SEC: UBS pays $25 million to settle fraud charges

Rick Steves

“Complex products can present unique risks.”

UBS has agreed to pay the SEC approximately $25 million to settle fraud charges relating to a complex investment strategy referred to as YES, or Yield Enhancement Strategy.

UBS marketed and sold YES to approximately 600 investors through its platform of domestic financial advisors from February 2016 through February 2017.

The SEC found that UBS did not provide its financial advisors with adequate training and oversight in the strategy, and although UBS recognized and documented the possibility of significant risk in YES investments, it failed to share this data with advisors or clients.

As a result, some of UBS’s advisors did not understand the risks and were unable to form a reasonable belief that the advice they provided was in the best interest of their clients, the regulator stated. When investors suffered losses, many of them, along with their financial advisors, expressed surprise and closed their YES accounts.

Complex products can present unique risks

Osman Nawaz, Chief of the Division of Enforcement’s Complex Financial Instruments Unit, said: “Advisory firms are obligated to implement appropriate policies and procedures to ensure all parties involved in the sale of complex financial products and strategies have a clear understanding of the risks those products present. As fiduciaries, advisers also must make suitable recommendations to their clients. Complex products can present unique risks, and the SEC will remain vigilant and continue to take action to protect those who invest in these products from misconduct.”

Without admitting or denying the SEC’s findings, UBS agreed to a cease-and-desist order, a censure, and to pay disgorgement of $5.8 million and prejudgment interest of $1.4 million, which is deemed satisfied by payments made to investors in related arbitration proceedings.

UBS also agreed to pay a civil penalty of $17.4 million, which it will undertake to distribute to harmed investors pursuant to the fair fund provisions of the Sarbanes-Oxley Act of 2002.

UBS paid SEC $8 million to settle ETP charges

Last year, SEC ordered UBS to pay $8 million to settle charges related to investments in a complex exchange-traded product.

The SEC found compliance failures from the bank relating to sales of a volatility-linked exchange-traded product (ETP), designed to track short-term volatility expectations in the market as measured against derivatives of a volatility index.

The issuer of the product had warned the bank that it was not appropriate to hold the product for extended periods. The product’s documents were explicit about the inherent risk, of being more likely to decline in value when held over a longer period.

While UBS prohibited brokerage representatives from soliciting sales of the product and placed other restrictions on sales of the product to brokerage customers, the bank allowed certain financial advisers to use the product in discretionary managed client accounts.

In addition, UBS adopted a concentration limit on volatility-linked ETPs, but failed to implement a system for monitoring and enforcing that limit for five years.

The bank prohibited the financial advisers from making additional recommendations of this ETP prior to being contacted by the Commission staff.

According to the SEC, these financial advisors had a flawed understanding of the appropriate use of the volatility-linked ETP and failed to take sufficient steps to understand risks associated with holding the product for extended periods.

Having purchased and held the product in client accounts for lengthy periods, including hundreds of accounts that held the product for over a year, these managed accounts were negatively impacted by the misuse of the ETP, from January 2016 and January 2018.

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