in Fully Paid Lending; 

(iv) permitted existing tools for monitoring customer accounts, already available to branch managers and other supervisors, to be significantly compromised when shares were lent through Fully Paid Lending - because a customer’s account no longer reflected the customer’s position in the security when the shares were lent through Fully Paid Lending, and the firms’ ability to supervise values of positions, concentration levels and the suitability of any subsequent securities recommendations for the customers was compromised;  and, (v) failed to make available adequate WSPs for supervising Fully Paid Lending to firms’ RR's and branch managers, and failed to have procedures at the branch level for Fully Paid Lending.

For all cases, click onto:    [ FINRA Disciplinary Actions for November 2010 ]