On October 25, 2011, The Financial Industry Regulatory Authority (FINRA) announced that it fined UBS Securities LLC (UBS) $12 million for violations of Regulation SHO (Reg SHO) and related failures in supervising short sales.  In general terms, FINRA found that, over a substantial period, UBS: (1) placed short sale orders to the market without the required “locates”; (2) mismarked sale orders including labeling short sales as “long”; and (3) misrepresented its aggregation units in a way that may have further produced failures to locate and mismarking.  Moreover, FINRA found that UBS had insufficient supervisory and monitoring procedures in place to either prevent or detect these violations.  FINRA’s charging document provides one of the most comprehensive recent analyses of Reg SHO in practice.  The document provides important insight into FINRA’s expectations with respect to a broker-dealers’ compliance obligations in connection with short sales.  And by extension, FINRA’s analysis is relevant to hedge funds because, as discussed in this article, Reg SHO affects hedge funds and hedge fund managers directly and indirectly (via their use of prime brokers).  Accordingly, the background and analysis in this article are important for hedge fund managers for whom short sales are part of an investment strategy.