The Securities and Exchange Commission (SEC) filed a settled action against UBS Financial Services for compliance failures relating to the sale of a volatility-linked exchange-traded product (ETP).
Without admitting or denying the SEC’s findings, UBS agreed to a censure and to pay disgorgement and prejudgment interest of $112,274 plus a civil penalty of $8m (£5.9m, €6.8m), which will be distributed to affected investors.
Daniel Michael, chief of the SEC enforcement division’s complex financial instruments unit, said on 19 July: “Advisory firms must protect clients from inappropriate investments in complex financial products.
“We will continue to scrutinise firms’ policies and procedures related to these risky products, and we will take action when they are inadequate.”
Details
According to the SEC’s order, the ETP was designed to track short-term volatility expectations in the market as measured against derivatives of a volatility index.
SEC said: “The issuer of the product warned UBS that it was not appropriate to hold the product for extended periods, and the product’s offering documents made clear that the product was more likely to decline in value when held over a longer period.
“The order finds that UBS prohibited brokerage representatives from soliciting sales of the product and placed other restrictions on sales of the product to brokerage customers but did not place similar restrictions on certain financial advisers’ use of the product in discretionary managed client accounts. The order further finds that UBS adopted a concentration limit on volatility-linked ETPs but failed to implement a system for monitoring and enforcing that limit for five years.”
According to the SEC, UBS “prohibited the financial advisers from making additional recommendations of this ETP prior to being contacted” by the staff at the US regulator.
The watchdog also found that between January 2016 and January 2018, “certain financial advisers 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”.
These financial advisers “purchased and held the product in client accounts for lengthy periods, including hundreds of accounts that held the product for over a year, resulting in meaningful losses”.
