UBS pays $8 million to settle SEC complaint for compliance failures in volatility-linked ETP

Rick Steves

The issuer of the product had warned the bank that it was not appropriate to hold the product for extended periods

UBS has settled charges with the Securities and Exchange Commission related to investments in a complex exchange-traded product. This is the sixth matter arising from the Enforcement Division’s ETP Initiative.

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.

Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, said: “Advisory firms must protect clients from inappropriate investments in complex financial products. We will continue to scrutinize firms’ policies and procedures related to these risky products, and we will take action when they are inadequate.”

UBS didn’t admit nor deny the findings, but agreed to disgorgement and prejudgment interest of $112,274 and a civil penalty of $8 million, which will be distributed to investors harmed by the conduct at issue.

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