SEC CHARGES UBS SUBSIDIARY WITH DISCLOSURE FAILURES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a subsidiary of UBS with disclosure failures and other securities law violations related to the operation and marketing of its dark pool.

UBS Securities LLC agreed to settle the charges by paying more than $14.4 million, including a $12 million penalty that is the SEC’s largest against an alternative trading system (ATS).

An SEC examination and investigation of UBS revealed that the firm failed to properly disclose to all subscribers the existence of an order type that it pitched almost exclusively to market makers and high-frequency trading firms.  The order type, called PrimaryPegPlus (PPP), enabled certain subscribers to buy and sell securities by placing orders priced in increments of less than one cent.  However, UBS was prohibited under Regulation NMS from accepting orders at those prices.  By doing so the firm enabled users of the PPP order type to place sub-penny-priced orders that jumped ahead of other orders submitted at legal, whole-penny prices.

Furthermore, the SEC investigation found that UBS similarly failed to disclose to all subscribers a “natural-only crossing restriction” developed to ensure that select orders would not execute against orders placed by market makers and high-frequency trading firms.  This shield was only available to benefit orders placed using UBS algorithms, which are automated trading strategies.  UBS did not disclose the existence of this feature to all subscribers until approximately 30 months after it was launched.

“The UBS dark pool was not a level playing field for all customers and did not operate as advertised,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Our action shows our continued commitment to policing the equity markets to ensure fairness and compliance with all laws and rules.”

In addition to UBS’s disclosure failures that violated Section 17(a)(2) of the Securities Act of 1933 as well as its acceptance of sub-penny-priced orders that violated Regulation NMS, the SEC outlined several other violations of the federal securities laws by UBS in its order instituting a settled administrative proceeding:

The Form ATS and amendments that UBS filed with the SEC included inconsistent and incomplete statements about the dark pool’s acceptance of sub-penny orders and the natural-only crossing restriction.  The filing also failed to attach certain required documents.
UBS violated requirements under Regulation ATS by unreasonably prohibiting subscribers from using the natural-only crossing restriction and failing to establish written standards for granting access to subscribers.
UBS failed to preserve certain order data for the dark pool from at least August 2008 to March 2009 and August 2010 to November 2010.
UBS violated confidentiality requirements under Regulation ATS by giving full access to subscribers’ confidential trading information to 103 employees who should not have had it (primarily information technology personnel).
UBS consented to the SEC’s order without admitting or denying the findings.  The order censures the firm and requires payment of $2,240,702.50 in disgorgement, $235,686.14 in prejudgment interest, and the $12 million penalty.

The SEC’s investigation, which is continuing, was conducted by Stephen A. Larson, Charles D. Riely, Mandy B. Sturmfelz, and Mathew Wong of the Market Abuse Unit and Nancy A. Brown and Thomas P. Smith Jr. of the New York Regional Office.  The case was supervised by Amelia A. Cottrell of the New York office and Daniel M. Hawke of the Market Abuse Unit.  The SEC’s examination of UBS was conducted by Ilan Felix, Richard Heaphy, Michael McAuliffe, Patrick McCurdy, and Genevieve Skabeikis of the New York office.