It's becoming clear that not all companies are having an easy time with Reg SHO, which was designed to curb abusive shorting selling practices.

In a nutshell, broker-dealers are faced with a request by a customers to short a stock, must provide "locates,"--assurances that "it has borrowed, arranged to borrow, or reasonably believes it could borrow the security to settle the short sale." Broker-dealers are required to accurately record the basis upon which it has provide locates to customers.

The latest company to run afoul of the law was UBS, which was fined $8 million. UBS also agreed to retain an independent consultant to review securities lending processes and help with compliance issues. UBS did not admit guilt. Other firms have been similarly fined, including Deutsche Bank.

The main issue seemed to be that UBS records were inaccurate when detailing whether the reasonable basis for the locates came from electronic feeds or direct communication with a lender.

"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."

The SEC does not believe that UBS ultimately executed short sales without a reasonable reason to think the stock could be borrowed in a timely manner. That would've been a much bigger violation. In any case, broker dealers should not take record-keeping laxly, nor should they assume that no one at the SEC is checking records. That said, it would be interesting to know exactly how the issue came to light.

For more:
- here's the release

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