The SEC charged UBS Securities LLC with maintaining inaccurate records pertaining to "locates” on customer short sales.  UBS must pay an $8mn fine and retain an independent consultant. Stock Locate Process. When a customer enters a short sell order, the broker-dealer routinely must locate stock for the short sale - and record the arrangement so as to comply with Regulation SHO.  The "locate” represents that the B/D has affirmatively determined that it  - (i) has borrowed,  (ii) arranged to borrow, or (iii) reasonably believes it could borrow the security - to settle the short sale.  These obligations are based on Reg SHO requirements. UBS Allegedly Took Shortcuts. UBS employees were found to routinely record the name of a lender’s employee, even when no one at UBS had actually contacted the employee to confirm availability.  In fact, UBS employees sourced thousands of locates to lender employees who, in fact, were out of the office at the time or on those days.

According to said George Canellos, the 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.”

When assessing the availability of shares for locates, B/D employees often have access to electronic availability feeds that are sent by lenders to many different firm.  At times, reliance on those feeds might not be reasonable and, in those cases, it may be necessary to contact lenders directly. What Went Wrong. Yet, UBS personnel posted entries to the firm's "locate log" that documented locates granted after the firm supposedly obtained direct confirmation of availability with a lender or identified locates based on electronic feeds. The SEC found that these allegedly false entries went back to at least 2007.  As a result, the UBS records effectively obscured the SEC 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 reviews did not find evidence that UBS necessarily executed short sales without a reasonable basis for believing that it could borrow the stock to fulfill its settlement obligations. SEC Sanctions. Based on its alleged violations of  Section 17(a) of the Exchange Act and Rule 203(b) of Reg SHO,  UBS consented to the SEC order and agreed to the sanctions:  (i) to pay the $8mn penalty ;  and, (ii) to retain an independent consultant to conduct a comprehensive review of the UBS Securities Lending Desk’s pols, procedures and practices with respect to granting locate requests. SEC Staff Credits. Investigation conducted by Stephanie Shuler, Adam Grace, Elzbieta Wraga of the SEC’s NY Regional Office;  Assisted by Daphne Downes in NY Regional Office’s Broker-Dealer Inspection Program. Questions may be directed to:  Director George Canellos, SEC NY Regional Office  [(212) 336-1020] and/or  Bruce Karpati, C0-Chief, Asset Mgmt Unit of SEC Enforcements.  [212 336-0104] For further details, go to:   [SEC PR, 11/10/11]   and [SEC Admin Proceeding 3-14620rpc].