On January 15, 2015, the SEC issued a cease-and-desist order pursuant to Section 8A of the Securities Act of 1933 and Sections 15(b) and 21C of the Securities Exchange Act of 1934 against UBS Securities, LLC (“UBS”) claiming numerous violations stemming from UBS’s operation and marketing of its dark pool, alternative trading system. UBS agreed to settle the matter without either admitting or denying the SEC’s findings. The SEC’s order can be accessed here.  

According to the allegations in the order, UBS operated between May 2008 and August 2012, one of the nation’s largest alternative trading systems (“UBS ATS”) geared to accept, match, and execute securities transactions on behalf of UBS clients and UBS ATS subscribers. During this time, UBS violated several securities laws in the operation of UBS ATS by failing to comply with mandatory disclosure requirements and restrictions on sub-penny order transactions. Specifically, the SEC found UBS ATS violated (1) Rule 612 of Regulation NMS by generating and executing preferential sub-penny orders and (2) Rule 301 of Regulation ATS by failing to fully disclose the nature of its “natural-only crossing” restrictions and its UBS ATS access standards.

Rule 612 of Regulation NMS is intended to prevent the preferential execution of trades placed in increments smaller than one cent ahead of those placed in legal increments exceeding $0.01.  Rule 612 specifies that “[n]o alternative trading system . . . shall display, rank, or accept from any person a bid or offer, an order, or any indication of interest in any NMS stock priced in an increment smaller than $0.01.” Between May 2008 and March 2011, according to the SEC, UBS willfully violated Rule 612 by internally authorizing the generation of PrimaryPegPlus Orders (“PPP”) and Whole Penny Offset Orders through UBS ATS. UBS’s PPP and Whole Penny Offset order types were almost always illegally priced in sub-penny increments even though UBS certified that its UBS ATS order types were in compliance with Regulation NMS. Consequently, UBS violated Rule 612 by allowing its favored high-frequency-trade subscribers to get priority in execution by placing orders that were slightly better than the national best bid and best offer.

UBS also, according to the SEC, violated several subsections of Rule 301(b) of Regulation ATS by failing to establish and fully disclose the internal operating standards and procedures used to govern the execution of trades through UBS ATS. Regulation ATS mandates that an ATS comply with the fair access requirements of Rule 301(b)(5) when an ATS processes at least five percent of the average daily volume for any covered security during four of the preceding six months (“fair access threshold”). The subsections of Rule 305(b)(5) require that an ATS (1) establish and disclose written access standards for ATS trading; (2) refrain from unreasonably limiting or discriminating against any person in permitting access to its ATS system; and (3) report all client and subscriber access grants, denials, and limitations on its Form ATS-R. During June 2011 and between August 2011 and November 2011, UBS ATS failed to meet the Rule 301(b)(5) fair access requirements on as many as four covered securities that triggered the “fair access threshold.” 

Furthermore, the SEC found that because UBS failed to disclose all of UBS ATS’s access grants, denials, and limitations in its Form ATS filing, UBS willfully violated Section 17(a)(2) of the 1934 Act by “directly or indirectly, in the offer or sale of securities, obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made . . . not misleading.”

In light of the above findings, the SEC accepted UBS’s proposed settlement to pay a $12 million civil penalty, $2,240,702 in disgorgement, and $235,686 in pre-judgment interest. To date, the $14.4 million penalty was the largest penalty assessed against an ATS.